Not Yet Chic
Low-key BKF Capital is drawing the attention of high-brow
investors
By MICHAEL SANTOLI
Many perfectly pleasant but unremarkable places gain exalted status after
winning the attentions of the rich, powerful and well-connected. So it is that
the Hamptons on Long Island, once the province of potato farmers and
penniless Expressionist painters, now is the land of "cottages" with eight-figure
price tags and a spa for Soho art dealers.
Which leads one to wonder if something analogous is happening with a
money-management company called BKF Capital, which is drawing the
attentions of some rather highbrow investment personalities, seemingly out of
proportion to its modest size and obscurity. Formerly a closed-end fund
called Baker Fentress, and a descendant of a 19th-century underwriter of
timber bonds, BKF Capital late last year distributed or liquidated a collection
of varied assets such as a land-development company, and transitioned to a
holding-company structure. Its principal business now is John A. Levin &
Co., a manager of $10 billion, which was founded in 1982 and sold to BKF
in 1996 by John Levin, now chairman and chief executive of the parent
company.
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John A. Levin was briefly in the news a couple of years ago when it hired
Jessica Bibliowicz, daughter of Citigroup boss Sandy Weill, as president, after
she was eased aside at Travelers, Citigroup's predecessor. She moved on last
year with far less fanfare. But on the whole, the firm quietly goes about its
business of managing institutional and individual money in its large-cap value
style. Mutual-fund investors know John A. Levin by its subadvisory
relationships with Mainstay Research Value and Vanguard Equity Income.
The firm's reserved demeanor has shown through a silent corporate transition,
an occasion that other small companies would have used as an excuse to
draw buyers to its under-appreciated stock.
But that hasn't kept some high-wattage folks from finding their way to BKF.
The company's reconfigured board of directors counts among its ranks James
Tisch, CEO of Loews; Peter Solomon, chief of investment bank Peter J.
Solomon; Anson Beard, a prominent banker and former Morgan Stanley
executive; and Burton Malkiel, Princeton professor and stock-market
theorist. As for what ambitions might be represented by the assemblage of
such a distinguished brain trust, the company isn't keen on talking strategy
during its current transitional period, a spokesman says.
Outside the boardroom, though, some investors who make it their business to
run ahead of the pack aren't waiting for any pronouncements from the home
office. Billionaire British currency speculator Joseph Lewis, now a resident of
Lyford Cay in the Bahamas, recently reported a 7.4% stake, much of it
accumulated last spring at prices one-third below the current quote of 18 1/2.
From the less-sumptuous locale of Omaha came a filing from Warren Buffett,
private citizen. He had taken ownership of more than 5% of BKF for his own
account as of December 31, though some speculate that his interest was
merely in the fleeting arbitrage opportunity presented by BKF's asset
distributions. Not insignificantly, John Levin himself has been buying BKF
shares, seeking to raise his personal interest above a current 10%.
No doubt these investors are mindful that in a market that's beginning to push
up the value of asset managers amid galloping industry consolidation, BKF
measures rather cheap. At its current share price, BKF has a market value of
$120 million. That's just over 1% of assets at a time when quality managers
are fetching 3%-5% of assets in private sales. It also amounts to about 1.25
times book value. On an annualized basis, BKF's pretax operating income in
the first quarter (the most recent period reported) was $20 million, boosted
by good returns in hedge-fund portfolios the firm runs. To boot, the company
has $2 per share in cash on its books.
BKF's still-modest valuation reflects a 60% jump in the shares since March,
likely helped along by Lewis' buying. So, some of the easy money almost
surely has been made. Then again, plenty of not-so-early birds who followed
the first Hamptons land speculator made fortunes as those quiet potato fields
erupted into mansions.
What would a businessman pay for the medical practice of an unquestionably
brilliant doctor, one who caters to many well-heeled and prominent patients,
as the physician prepares to retire? Could the bidder extrapolate from past
professional performance and business trends to construct a rationale for
paying a nice premium for such a practice?
Similar questions surround the current bidding for the Houston
money-management firm Fayez Sarofim, overseer of $50 billion in large-cap
stocks, founded by the secretive Sarofim. The firm has built an enviable
long-term track record and has won the loyalty of major institutional investors
with an emphasis on brand-name blue chips, many bought in massive
quantities at times when their value was ill-understood by the market at large.
