A Value Fund with an Outstanding 10-Year Track Record
Mark Travis is a co-founder of Intrepid Capital. He is also the lead portfolio manager of the Intrepid Capital Fund (ICMBX), the separately managed Intrepid Balanced portfolio and the Intrepid Capital, L.P. Mr. Travis is also a member of the investment teams responsible for the Intrepid Endurance Fund (ICMAX), Intrepid Disciplined Value Fund (ICMCX), Intrepid Income Fund (ICMUX), Intrepid Select Fund (ICMTX), Intrepid International Fund (ICMIX) and the Intrepid Small Cap, Intrepid Disciplined Value, Intrepid Income, Intrepid Select and Intrepid International portfolios. He has over 30 years of experience in asset management. Mark received his BA degree in Economics from the University of Georgia.
Over the last 10 years, the Intrepid Capital Fund has returned 7.59%, which is 172 basis points ahead of its benchmark, the Morningstar moderate-risk total-return index, and 221 basis points ahead of its Morningstar peer-group average, placing it in the top 3rd percentile of that peer group. It has also outperformed the S&P 500 and Russell 2000 over that time period.
I spoke to Mark on August 30.
You founded Intrepid in 1994 along with your father, Forrest, in Jacksonville Beach, Florida. What was your background, and what led you to locate the fund there?
I started as a 22-year-old rookie broker with my dad at E. F. Hutton. We spent a decade together selling investment management to hospitals, labor unions, municipalities and large defined-contribution plans. It was an institutional business along the eastern seaboard. But we went through a series of mergers at E. F. Hutton, culminating with Smith Barney in the early 1990s.
I had gone outside of the firm at that point, looking for managers I knew and trusted and with whom we could have a good dialogue. I was less enamored with the “wrap” business, which was a big, automated portfolio construction. I like a little more of a partnership with a portfolio manager. So, I found some firms that I brought business to and we had good relationships.
I got to see all sorts of asset managers, handling everything from short-term Treasury bills to aggressive growth equity, balanced and value. I saw the pros and cons of all sorts of different styles. I took what I learned in that period and started managing money in early 1995. We were in Jacksonville at the time, but we are in Jacksonville Beach today.
We managed separate accounts. Unfortunately, a lot of the big committee-driven, trustee-driven plans didn’t want to go with a startup firm like ours. We lost a lot of what had been our core business. Fortunately, being natives of this area, we were able to garner enough private client business to get over the hump. In early 2000, we were being distributed through what I would consider second-tier broker dealers. I used to say sarcastically, “We traded by smoke signal and settled by pony express.”
We had focused on small-cap-value equity and short-duration high-yield debt. Those things didn’t really work with those broker dealers. We like to use limits and patiently work our trades. We buy debt from all over the street, wherever we can find it. We weren’t buying only very liquid corporate debt. We were finding obscure illiquid corporate debt.
I made the decision in 2004 to start the Intrepid Capital Fund, ticker ICMBX. We had some smaller accounts that were too small to even be separate. I did some analysis for these customers and said, “Look, if you’ll go into this new mutual fund we’re starting in January of 2005, I think you’ll get a better outcome.”
We ended up converting a lot of our separate-account composites into funds. In the fall of 2005, we opened up the small-cap fund, ticker ICMAX. It’s now called the Intrepid Endurance Fund. In 2007, we had to overcome some regulatory issues with purchasing illiquid debt. I went back to some of our bigger customers and said, “Look, we like these illiquid pieces of paper, but you really need to own them through a fund. You’ll get daily liquidity, which you’re really not going to get necessarily with individual issues, and it will allow us to find that type of security for you.”
In 2007, we started our income fund, ICMUX. Later that fall, we started the Discipline Value Fund, ICMCX. We waited a long time, but we wanted to expand our reach. We spent about a year or more running a small-cap non-U.S. equity portfolio. We converted that to the Intrepid Capital International Fund, ticker ICMIX, on December 31, 2014.
We have had people complain about our cash. They say, “I understand what you’re doing. I appreciate the good risk-adjusted returns I’m getting. But I can’t go back to my customer and say, ‘Hey, you’ve got 50%-70% cash.’ I need something else.” With that as a backdrop, we stripped out the cash, and we opened a cash-constrained product, the Select Fund, ICMTX, last July. It too is off to a pretty good start.
Approximately 90% of our assets are in one of those six funds. We do have some legacy separate accounts.
The only advantage that I still see in a separate account is the possibility of controlling the tax bill and avoiding certain taxes. That happens in a fund when you have some cash outflows that may cause taxes to be prorated across numerous shareholders.
I understand you take a contrarian, risk-based, value-driven approach to investing. Tell me a little bit more about your investment philosophy.
If you’re going to outperform you’re going to have to do something different. If you do the same thing everybody else is doing, you’re going to get the same results.
With the help of my team, I apply what I call classical security analysis across the less efficient parts of the capital markets, be around the globe, the sub-$2 billion equity market cap or short-duration, high-yield debt. For us that’s typically double-B, single-B, five-year maturity-type paper.
If we can do the underwriting in a conservative fashion and determine the business value, we can buy that value in the market at a discount. We’re very patient. We practice what some might call “time arbitrage.”
Most of my peers are “di-worsified.” They own over 100 securities. That’s error number one in my view. Number two, they turn over their portfolio 100%. If they bought something January 1, it’s long gone by New Year’s Eve. As you and I know, a taxable individual is going to pay twice the tax rate on a short-term trade as on a long-term one.
We feel like we fish in a deeper pond. Most of my peers are very index-centric, both by sector and by name, and they tend to look at the S&P100 or S&P200 for investment possibilities. We don’t look at the index. I couldn’t tell you what the composition of the index is or its sector weights. If we find something that we like, either sector-wise or company-wise, we’ll tend to buy a lot of it. Then we’re patient and wait. My turnover over the last 20 years averaged approximately 30% a year, which implies a three-year-plus holding period.
We have a willingness to invest when there’s fear, which I’ve gotten to be pretty good at. It doesn’t happen that often. We have a stubbornness to hang on until that value is realized.
It’s easier to say than it is to do. I didn’t realize how contrarian I was until I got to this age and observed how I thought over a long period of time. The most telling year for me in the industry was 1999, when most people were partying like rock stars with something with a dot-com after it. I didn’t make any money that year. If anything, I probably lost a little bit. Then in 2008, I didn’t lose much money, and I made a lot of really good investments in the post-Lehman failure.
I’ve found myself on a little bit of an ice floe here the last couple of years. As prices reached our conservative estimates of value, we’ve been a seller. We still have high levels of cash in many of our funds. This year has worked out better than I would have guessed if you’d asked me in December. We’ve actually had net inflows into ICMBX this year. Collectively as a firm we’ve had slight inflows. I’m pleasantly surprised, as we roll into the more difficult month of September.