Indiana-based SBAuer Funds launched its inaugural mutual fund in December of 2007, after having established a successful track record with a separately managed account business. The Auer Growth Fund (AUERX) is managed by father-and-son team Robert and Bryan Auer. The Auers have employed the same stock selection system used by the fund for the last 25 years.

Bob Auer

I spoke with Bob Auer on November 2 at the Schwab IMPACT conference.

What is the history of your fund? I understand it grew out of a separately managed account business and then you created a mutual fund.

I was a registered investment adviser with Morgan Stanley. I started there in 1987, and I had a small retail practice for 21 years, from until 2007. I totally understand where advisors are coming from, because my business was advising clients. I had no institutional accounts.

In 1987, as a new young broker not knowing anything and trying to drum up business, I hit up my family, of course. My parents were not very wealthy, but my Dad had always dabbled in the stock market and he had a small IRA account from rolling over a pension from another company. He had $100,000 and he said I could have his account, but we had to take that $100,000 and buy 100 stocks, or up to $1,000 in each holding.

I thought that was a little overkill. We should have been able to at least take a $10,000 position, and we could have built a nice portfolio with 10 different stocks. He said, “No, I want to spread it in 100 companies, and give me a big discount on the commission so we don't get eaten up.” So that's what we did.

He had formulated – I give him all the credit – an investment thesis of simply doing three things: buying only companies that had 25% increase in earnings for the quarter versus last year's quarter (not for the year); sales or revenues up 20% year-over-year; and P/E ratios no more than 12. He gave us permission to buy the first 100 stocks we found that meet those criteria.

He added another caveat. “If you send me any research from your firm – at the time it was Dean Witter – I will close my account, because I don't want to be biased by that,” he said. “I just want it to meet these simple criteria.”

That was in 1987, before the crash on October 19. Just before the crash, the $100,000 was worth $120,000, so we had made 20%.

On the day of the crash we went down to $60,000. It dropped 50% in one day because the portfolio held micro-cap and small unheard-of stocks. But by the end of the year it was at $105,000 and we had a gain of 5%, which only equaled the S&P 500 for that year. We had worked our tails off – we had probably touched 120 stocks over the year – and we had only made $5,000.

He made five $2,000 contributions over the course of the next five years. So there was $110,000 invested, $100,000 initially and another $10,000 in small contributions. By the end of 2007, without adding any additional money, its value was $34 million. We kept to the same methodical investing system.

Nobody knew about it except me, my family, and the branch manager.

We started looking at it, humbly, and nothing beat it. Out of 10,000 mutual funds, nothing beat it. Warren Buffett didn't beat it.

Has anyone reviewed your performance record?

We brought in one of the top auditing firms in the US. I personally picked up one of their partners from the airport. He went through 21 years of statements. When I drove him back, I asked, “Have you ever seen anything like this?” He said no, he hadn’t.

Our returns were achieved without ever shorting stocks and with no market timing whatsoever. We were always fully invested, through thick and thin. We had no leverage, because in an IRA there is no margin. We were basically in 100 names the whole time.

When we show people our track record, they say, “Oh you must have owned Cisco, Microsoft, Starbucks and Wal-Mart 20 years ago, because those were what were hot. They were the Apple Computers of those 20 years. But we never owned any of those stocks, because they always had too high a P/E ratio even though they often had the growth metrics we required.