Though principally a manager of endowment and pension money, Sarofim
also runs the $4 billion Dreyfus Appreciation Fund, whose holdings and
performance can be used as a proxy for the firm's investment fortunes. The
fund is a near-static collection of top S&P 500 names such as Intel, Pfizer,
General Electric and Merck, but has trailed the S&P over the past few years
as non-tech consumer blue-chips such Coca-Cola and Philip Morris have
gone sour. But a potential purchaser of Fayez Sarofim would be much more
interested in the firm's assets, client relationships and fund-management
expertise than in a single $4 billion fund. Firms with $50 billion mostly in U.S.
equity assets don't become available all that often. So, in the current race by
financial institutions to corral asset managers, many companies are giving
Sarofim a long look.
But potential acquirers must be asking what they'd really be buying when the
founder himself inevitably surrenders the helm, perhaps loosening client
loyalties in the process. Russell Hawkins, a Sarofim portfolio manager and
executive, is seen as one candidate to carry on the firm's style, as is the top
man's son, Christopher Sarofim. Yet a buyer would have to gain solid
assurances of continuity before writing a check, presumably for $1 billion or
more. Similar issues were addressed in Liberty Financial's recent deal to buy
Wanger Asset Management, when proprietor Ralph Wanger agreed to stick
around for five years. Tom Marsico, though, made no such commitment when
Bank of America bought Marsico Capital Management earlier this year.
One senior executive at a money-management firm says, "Of all the properties
for sale right now, [Fayez Sarofim] is probably the most problematic. I think it
would be a real challenge" for an acquirer.
Mellon Financial, parent of Dreyfus and owner of asset managers with a
combined $500 billion in house, is thought to have an inside track in the
auction process. But while the company is known to have submitted a bid,
success is far from assured. Indeed, in the present deal climate, when
free-spending European institutions have been the pacesetters in paying gaudy
premiums for financial firms, a price-sensitive, shareholder-attentive company
such as Mellon might be at a disadvantage. As in many auctions, it's often the
most reckless bidder who sets the price.
There are 135,000 members of the two main actors' unions, each with glossy
head shots and dreams of magazine-cover stardom. All in all, a pretty
unwieldy group for a movie producer to navigate. That's where casting
directors come in, matching eager talent to the money men who want to put
them in lights.
There aren't quite as many mutual funds -- just 7,000 or so -- but there are
more managers seeking their big break than your typical investor can keep
track of, let alone have an informed opinion about. The pros at Managers
Funds do the casting work for retail investors, auditioning and reviewing the
performance of money managers and then placing them in ensembles in the
hopes of creating good chemistry.
The Managers group runs several funds in which managers of differing, but
ideally complementary styles are allocated assets on a no-load basis. The
Norwalk, Connecticut, firm crunches the subadvisers' performance data and
rides herd on their investment process to ensure that they're delivering as
promised. If not, they can be dismissed or their share of a fund's assets might
be cut. The net effect is comparable to a brokerage-house wrap account, in
which a financial adviser farms out money-running duties to outside managers.
Rather than a fee of 3% on assets that a wrap account might carry, however,
Managers' funds are free of any sales charge. Their expense ratios fall right in
line with most stock funds, in the range of 1.2%-1.4% a year.
One could argue that layering the investment process in this way -- selecting a
fund that selects other managers who select stocks and bonds -- could be a
formula for compounding bad judgment. Certainly that's a potential hazard.
But in fact Managers' long-tenured funds have generally been fine performers,
a sign that the firm's quantitative performance screening and face-to-face
vetting of investing talent has added value.
Managers Capital Appreciation had annualized returns through June 30 of
50.8% for three years and 35.6% over five years, though it has slipped more
than 2% year-to-date in the growth-stock comeuppance of 2000. The
portfolio is split 50-50 between Essex Investment Management, which favors
companies showing rapid earnings growth, and Roxbury Capital
Management, a growth manager with greater valuation sensitivity. Essex --
like Managers Funds, a subsidiary of Affiliated Managers Group -- has been
running its portion since March 1997. Roxbury was brought on board in
October 1998.
A 16-year-old fund with portfolio managers, and investing styles, that were
tapped two and three years ago provides an illustration of how the
fund-of-funds structure can work to capture fresh approaches to the market.
Similarly, Managers Special Equity, a small-cap growth fund with a value
sensibility, has put together a solid long-term record while sometimes shuffling
its deck. Two of its managers -- Westport Asset Management and Goldman
Sachs Asset Management -- date from 1985, while Pilgrim Baxter (1994)
and Kern Capital Management (1997) are more recent recruits. Clearly,
enduring stars keep getting the big roles, while actors who fail to hit their cues
get no call-backs. |
