Torray Fund managers are self-taught investors who don't follow the crowd.

Whether the topic is investing or the state of fees in the mutual fund industry, Robert Torray and Douglas Eby, co-managers of The Torray Fund, write their own script.

The purchase of municipal bond insurer Ambac Financial Group, the only new addition to this $1.5 billion large-company stock fund during the first seven months of 2003, reflects the pair's penchant for bucking conventional wisdom. They bought the stock at the beginning of the year, just after growing concern about the deteriorating state of municipal finances and fallout from problems in the mortgage-backed securities market prompted many investors to unload it.

But Torray and Eby knew Ambac well, and had faith in its business model. They had purchased the stock for the fund back in 1994, shortly after the well-publicized financial crisis in California's Orange County, and it had recovered nicely with the economy. They think the insurer has a lot going for it this time around as well. Thanks to skilled underwriting, it has only had to pony up 0.03% of $640 billion in insured debt during its 30-year history. Its coveted AAA-rating remains a blessing for insured borrowers seeking to lower their cost of debt. Growth in foreign markets, and the perennial need for municipalities to expand services, bodes well for future growth.

"This is a highly profitable company with a business that has always appeared too good to be true," says Eby, 44. "Sure, there's some short-term headline risk. But the demand for critical funding of hospitals, bridges and roads isn't going to go away."

Nor does it appear that 66-year-old Robert Torray will, either, at least not any time soon. When asked if he plans to retire in the near future, his emphatic and unelaborated response is "no." He also has no plans to sell out to a larger firm, although he says he's received "lots of offers" to do so.

For now, Torray appears content to ride at full speed into the sunset of a career that began as a broker for Alex Brown & Sons in the early 1960s. In 1967, he joined New York's Eastman Dillon, Union Securities & Co., and eventually became a vice-president in charge of the pension fund management division. Some clients from that firm followed him when he founded Robert E. Torray & Co. in 1972. Between institutional accounts and The Torray Fund, which he started in 1990, his firm manages more than $6 billion in assets.

Torray, who once intended to go to law school but gave up on the idea because he liked investing more, views his lack of formal securities analysis training as an advantage. "I'm a self-taught investor," he says proudly. "It took me a long time to learn this business, and what I know they can't teach in schools. Most academics are misdirected and misfocused."

Eby says that despite his MBA from Indiana University, most of his securities training has come on the job as well. Before joining Torray's firm in 1992, he worked at Thomson Advisory Group for seven years as an investment manager and research analyst.

Torray's contrarian, against-the-crowd philosophy on investing applies to some of his other viewpoints as well. Over the years, he has emerged as an outspoken critic of what he considers abuses by the fund industry and widely held but misguided notions about investing. While most mutual fund shareholder reports focus on individual stocks in the portfolio and the reasons behind their purchase or sale, Torray prefers not to discuss individual fund holdings in his fund's reports. In press interviews, he often defers to Eby on questions about individual holdings.

"I think it's more important to educate people about the aspects of investing that will get them into trouble," he says. "Most individuals are clueless about how the financial services industry is structured, and how much it costs them to participate. They don't need to hear about the story behind why XYZ is a great stock."

His harsh and repeated criticism of hefty technology stock valuations in the late 1990s, a stance that caused the fund to underperform the market in 1998 but paid off later, has given way to more recent condemnation of what he considers high industry expenses and manipulative advertising ploys. In a recent shareholder report, he decries the average mutual fund's inability to beat the market and the heavy toll taxes and expenses take on returns.

Balancing out the tough talk is a rare candor that reflects his concern for shareholders, as well as his hefty personal stake in the fund. "While our long-term record is significantly above average, we fully appreciate that many of you invested with us in the latter stages of the market's rise and now sit on a loss," he wrote in a July 2002 semi-annual shareholder report. "It is hard to find the right words to tell you how disappointed we are about that ..." His softer side also is revealed in a $1 million donation to his alma mater, Duke University, for scholarship grants to economically disadvantaged undergraduate students.

The Torray Fund's record of returns and expenses shows that its namesake matches talking the talk with walking the walk. Its low portfolio turnover, which typically falls between 20% and 30% annually, makes the fund one of the most tax-efficient around. Over the last ten years, its pretax annualized return of 13.70% put it in the top 2% of performers in Morningstar's large-cap blend category, and it ranked in the top 1% based on its 12.64 % annualized, tax-adjusted return over the same period. Since inception, the fund has beaten the overall market by about 3% annually.

Keeping expenses in check has played a key role in keeping returns healthy. The fund's most recent annual report pegs its annual expense ratio at 1.07%. A $10,000 minimum investment restriction, which weeds out costly smaller accounts, helps keep expenses low.

According to Torray, costs that aren't included in the expense ratio, such as transaction costs, bring total fund expenses up just a few basis points, to 1.12% a year-about one-third the industry average. He also points out that he doesn't engage in "soft dollar" arrangements that allow the brokerage firm the fund uses to provide research, then recover the cost through higher trading commissions or larger spreads on block trades.

But reasonable costs aren't the only contributor to the fund's exceptional long-term track record. "This is one of the best stock-picking vehicles out there," reports Morningstar analyst Brian Portnoy. "Because many of its picks have been big winners, long-term returns are excellent." He cautions that because of its compact portfolio and sector concentration, investors should expect above-average volatility and "the occasional off quarter or two."

Long-term returns, rather than the occasional off quarter, are what matter most to Torray and Eby in this portfolio of between 30 and 50 names. "About half the time shares go down after we buy them," says Torray. "We only care where they are a few years from now." He doesn't categorize his style as value or growth, but says simply that he likes to buy strong businesses at reasonable prices.

Some holdings remain core positions for years. Others leave the fund when their prices get uncomfortably high, then return on price dips years later. Torray and Eby first bought Amgen, their largest holding, in 1997. They sold the stock when it reached a peak in 2000, then purchased it again in mid-2002 after a steep decline.

While Eby acknowledges short-term problems in the drug industry, such as a large number of patent expirations and uncertainty over Medicare reform, he thinks the sector's long-term prospects remain strong. He believes continued research and development will expand the product pipeline in the coming years, and that an aging population will keep demand strong. "These are great businesses with a great future that trade at market multiples," says Eby. "We view that as an interesting opportunity." Other favored areas include media and financial services companies. Eby says avoiding big mistakes has been an important ingredient of delivering competitive long-term returns. "About 20% to 30% of companies in the S&P 500 Index are businesses that we think will underperform in the coming years," he says. "We add a lot of value by weeding those out." Sectors the pair views as unfavorable include low-return, capital-intensive industries such as retailing, airlines, automobiles and utilities. The managers also tend to have a light touch on technology stocks, which they believe remain overvalued.