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The Killen Group, new manager of the Nedgroup Investments Global Cautious Fund

By Simon Watts, Senior investment analyst

US-based manager, The Killen Group Inc. (Killen), has been appointed to manage the Nedgroup Investments Global Cautious (and Feeder) Funds. Killen will assume investment management responsibility for the fund on 2nd March 2015 replacing JP Morgan. The Nedgroup Investments Global Cautious Fund will be modelled on Killen’s main strategy, which is called the Berwyn Income Fund.

Killen was founded in 1982 in Berwyn, Pennsylvania, a small town outside the city of Philadelphia. The firm is independently owned, with six investment professionals and 14 employees in total. Bob Killen, CEO, is the majority shareholder, with Lee Grout and George Cipolloni also owning stakes.

Killen is a valuation-based manager, buying undervalued and often out-of-favour stocks and bonds which, in their opinion, have sound fundamentals. They define value more in absolute than relative terms (i.e. relative to any particular benchmark), applying their valuation discipline to stock and bond selection, seeing shorter-term market dislocation more in terms of opportunity than threat.

When asked what its primary differentiator to its peers was, Killen replied “We conduct all research internally, unlike many mangers that use third party research. We look for companies that are out of favour, and not widely followed by ‘The Street’. From that we emphasise companies exhibiting a sound long-term business plan, strong management, a solid financial structure, and which are selling at a deep discount to what we believe to be the true value of the business. This disciplined approach helps us to maintain our bearings when market volatility is high and conflicting opinions are prevalent. We feel this investment model gives us an information edge given that the companies we own are not broadly followed until their turnaround strategies take hold. By that time we’re typically fully invested at a deep discount”.

Why we appointed Killen
We believe Killen has many of the qualities and characteristics that we look for when selecting a manager for our Best of breed™ range. Below are the five key attributes:

  • Stability of the manager
    Continuity of key people and investment philosophy is crucial for replicating past success. The key people at Killen have been part of the investment process for a very long time. The manager’s founder, Bob Killen, has been actively involved for the longest period, having originally launched the Berwyn Income Fund in 1987. However, other key investment professionals have also spent a significant part of their career at Killen, with Lee Grout joining in 1997, while George Cipolloni arrived in 2002. Even the most recent member of the investment team, Mark Saylor, has spent eight years with the company.
  • Alignment of interests
    Killen is well aligned with the interests of their underlying clients, being an entirely employee- owned company where key staff invest substantial amounts in their own funds. We believe that managers should ideally own the businesses they work for, or at least be significantly invested in the funds that they manage. This ensures long-term alignment between manager and investor. Those managers that own their own businesses have ’self-selected’, based on their belief in the ability to generate great long-term results. 
  • Act as stewards of capital
    During a period of significant investor inflows and limited opportunity, Killen took the client- focused decision (and one that many managers avoid) of closing the Berwyn Income Fund to new investors in 2010. They did this because they believed it necessary to protect existing client returns. While, the fund subsequently reopened as market conditions improved, we believe that this sort of action demonstrated that Killen prioritises the interest of clients ahead of its own short term business goals. In our opinion, this provided strong evidence that Killen is an excellent steward of client capital, which is a vital ingredient for delivering good long term performance. 
  • Consistent approach
    Killen has demonstrated that they strictly follow their valuation-led approach, unlike many investment managers, it is not tied, or predisposed, to hold any particular security type, and is not afraid to hold a significant portion of the portfolio in cash. Allocations in the Berwyn Income Fund have changed over time to reflect where their research team is finding value within financial markets.

  • Great long-term performance/ downside protection
    The cumulative long-term performance of the Berwyn Income Fund versus its peer group, relevant market indices, and a cash +3% absolute target has been extremely impressive (see chart below) across both bull and bear market conditions. The fund has outperformed US dollar cash deposits by 5.1% p.a. with a volatility of 6%, which is only marginally higher than that of US treasuries.

Protecting capital in down markets is important as our research suggests that the best performing managers have produced the bulk of their outperformance in poor market conditions, rather than in strong markets. This would make sense, especially over the long term, given that the compounding of returns is far more effective if large losses are avoided.

The chart above shows that the rolling one-year returns have been positive 90% of the time since the fund’s launch in 1987.

We are excited to find a manager with so many of the qualities that we value in Killen and believe they will do an excellent job of managing the Nedgroup Investments Global Cautious Fund.

Nedgroup Investments Global Cautious Fund’s mandate remains unchanged
The Nedgroup Investments Global Cautious Fund’s investment objective of US dollar cash +3% per annum remains unchanged. The fund is aimed at investors looking for material upside relative to offshore cash deposits, with a high degree of dependability and also serves as a low-risk, well regulated, cost effective alternative to hedge funds. The fund seeks to identify value across the capital structure and is constructed with securities ranging from dividend paying common stocks, preferred stocks, convertible preferred stocks, convertible fixed income securities, and fixed income securities with maturities ranging from short to long-term; including corporates, government, agencies and mortgage backed securities. Essentially, the fund looks to create a diversified portfolio of income producing securities that Killen perceive as cheap, but which have solid fundamentals. This portfolio construction allows the fund managers wide discretion to invest where they see the best value, and to avoid securities altogether where they do not see value. For example, they currently don’t hold any government bonds within the fund.

The Nedgroup Investments Global Cautious Fund does not have any stated required minimum holding percentages for any security type, and does not have a stated maximum for cash. However, the fund will be limited to a 30% allocation to equity, which is consistent with the low-risk nature of the fund.

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