Great money managers are like the rock stars of the financial world. While Warren Buffett is a household name to many, to stock geeks, Graham, Templeton and Lynch lead to extended conversations on investment philosophies and performance.
Before we get to the list, let's take a look at the criteria used to choose the top five:
- Long-term performers: We only consider those managers with a long history of market-beating performance.
- Retired managers only: We only consider those managers who have finished their careers.
- No "team managed" funds: These were not evaluated because the teams might change midway through the results. Besides, as John Templeton put it, "I am not aware of any mutual fund that was run by a committee that ever had a superior record, except accidentally."
- Contributions: The top managers also made contributions to the investment industry, as well as their own companies.
The "father of security analysis" is in the top spot. Many may not think of Benjamin Graham as a fund manager, but he qualifies because he managed the modern equivalent of a closed-end mutual fund with his partner Jerome Newman from 1936-1956.
Best Investment: GEICO (NYSE:BRK.A) - It spun-off to Graham-Newman shareholders at $27 per share and rose to the equivalent of $54,000 per share. Oddly, the GEICO purchase became his most successful investment, although it didn't fit into his deep discount strategy very well. Most of Graham's positions were sold in less than two years, but he held GEICO stock for decades. His main investments were numerous low-risk arbitrage situations.
Major Contributions: He wrote "Security Analysis" with fellow Columbia Professor David Dodd (1934), "The Interpretation of Financial Statements" (1937) and later, "The Intelligent Investor" (1949), which inspired Warren Buffett to seek out Graham and study under him at Columbia and later to work for him at the Graham-Newman Corporation.
Graham also helped start what would later become the CFA Institute. Graham started on Wall Street in 1914 - long before securities markets were regulated by the Securities and Exchange Commission (SEC) and saw the need for certification of security analysts - thus the CFA exam. (For more on your CFA exam, see Prepare For Your CFA Exams.)
Besides Buffett, Graham also mentored numerous pupils who went on to have fabulous investment careers of their own, but whose names aren't in the public eye. (For more on Graham, read The Intelligent Investor: Benjamin Graham and The 3 Most Timeless Investment Principles.)
Estimated Return: Reports vary due to the time period in question as well as the calculation methods used, but John Train reported in "The Money Masters" (2000) that Graham's fund, the Graham-Newman Corporation, earned 21% annually over 20 years. "If one invested $10,000 in 1936, one received an average of $2,100 a year for the next 20 years, and recovered one's original $10,000 at the end."
Sir John Templeton
According to Forbes Magazine, Templeton is the "dean of global investing" and was knighted by the Queen of England for his contributions. Templeton was a philanthropist, Rhodes Scholar, CFA Charterholder and a benefactor to OxfordUniversity who pioneered global investing and found the best opportunities in crisis situations.
Investment Style: Global contrarian and value investor.
His strategy was to buy investments when, in his words, they hit the "point of maximum pessimism." As an example of this strategy, Templeton bought shares of every public European company trading for less than $1 per share at the outset of World War II, including many that were in bankruptcy. He did this with $10,000 of borrowed money. After four years, he sold them for $40,000. This profit financed his foray into the investment business. Templeton also sought out underappreciated fundamental success stories around the world. He wanted to find out which country was poised for a turnaround before everyone else knew the story.
- Europe, at the start of World War II
- Japan, 1962
- Ford Motors (NYSE:F), 1978 (it was near bankruptcy)
- Peru, 1980s.
- Shorted technology stocks in 2000
Major Contributions: Built a major part of today's Franklin Resources (Franklin Templeton Investments). TempletonCollege at OxfordUniversity's SaidBusinessSchool is also named after him.
Estimated Return: He managed the Templeton Growth Fund from 1954 to 1987. Each $10,000 invested in the Class A shares in 1954 would have grown to more than $2 million by 1992 (when he sold the company) with dividends reinvested, or an annualized return of about 14.5%.
T. Rowe Price, Jr.
T. Rowe Price entered Wall Street in the 1920s and founded an investment firm in 1937, but he didn't start his first fund until much later. Price sold the firm to his employees in 1971, and it eventually went public in the mid 1980s. He is commonly quoted as saying, "What is good for the client is also good for the firm."
