Co-manager James Davolos told Insider about the fund's approach to identifying market mistakes.The managers of theutilize an unusual investment process, but it's hard to argue with the results.
The fund, created in 2000 and managed throughout its history by firm co-founders Peter Doyle and Murray Stahl, has lived in the upper echelon of small-cap stock funds for a long time. Its returns over the last three, five, and 10 years all rank in Kiplinger's top 10 among similar funds, and over the last 20 years it's the second-best fund in the space, with an annual return of 13.6%.
For instance, he said that market mistakes are particularly common when it comes to companies that were recently spun off. Index-tracking funds often sell those stocks immediately because they don't meet the funds' inclusion criteria, and investors who bought the former parent company will sell the new stock without thinking about it.
Davolos says investors have consistently underestimated the value of the company's land, the overwhelming majority of which is still undeveloped, and they also don't appreciate the value of the revenue it gets from oil companies that drill for shale oil on that land. "The market has a very difficult time placing a value on that undeveloped acreage. Plus the other nuance is that they also have close to a million acres of surface land, so separate and distinct from the royalties, which are purely a financial revenue interest."
The fund has a total of 48 stocks, but the concentration in energy companies in general and Texas Pacific Land in particular mean it looks very different from its benchmark and from competing funds. Morningstar data reveals the fund has a boom-and-bust history; it beat nearly all of its peers in 2017, 2018, 2021, and 2022, but in 2020 and in the early months of 2023, it's among the weakest performers in its class.
Impressive track record by James Davolos and Horizon Kinetics! It's inspiring to see unconventional investment strategies yield such fruitful results. Looking forward to learning more about their approach and the unique insights they bring to the table.
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