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Last year was another fabulous year for stock market investors; there's no doubt about that. But when you hear about the performance of a tiny local investment practice, you have to gasp, "How did it do that?"
Robert Waltz, president and La Jolla Asset Management's chief investment officer, recently announced that the firm's composite appreciation portfolio posted a 56.3 percent average gain in 1998, more than double the performance of the Standard & Poor's 500 Index gain of 26.7 percent.
How did Waltz achieve such eye-popping results? He did it the old-fashioned way, by investing for the long term in solid domestic companies with strong past and projected earnings. To be more specific, he used a proprietary system called the "Stock Selection Logic Model" to narrow the equity universe from 9,000 to 25 of the best-performing stocks. Selecting from the securities identified by the model, separate investment portfolios are fashioned for each of LJAM's client accounts, depending on the client's investment goals and taste and tolerance for risk.
You may never have heard of La Jolla Asset Management, which just recently adopted that name. But you may never have heard of its predecessor either, Investment Management Associates, which has been among the group of small but top performing San Diego County investment management firms. Waltz and his partner, H. Carter House, changed the company’s name this year because IMA simply sounded too nebulous. The new name, Waltz admits frankly, has social status (although the company actually is located in La Jolla East — or the University Towne Center area), is catchy and "it states what we do, which is manage liquid assets."
House, a retired vice president of finance and treasurer of Gulf Atomics, first started the company nine years ago with Dave Trumbull to manage money for themselves and for a group of former business associates. Things went well, and in 1994 Waltz, a 30-something La Jolla native and then a vice president at Wells Fargo Bank, heard about House and Trumbull from ski buddies. He was impressed, and asked if the two were looking to hire someone. Waltz was brought aboard to bring in some younger blood and to assure clients that investment management succession was in place. Not long afterward Trumbull, who was the primary developer of the Stock Selection Logic Model, died. House now manages the accounts of income-seeking clients, while Waltz concentrates on growth portfolios.
Since Waltz joined the firm, it has achieved a five year annualized return of 32.8 percent, compared to a 22.8 percent return on the S&P 500 for the same period. LJAM has beat the S&P every year except 1997, a year in which Waltz and House delivered a 19.4 percent return vs. the S&P's 31 percent return. The company now has $15 million under management.
Turnover of equities in the accounts is relatively low, with a typical holding period of 24 months. In 1998, most of LJAM's clients had no tax liability, because only stocks showing losses were sold so that investors could use the losses to offset gains from other investments.
Despite the firm's record, House says he makes it clear to clients that to expect a 30-plus return every year would be unrealistic. The stock market has been known to lose as much as 30 percent of its value in a single year, and for multiple years in the 1970s, the market was as flat as a lake, driving all but the most patient investors away.
Even in a typical year, says House, "you’re not going to be right 100 percent or even 90 percent of the time, because factors come into play that did not exist the day you made your [stock] selection."
The investment managers are somewhat unusual in that they do not pool clients' funds, nor do they take full custody of the investment funds. LJAM is only given the right to manage the funds held at the client's designated brokerage house. Waltz and House can buy and sell within the account, but cannot withdraw money. The client receives a written confirmation of each transaction plus the standard monthly statement from the broker. Additionally, LJAM provides a monthly report on the status and progress of the portfolio.
While Waltz would like investors to keep their money under his management for a minimum of two years to allow long-term management objectives to play themselves out, investors can take their money and walk away at any time.
La Jolla Asset Management requires a minimum initial investment of $100,000, and charges a management fee of 1 percent to 1.75 percent of assets, with a lower percentage for a higher amount of money. The management percentage is based on assets at the beginning of each year, so that fees do not automatically escalate as the investment grows.
What Waltz did not do for his clients is almost as surprising as what he did do. "There are no E-Bays or Amazon.coms in our portfolio," says Waltz. "We’re not looking for a broad number of companies, but a lesser number of really good companies."
LJAM invests in domestic stocks, only participating in international growth through U.S. companies with a strong global presence. Among the equities Waltz holds at the moment are Pfizer Inc., Dell Computers and Varco International.
While the details of La Jolla Asset Management's investment-decision process are never revealed, they sound oddly close to the methods used by super-investor Warren Buffett, with a little Peter Lynch thrown in. Waltz and House readily admit that they never invest in companies that don’t have earnings.
"If a start-up or high-tech company is a good company before it has earnings, it will be a great company after the earnings start coming in," says Waltz. "There's plenty of time left to get in on growth, and by then, there's a lot less risk."
Janet Lowe is the author of 10 books, including "Bill Gates Speaks: Wisdom from the World's Greatest Entrepreneur" and "Oprah Winfrey Speaks: Wit & Wisdom from the World's Most Influential Voice."
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