Something for Everyone

Kurt Brouwer believes that no one is too wealthy to invest in mutual funds. He’s the president and co-founder of Brouwer & Janachowski Inc., a money management company in Tiburon, Calif., that caters to individuals with at least $1 million (and usually much more) to invest. The firm’s approach is unusual--most investment advisors for the affluent suggest individual stocks and bonds, not funds.

Actually, Brouwer and partner Stephen Janachowski see mutual funds as the perfect investment vehicle for all investors, regardless of wealth. It’s a theme they build on in “Mutual Fund Mastery” ($20, Times Business), which will arrive in bookstores next month.

Brouwer, 46, is a Michigan native whose early working years were spent as a drug counselor and restorer of musical instruments. He moved to the Bay Area in the early ‘70s, joining Merrill Lynch as a stockbroker. He and Janachowski, a University of Chicago graduate he met at Merrill, were not comfortable with the commission orientation of the brokerage business and formed their fee-only investment advisory firm in 1985. Today, Brouwer & Janachowski manages more than $500 million in mutual fund assets for clients, charging a maximum 1% annual fee.

Brouwer spoke recently to Russ Wiles, a mutual funds columnist for The Times.

Times: When you founded the firm in 1985, you felt no-load mutual funds were the best way to build client portfolios. Do you still think so?

Brouwer: Definitely. The merits of mutual funds are more obvious to more people today than in 1985. Back then, institutional clients didn’t think much of mutual funds. They thought funds were just for small investors.

Times: It appears that your clients don’t mind using these common-man investments.

Brouwer: We have accounts in the $70-million-to-$80-million range, and they’re exclusively in mutual funds. These clients have come to us and said they want a mutual fund portfolio. Whether you have $500 to invest or $500 million, funds really are the best single investment vehicle.

Times: Why?

Brouwer: Let’s say you have $10 million in your account. Even with that much money, it’s not easy to develop a diversified portfolio of individual stocks and bonds.

Suppose you want to include a small-stock component in your portfolio, along with large companies, international stocks and fixed income. You can try to find an investment advisor to manage each part, giving him or her $2 million or $3 million to invest. But many of the best advisors require much higher minimums. For example, Pacific Investment Management in Newport Beach, one of the best bond managers, has a minimum account of $75 million. But you can invest in mutual funds that Pimco manages for $1,000 or so.

We want Wall Street’s best money managers running parts of client portfolios, but we also see the need to spread money around. Mutual funds are a perfect vehicle for that. You get the obvious advantages of diversification and professional management at moderate cost. You enjoy the added benefit of being able to focus your portfolio in the direction you want, with the ability to make changes almost instantly, at little or no cost. That would be impossible with any other form of investment.

Times: Do you suggest that investors focus on no-commission, or no-load, funds?

Brouwer: Yes. If you’re willing to take the time to do some research, you will save money and become a better investor. If you’re doing your own research, there’s no reason to pay a load.

Times: Do you ever buy stocks or municipal bonds or anything else besides mutual funds?

Brouwer: No.

Times: What are the traits of an ideal fund?

Brouwer: Excellent and stable management would be one. A fund’s track record doesn’t mean much if the person who built it is no longer there. Some funds are team managed, but usually there are one or two people who are key members of the team. So we watch for excellent and stable portfolio management.

Times: How do you determine excellent management?

Brouwer: You have to look at a fund’s track record. You want to see that the manager has been able to add value compared to other funds or an appropriate index for five years or more. It doesn’t matter if the manager accomplishes this every year or quarter--in fact, no fund always beats its index.

Incidentally, I have nothing against index funds, which are appropriate for many investors. But if you’re going to buy a fund that’s actively managed, you need a reason to buy it--either because the manager has achieved a higher return or because he or she manages risk well.

But before you even look at a fund’s track record, you need to find funds that match your investment objectives. It’s easy for people to get off track. You might read or hear of a great bond fund, for example, but if you’re a growth investor, you might not need it.

Times: Do you prefer risk-adjusted ratings like Morningstar provides, or straight performance numbers?

Brouwer: We focus on the actual returns, along with the volatility of those returns. We look at a lot of the information that Morningstar provides, such as year-by-year results and comparative performance of a fund against an index like the Standard & Poor’s 500. But we don’t pay that much attention to the star ratings, which really are more of a starting point.

Times: What do you mean by the volatility of returns?

Brouwer: You want to see if a fund’s performance bounces around a lot, and how the fund fared in down markets like the fourth quarter of 1987 or the third quarter of 1990. [Special mutual fund tables in today’s Business pages include two measures intended to help predict performance in bear markets.]

Times: Do fund expenses figure into your analysis?

Brouwer: Expense ratios certainly are worth looking at. But they’re secondary to performance numbers, which are presented net of expenses. Take an investment like the Kaufmann Fund [an aggressive-growth stock fund]. I’ve often said this fund’s expenses are too high, yet it has done extremely well. So expenses aren’t the No. 1 thing. Rather, management, investment style and the results obtained are the primary issues.

Times: Do you use the Kaufmann Fund in client portfolios?

Brouwer: No. That’s one we missed, largely because it is so aggressive and has had such high expenses. We haven’t been along for the ride.

