"Managing" a Stock Portfolio for the Long Haul

I came across an example of a somewhat unique buy-and-hold "manager-less" stock investing approach and wanted to share it with you as a simple example of "DIY investing ain't that hard." 

Recipe for Success: Pick 30 Stocks, Then Just Sit Back for the Next 77 Years has the story:

"ING Corporate Leaders Trust has outperformed most of its competitors over the past decade, thanks to outsize holdings in energy and railroads, which both benefited from rising oil prices. The fund was also underweight in financials, which helped it dodge the worst of the 2008 bear market.

So who is the savvy portfolio manager who made those bets?

There is no such manager.

The 22 stocks in the $750 million portfolio are all descended from a portfolio chosen in 1935, set up so the stocks wouldn't be traded except in a handful of cases, such as a dividend elimination, a debt default or a downgrade. David Snowball, publisher of the Mutual Fund Observer website, calls it "the ghost ship of the fund world."

"It's a fund whose motto is, 'No manager? No problem!' " Mr. Snowball says.

The largely static holdings of Corporate Leaders Trust make index funds based on Standard & Poor's 500-stock index, which changes about 20 components every year, look like fast-trading hedge funds by comparison.

Thriving on Passivity

"The fund takes passivity to a level that would be intolerable to most investors," says Morningstar  analyst Kevin McDevitt, who adds that the fund "has thrived for 75 years on chronically low expectations for its old-economy holdings."

The fund sponsor, ING Investments LLC, a unit of ING Groep NV, declined to discuss the fund, but an outside spokeswoman answered questions by email.

While some of the 30 blue chips originally in the fund have fallen by the wayside, about a third remain in something resembling their original form. Others have morphed into different holdings through acquisitions, spinoffs or other changes.

Those remaining include household names like Union Pacific Corp. UNP,  DuPont Co. DD  and Procter & Gamble Co. PG . Gone are International Harvester Co. and American Can Co. F.W. Woolworth Co. became Foot Locker Inc. FL. Stakes in two oil companies, Standard Oil Co. of New Jersey and Socony-Vacuum Oil Co., became parts of Exxon Mobil Corp., XOM the fund's largest holding.

And a holding of Atchison, Topeka & Santa Fe Railway Co. eventually became stock in Warren Buffett's Berkshire Hathaway Inc. BRKB  when Berkshire acquired Burlington Northern Santa Fe Corp. in early 2010.

The fund has trailed the market at times, such as during the 1990s tech-stock boom. It lacks exposure to pharmaceuticals, health care and social media. But over the past decade, through the end of June, it returned an average 8.3% a year, compared with 5.3% for the S&P 500 and an average of 4.7% for peers in Morningstar's large-value category. During that decade, shares of Union Pacific and Burlington Northern both tripled in price. Praxair Inc., PX  the former industrial-gas business of Union Carbide Corp., also tripled.

'Sustainable' Advantages

But Mr. McDevitt also credits the fund's recent results to its inaction. "The original advisers wanted to find blue-chip, dividend-paying companies that could thrive for decades," he says. The portfolio was set up as a unit investment trust—generally an unmanaged cousin of a standard mutual fund—and depends on "brands and sustainable competitive advantages," rather than short-term stock picking, he says. Comparable funds own about 75 stocks and trade in and out of 38% of their assets annually, he adds.

Static though it is, the portfolio continues to suffer some attrition in the ordinary course of events. It sold Citigroup Inc., a holding descended from American Can, in early 2009 after the bank eliminated its dividend, based on the trust's guidelines. And it dumped Eastman Kodak Co. last year when its stock price fell below $1, another sale guideline, before Kodak sought bankruptcy-law protection from creditors in January. Both stocks had been a drag on the fund's performance before their ultimate sale."

THE TAKEAWAY LESSON

The basic lesson is simple. Even in the midst of a Depression, we should buy a basket of diversified solid performing blue chip companies that pay dividends, then hold them until something unforeseen happens which triggers an automatic sell, and then sit back again and enjoy the portfolio's growth over time.

That said, the buy-and-hold formula doesn't mean that we don't have established investing rules or that we don't monitor our investments regularly.

What it does mean is that individual investing doesn't have to be difficult and that we can in fact adopt a "do-it-yourself" investment approach and style.

In the end, we will more than likely do at least as good a job for ourselves than experts will do for us by charging a sizable commission.

And we can keep the "commission" money in our investment portfolio and growing instead of paying the "expert" to manage our portfolio for us.

Thanks. Bob.