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Clipper's Pick to Helm Fund May Rock Boat

In an unusual move, the board is expected to say it is breaking with its management company in favor of another firm.

November 30, 2005|Josh Friedman | Times Staff Writer

The team steering the Clipper mutual fund is charting its own course.

In a surprise move, the board of Beverly Hills-based Clipper is expected today to announce that it is severing ties with the fund's management company and instead hiring a firm that has had no connection to the fund.

Analysts called it an unheard-of development in an industry in which "independent" directors rarely live up to that billing.

"It's a refreshing surprise," said Christopher Traulsen, senior analyst at investment research firm Morningstar Inc. in Chicago. "All too often fund boards don't show a lot of independence, but here they appear to be veering from that pattern."

Boston-based Old Mutual Asset Management, whose subsidiary manages Clipper's portfolio, had recommended that a another subsidiary take over the approximately $6-billion fund when the veteran crew led by James H. "Jip" Gipson steps down Dec. 31.

The directors, however, have decided to reject Barrow, Hanley, Mewhinney & Strauss Inc. as fund managers and will instead name New York-based Davis Selected Advisers as the new Clipper skippers, according to an attorney for the board.

In a statement, Old Mutual Asset Management Chief Executive Scott Powers said the company would "work closely with the directors of the Clipper fund to ensure a seamless transition."

Mutual funds are required to have portfolio managers who operate separately from the fund company itself, although they may be employed by the company. The fund company handles or contracts out administrative functions, such as selling shares; the portfolio managers determine how money is invested.

Clipper was long managed by Pacific Financial Research Inc., which was also an Old Mutual subsidiary. On Sept. 30, Clipper announced that Pacific's senior managers -- Gipson, Bruce G. Veaco and Michael C. Sandler -- would leave the company for undisclosed reasons.

At the same time, Old Mutual Asset Management, which is owned by London bank Old Mutual, announced that it would merge Pacific into corporate sibling Barrow Hanley. The plan to put Dallas-based Barrow Hanley in charge of Clipper needed approval of the fund's board, a process that industry analysts had considered almost a foregone conclusion.

On Oct. 13, however, the fund's directors hired Santa Monica-based consulting firm Wilshire Associates to evaluate Barrow Hanley and other potential managers for the portfolio -- which focuses on stocks of big companies that have fallen out of favor with investors.

After interviewing several finalists, the Clipper directors chose Davis Selected, headed by Christopher C. Davis and Kenneth C. Feinberg, which manages such value-oriented funds as Selected American Shares. The decision to hire Davis must be ratified by Clipper shareholders by the spring, said Los Angeles attorney Michael Glazer of Paul, Hastings, Janofsky & Walker, who represents the fund and its independent directors.

Davis Selected and the Gipson team have similar "contrarian" styles, Davis said in an interview. He noted that several of his funds' top holdings, such as American Express Co., food and cigarette maker Altria Group Inc. and manufacturing conglomerate Tyco International Ltd., overlapped with Clipper's recent favorites.

Davis said his firm and its principals would invest $50 million of their own money in Clipper. "That's part of our philosophy -- we should eat our own cooking," he said.

Davis said his firm would continue to run Clipper in the concentrated style the fund was known for, holding only 15 to 25 stocks.

The fund's unusually high cash levels are sure to come down, however, he said. Clipper managers often have held 20% to 40% of assets in cash when they couldn't find enough stocks they liked, whereas the Davis team usually sets aside far less.

Clipper's expense ratio will drop as well. Davis charges an annual management fee of 0.5% of assets, compared with the 1% that Pacific Financial Research now charges. But continuing the fund's investment approach was a bigger factor than cost in the board's decision, Glazer said.

"They chose the firm that best represented the spirit and philosophy in which the fund has been managed," he said.

Old Mutual spokesman Tucker Hewes noted that in October the trustees of Clipper offshoot Clipper Focus, a $1-billion fund, approved Pacific Financial Research as manager of that fund after its reorganization under Barrow Hanley.

Gipson founded Pacific Financial Research in 1980. He and his partners sold it to Old Mutual Asset Management in 1997 but stayed with the firm.

Directors in the $8-trillion mutual fund industry have long been criticized for a perceived lack of independence.

Morningstar's Traulsen said the decision by Clipper might reflect heightened pressure on fund boards in the wake of trading scandals that have scarred the industry.

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