Times: Which are your favorite funds for client portfolios?

Brouwer: One would be Selected American Shares, a fund we have liked for a long time. We think very highly of both Shelby Davis and his son Chris, the co-managers. They have done extremely well over a long period, and they have a consistent style. They believe in buying good, brand-name blue-chip stocks, particularly when they’re out of favor, then holding for the long haul. Selected American Shares is an excellent example of a large-cap stock fund that seeks growth companies trading at a good price.

Another favorite is the Brandywine Fund. It has a different style, marked by higher turnover and more of a pure-growth orientation. It too has done very well. We also use Harbor Capital Appreciation, another growth fund, and we own Harbor International, which has been an absolutely spectacular international fund for years, although it’s now closed to new investors.

Times: How about a favorite international choice that still is open?

Brouwer: Janus Overseas is one that we use. It doesn’t have a long record, but it’s managed by Helen Young Hayes, the same manager who runs Janus Worldwide, a global fund that has had a spectacular record for six years. We also like Warburg Pincus Emerging Markets, run by Richard King. And we own GAM International, although that’s a load fund that we buy on a no-load basis.

Times: So in a typical client portfolio of more than $1 million in assets, how many mutual funds would you own?

Brouwer: It depends . . , but in general, 10 or so.

Times: And your portfolios are tilted primarily to stock funds as opposed to bond or money market products?

Brouwer: Yes. Relative to other investments, I think stock funds will continue to do very well. But I can’t imagine that they will do as well as they have been doing lately. I just don’t think the recent increases are sustainable.

You have to be careful not to put short-term money in the stock market. I think some people are doing that now because they think they can keep the money in for a year, earn 18%, then buy a house. We tell long-term investors that they should be thinking in terms of a 20-year horizon, if not more.

Times: Do you ever buy closed-end funds?

Brouwer: No. With closed-end funds, you have to deal with the issue of discounts. Plus, you have to buy these investments on the stock exchanges, and the funds often have low trading volume. We manage roughly $500 million. If we wanted to put 5% of our clients’ assets into a fund, that would amount to $25 million. Trying to put that much money in many closed-end funds just isn’t practical.

Times: Are you a buy-and-hold investor?

Brouwer: Yes, although we do make changes from time to time. But we try to find funds that we can own for a long period. We have owned Pimco Total Return [a corporate-bond fund] since 1988, for example. That’s our longest hold.

Times: What would cause you to sell a fund?

Brouwer: First, if a critical portfolio manager left. Second, if the fund has made a fundamental change in its investment style, which happens from time to time. A third reason would involve changing conditions. Maybe a fund has grown too big or maybe its area of investment focus no longer interests us. Finally, we would sell if we became convinced that a much better replacement has come along.

Times: What have you sold fairly recently?

Brouwer: Strong Common Stock. This fund has grown to such a large size that we felt it no longer could focus on small stocks. . . . So we reluctantly sold Strong Common Stock a couple of years ago.

Another example is Fidelity Disciplined Equity, run by Brad Lewis. This is a quantitative fund [focused on measurable factors], and I’m always edgy about quant funds because you never can fully understand how they operate. This fund changed its style, and its performance suffered. Then management reacted by tweaking the formula some more. Every fund, no matter how good, will endure times when its investment style is out of favor. But when managers change strategy in an attempt to chase performance, then we worry that they’re not sticking to their knitting.

We stopped using Fidelity Disciplined Equity sometime around late ’95 or early ’96. We felt it no longer was very disciplined.

Times: You mentioned earlier that indexing is a good strategy for some investors. Do you use index funds?

Brouwer: Yes, from time to time. We often own a mix of actively managed and index funds. Index funds are appropriate for people who don’t want to spend a lot of time managing their portfolios. But they still have to do the hard work--determining their investment objectives, setting on a course of action and sticking to it for a long time. Deciding between index and actively managed funds is less critical than deciding which asset classes you should own.

Times: Any thoughts on how fund investing might change in the years ahead?

Brouwer: Funds have become the dominant investment vehicle in America. There are thousands of funds around, and we’re seeing a lot of consolidation because many funds are finding it hard to compete. The services that investors require--800 numbers, round-the-clock phone reps and all the shareholder information--are hard for small fund companies to provide.

The flip side of this competition is that shareholders benefit. When you think about it, this really is the golden age for investors. Say you put $5,000 into a fund like Selected American Shares and get access to Shelby and Chris Davis for a cost of about $50 a year. You can’t hire the best doctor to take care of you for $50. You can’t find the world’s best sailing teacher or ski instructor for $50. The services, information, caliber of investment advisors and range of choices will get even better ahead. It’s a golden age for investors, without any doubt.

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Profile

Kurt Brouwer

Position: President, Brouwer & Janachowski Inc. Designs and monitors portfolios of no-load mutual funds for wealthy clients.

Background: Former stockbroker at Merrill Lynch, Boetcher & Co. Bachelor’s degree in business, University of San Francisco.

Books: “Kurt Brouwer’s Guide to Mutual Funds” (John Wiley & Sons, 1991); “Mutual Fund Mastery,” with Stephen Janachowski (Times Business, 1997).

Quote: “Whether you have $500 to invest or $500 million, mutual funds really are the best single investment vehicle.”