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.