Circa 1999, high-tech growth stocks were going up, up, up. Professional investment advisers hardly seemed necessary. And a strategy focused on unadventurous large-cap value sounded downright old school.
"There were clients at the cocktail parties," remembered Woodley Farra Manion Portfolio Management Inc. cofounder and principal George Farra. "They heard about their friends who had [quickly] doubled their money, and it all looked pretty easy."
But today, most investors still feel the sting of their recession-induced losses. Ironically, the dot-com bust was a windfall for locally based Woodley Farra Manion. Its clients were still well in the black when other managers could show only red.
"The bear market was our best ally," said WFM co-founder and principal Donald Woodley.
Now 10 years old, Woodley Farra Manion has $343 million under management, mostly from wealthy Hoosiers. Its next goal is to crack the money-management market for institutions such as notfor-profits and pension funds.
To get there, Woodley Farra Manion will remain faithful to its roots: original research on undervalued large companies with a market value of at least $1 billion. But the financial advisory firm faces stiff competition. Bank industry giants like JP Morgan offer private client services for rich folks backed by hundreds of billions in assets and much-bet- ter-known brand names.
And even many local money managers preach a different investment formula than Woodley Farra Manion. They say only a selection of small and large stocks from across the efficient frontier can maximize investors' returns at a minimum of risk.
"There are investment managers who just manage one sector of the market. To me, that's not being diversified at all," said Elaine Bedel, president of locally based Bedel Financial Consulting Inc. "They're running the risk of whatever that sector's going to perform for them. I think most people see the value of full diversification."
Local bank roots
Educated at Indiana University, both Woodley and Farra are chartered financial analysts whose careers began in the 1980s, before industry consolidation gobbled up most every Hoosier banking mainstay. The shakeout was like a meteor impact, Woodley remembers, and it left the local dinosaurs nearly extinct.
After working together at INB National Bank and Trust Investment Advisors Inc., Woodley and Farra saw prospects amid the turmoil. Big banks headquartered outside state lines were moving local wealth and trust advisory services elsewhere.
Woodley and Farra knew money management is a business built on relationships. Few folks enjoy waiting on hold as their phone calls ricochet across the country. Wealthy individuals in particular expect more for their money.
"After family-your wife and kids-your assets are the most vitally important thing to people," Farra said. "They want to know they're cared for and respected."
Sensing the opportunity, Woodley and Farra formed their firm in October 1995 as a local alternative. Within a year, they had $17 million under management. Every year since, more people have entrusted the company with their dollars.
And the focus on personal relationships worked, Farra said. Through thick and thin, he said, most kept their money with the firm. As returns remained strong, clients' desire to micromanage declined.
"These days, if the market is down 160, the phone doesn't ring," Farra said.
In 1998, Woodley and Farra brought on a third partner, Michael P. Manion. The firm now has eight employees, with a staff of five investment professionals and $343 million under management.
In the go-go heyday of the late 1990s, the pressure to chase after the hottest new tech stocks was high, Farra said, and the firm lost a few clients. During the boom years, some were frustrated by Woodley Farra Manion's devotion to its large-cap value formula. One of its cornerstones is to invest only in companies whose business you understand.
When the market went bust, Woodley said, the method was validated. And everybody else finally understood what Woodley Farra Manion had preached all along.
"For 10 years, Conseco was one of the best-performing companies on the exchange. George and I shook our heads," Woodley said. "If it smells bad, we stay away from it."
Despite its small size, Woodley Farra Manion does its own research. Thanks to modern electronics and SEC disclosure regulations, the firm believes it has just as much access to information as any analyst on Wall Street.
And rather than sell its clients mutual funds, Woodley Farra Manion builds portfolios of individual stocks. They're selected via careful, standardized analytics of companies' income statements and balance sheets. Cash flow, dividends, price vs. sales and the like tell whether an industry giant's shares are undervalued.
The firm concentrates on the large-cap value area because Woodley and Farra believe that's the single stock sector with the greatest return and lowest risk. They deliberately avoid the instability of smaller companies, which sink or swim on the fortunes of only a few products.
Due to Securities and Exchange Commission regulations on solicitation, Woodley Farra Manion can't openly share details about its returns. But the firm's steady annual growth in assets shows many clients agree with its investment philosophy.
Bruce Benjamin, managing principal for Cincinnati-based Fund Evaluation Group LLC, said Woodley Farra Manion's performance compares favorably to other large-cap value money managers.
"For those that desire someone in their own back yard that they can see and feel and touch pretty easily, Woodley Farra offers that," Benjamin said. "And you really don't have to take a haircut, based on their results in the past."
"They've performed quite admirably, not only against benchmarks, but against other managers that invest in a similar style and fashion," he added. "Their track record is quite enviable."
But it's not difficult to find other financial advisers who advocate diversification via investments across the market. To gain the best return at the least risk, they believe, a portfolio should include assets from every equity sector. A careful selection of growing small-, medium- and large-company stocks compliments value stocks in all those sectors. For them, a balanced portfolio would also include a selection of bonds to minimize risk and international equities to maximize return.
"The smart thing to do is to be diversified," Bedel said. "And if [investors] really want to be diversified, that's the strategy they're going to have to take."
Whether investment in one sector can constitute full diversification is hotly debated in academic circles, said Kenneth Klabunde, vice president of locally based City Securities Corporation Wealth Advisors. And even at the highest theoretical level, the question hasn't been settled.
"If you peruse the PhD white papers, you'll find opposing [arguments] even there," Klabunde said.
Institutional money management
As it approaches a half-billion in assets under management, Woodley Farra Manion stands at a crossroads. The vast majority of its clients remain wealthy individuals. To grow, it hopes to break into the institutional money management market of pension funds, not-for-profits and foundations.
To get there, Woodley Farra Manion last year hired Angelo Auriemma as its new director of marketing as well as Thomas Maurath, who brings a third CFA to the firm. Ten years in the business have given Woodley Farra Manion the reputation to show real results to boards of directors.
Breaking into that market will be a test for Woodley Farra Manion, because many local institutional directors are only comfortable choosing managers bearing Wall Street brand names and the expertise they guarantee.
JP Morgan Private Client Services, for example, can provide personal trust, investment management and financial planning for individuals and families with $1 million to $25 million in net worth, said JP Morgan spokeswoman Gabrielle Gagliardo. JP Morgan steers folks with even more money to manage toward its Private Bank. Together, Gagliardo said, JP Morgan has more than 90 employees devoted to the area in Indianapolis alone. Worldwide, JP Morgan Chase oversees assets worth more than $780 billion.
And JP Morgan is just one of the global giants looking for a slice of the local wealth market.
It will be interesting to see how Woodley Farra Manion fares as it attempts to broach the institutional money management sector, Klabunde said. A lot of institutions are convinced of the full-market diversification approach. But rather than manage an institution's entire portfolio, Woodley Farra Manion might position itself as its manager of choice for the large-cap value segment.
"They're incredible at large-cap value," Klabunde said. "They'll have no trouble capturing that marketplace."