Morningstar Advisor - December/January 2012 - (Page 61)

enough to know that we don’t have an IQ advantage,” Rolfe says. But the firm does have a structural advantage, he believes. Rolfe and his team—Michael Quigley and Dana Webb—limit their circle of competence, get to know a handful of stocks very well, home in on those they think can grow faster and longer than other investors expect, bide their time for the right moment to buy, and then let the market do the math. “If we can build portfolios that are this growthy and not have to pay up for it, then we have a horse race,” Rolfe says. Wedgewood has run its race well, so far. Since its Sept. 30, 1992, inception through Sept. 30, 2011, the Wedgewood Concentrated Large-Cap Growth separate account has gained a cumulative 725.5% versus 554.8% for the typical large-growth separate account, 263.5% for the Russell 1000 Growth Index, and 331.6% for the S&P 500 Index. The account has achieved those results without much more volatility, as measured by standard deviation, than the Russell 1000 Growth Index, even though it’s focused and benchmark-agnostic. The firm’s only and still-young and small mutual fund, RiverPark/Wedgewood Fund RWGFX, has gained 3% annualized in the year ended Sept. 30, beating the average large-growth fund and the S&P 500 but lagging the Russell 1000 Growth by about 30 basis points. The Kid From UMSL wanted to do,” Rolfe says. “I wanted to invest.” The easiest way for a kid from UMSL, as locals refer to Rolfe’s alma mater, to get into investing was as a stock broker. After a few “incredibly unproductive” years at Westport Financial Group and PaineWebber, Rolfe became a portfolio manager at Boatmen’s Bank, which had St. Louis’ largest trust department. There he honed what would become his and Wedgewood’s competitive edge. Rolfe knew from his education and reading that the stock market was pretty efficient and hard for active managers to beat. Yet he also knew from studying great stock-pickers that the market was not perfectly efficient. “There were enough investors who were outperforming the market on a consistent-enough basis to refute key elements of the efficient-market hypothesis,” he says. “There is a big gulf between relatively efficient and perfectly efficient.” That investors often mispriced securities as they swung from fear to greed wasn’t an original insight. Few managers seemed to take full advantage of the inefficiencies, though. Those who did seemed to have one thing in common. “Whether they were growth or value,” Rolfe says, “They viewed investing more like a successful business owner than a green eyeshade investment analyst.” To Rolfe that meant buying and holding as well as being willing to look different from the benchmark and the typical large-growth portfolio. “We choose not to manage money like others,” he says. After four years of putting theory into practice at Boatmen’s, Rolfe’s eye began wandering for more entrepreneurial opportunities. When he heard of the impending retirement of the chief investment officer of Wedgewood, which Guerrerio founded in 1988 after running Mark Twain Bancshares’ brokerage for nearly a decade, Rolfe applied. His passion and voracious reading appetite sorted him from the pack of candidates. “He lives, eats, breaths, thinks, and sleeps stocks,” Guerrerio says. “In this game you have to have a passion for it.” Guerrerio hired Rolfe in 1992 and gave him carte blanche to remake the firm’s investment process. Giving a blank slate to a young manager was risky, but Guerrerio had learned to value native intelligence, drive, and work ethic more than credential, tenure, or rank. The former Army nuclear missile battery commander put himself through Harvard Business School while starting a family and worked at Salomon Brothers before an MBA buddy lured him to Mark Twain Bancshares in 1979. At the old Salomon Brothers “if they spotted talent, they would give them a shot,” Guerrerio says. “That was in my blood.” Indeed, Guerrerio continued giving underdogs their shots. Webb, who was one of Guerrerio’s brokers at Mark Twain, was Wedgewood’s first employee. After she took a break to raise her children in the 1990s, he not only welcomed her back in 1997 but also made her a portfolio manager in 2002 after she earned her MBA and CFA. “I watched her grow,” Guerrerio says. Fellow investment team member Quigley joined Wedgewood as an intern after graduating from high school in 2000, in part because his parents were Guerrerio’s friends and neighbors. He worked at the firm while studying finance at St. Louis University and joined Rolfe and Webb after his 2004 graduation. “[Guerrerio] gives you as much rope as you want,” Quigley says. “I tried to take advantage of that.” Preferring home-grown talent has helped keep the boutique unique. “They don’t come in with a biased approach,” says Steve Snyder, director of equity investments for Fortigent, an investment consultant. “In St. Louis, they’re definitely removed from the Manhattan mind-set and focused on the long term.” The tall, garrulous Rolfe, whose office is a thicket of teetering stacks of books, annual reports, and journals, clearly drives the process, though, which creates a bit of key-man risk. “If Dave was ever to decide to leave Wedgewood, we would part ways,” Snyder says. That record is the product of the pairing of a West Point graduate who grew up in the Bronx and a Midwestern frat boy. In the early 1980s, Rolfe went to the University of Missouri to study engineering. He joined a fraternity and fell in love with his future wife—”Two of the best things in my life,” Rolfe says—but engineering didn’t pan out. So, Rolfe returned to his native St. Louis to study finance and economics at the University of MissouriSt. Louis, where he got hooked on the Financial News Network, a precursor to CNBC, and the approaches of legendary investors like Buffett, Hawkins, Sir John Templeton, and T. Rowe Price. Rolfe started a student investment club and began plotting his career. “That’s what I MorningstarAdvisor.com 61 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - December/January 2012

Morningstar Advisor - December/January 2012
Contents
Contributors
Letter From the Editor
Seduced by Complexity
Is China Exposure Important for a Portfolio?
A Niche Built on Trust
How to Find Your Client’s Investment Style
Taking the Long View
Consensus on Europe Elusive
Four Picks for the Present
Investment Briefs
Is Perception Reality for Active Managers?
Be Alert for Basic-Materials Bargains
Investment Boom Unsustainable
Digging Moats in China
Where China’s Domestic Companies Stand to Benefit
Arising Opportunities
China Strong Long Term
From Currency Manipulation to International Acceptance
The Keys to China’s Fortune
Wedgewood’s Lessons Pay Off
Reading the Evidence on Indexing
Scouting for Investments Abroad
Yield, Please (Hold the Europe)
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
China Fund Managers Eat Elsewhere

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