Investment style: Value and long-term growth.
Price invested in companies that he believed had good management, were in "fertile fields" (attractive long-term industries), and were industry leaders. He wanted companies that could grow for many years because he preferred to hold investments for decades.
Best Investments: Merck (NYSE:MRK) in 1940; he reportedly made more than 200 times his original investment. Coca-Cola (Nasdaq:COKE), 3M (NYSE:MMM), Avon Products (NYSE:AVP) and IBM (NYSE:IBM) were other notable investments.
Major Contributions: Price was one of the first to charge a fee based on the assets under management and rather than a commission for managing money. Today, this is common practice. Price also pioneered the growth style of investing by aiming to buy and hold for the long term and combining this with wide diversification. He founded publicly traded investment manager T. Rowe Price (Nasdaq:TROW) in 1937. (For more insight on growth investing, see Stock-Picking Strategies: Growth Investing.)
Results: Individual fund results for Price are not very useful as he managed a number of funds, but two were mentioned in Nikki Ross' book "Lessons from the Legends of Wall Street"(2000). His first fund was started in 1950 and had the best 10-year performance of the decade - approximately 500%. Emerging Growth Fund was founded in 1960 and was also a standout performer with such names as Xerox (NYSE:XRX), H&R Block (NYSE:HRB) and Texas Instruments (NYSE:TXN) (also a long-time holding of Philip Fisher).
The Ohio-born Neff joined Wellington Management Co. in 1964 and stayed with the company for more than 30 years managing three of its funds. One of John Neff's preferred investment tactics was to invest in popular industries through indirect paths, for example, in a hot homebuilder market he may have looked to buy companies that supplied materials to the homebuilders.
Investment Style: Value, or low P/E, high-yield investing.
Neff focused on companies with low price-earnings ratios (P/E ratios) and strong dividend yields. He sold when investment fundamentals deteriorated or the price met his target price. The psychology of investing was an important part of his strategy.
He also liked to add the dividend yield to the growth in earnings and divide this by the P/E ratio for a "you get what you pay for" ratio. For example, if the dividend yield was 5% and the earnings growth was 10%, then he would add these two together and divide by the P/E ratio. If this was 10, then he took 15 (the "what you get" number) and divided it by 10 (the "what you pay for" number). In this example the ratio is 15/10 = 1.5. Anything over 1.0 was considered attractive.
Best Investment: In 1984/1985, Neff started to acquire a large stake in Ford Motor Company; three years later, it had increased to nearly four times what he'd originally paid.
Major Contributions: Wrote an investing how-to book covering his entire career year by year entitled "John Neff on Investing"(1999).
Results: John Neff ran the Windsor Fund for 31 years ending in 1995 and earned a return of 13.7%, versus 10.6% for the S&P 500 over that time span. This amounts to a gain of more than 55 times an initial investment made in in 1964.
A graduate of Penn's Wharton School of Business, Lynch practiced what he called "relentless pursuit." He visited company after company to find out if there was a small change for the better that the market hadn't picked up on yet. If he liked it, he'd buy a little and if the story got better, he'd buy more, eventually owning thousands of stocks in what became the largest actively managed mutual fund in the world, the Fidelity Magellan Fund.
Investment style: Growth and cyclical recovery
Lynch is generally considered to be a long-term growth style investor, but is rumored to have made most of his gains through traditional cyclical recovery and value plays.
Major Contributions: Lynch made Fidelity Investments into a household name. He also wrote several books, namely "One Up on Wall Street"(1989) and "Beating the Street" (1993). He gave hope to do-it-yourself investors saying "use what you know and buy to beat Wall Street gurus at their own game."
Results: Lynch is widely quote as saying that a $1,000 in Magellan on May 31, 1977, it would have been worth $28,000 on by 1990.
These top money managers amassed great fortunes not only for themselves, but for those who invested in their funds as well. One thing they all have in common is that they often took an unconventional approach to investing and went against the herd. As any experienced investor knows, forging your own path and producing long-term, market-beating returns is no easy task. As such, it's easy to see how these five investors carved a place for themselves in financial history.
For more on mutual funds, see our Special Feature: Mutual Funds.