Back in 1993, Henry B. Tippie and Cedar Rapids businessman Henry Royer backed the idea of a student-managed investment fund called the Henry Fund. The initial $50,000 investment has grown to $21 million. Over the years, Tippie helped shape the fund through everything from the construction of its charter and policy statement to subtle remarks about its ongoing management. Henry Fund Director Todd Houge shares how Tippie’s own investing philosophy might be infused into this namesake fund.
#1 Opt for a Concentrated Portfolio
With the Henry Fund, Tippie believed a concentrated portfolio rather than a diversified portfolio was the best approach. He preferred having about 20 to 30 stocks in the portfolio at any given time. “The more holdings that you put into the portfolio, you get more diversification but you also lose out on the ability to benefit from a few of your ideas that do really well,” Houge said. “By having a more concentrated portfolio, you focus on your best ideas and you don’t dilute those really good ideas because you feel like you have to hold a large number of assets in the fund.”
#2 Avoid Initial Public Offerings
There were specific types of companies that Tippie preferred to avoid—namely, initial public offerings, or IPOs. “A lot of that comes from academic research that shows IPOs tend to be relatively poor performers after they go public, so one rule in our fund’s charter is that companies must be publicly traded for at least five years,” Houge said.
#3 Maintain the Risk Level
In the Henry Fund policy statement, there’s a goal of maintaining a similar risk profile as the S&P 500 Index. “We try to beat the index in terms of performance,” Houge said. Seeking to assemble a portfolio with a similar risk year after year has forced Houge and the students to diversify by sector and industry. Now, each student ends up covering a different sector—from energy and financial services to technology and health care, etc.—and the portfolio ends up containing companies from a variety of industries.
#4 Get a Supermajority Consensus
Whenever there are trade proposals on the table, students need a two-thirds majority to vote in favor of initiating a trade. “That establishes a higher threshold where students really have to convince their peers—a supermajority of their peers—to go along with the idea,” Houge said. This has the effect of making each student manager hyper-focused on finding and investigating only the opportunities the group would likewise get on board with.
#5 Hang in There with Buy and Hold
Houge said there has never been any instruction in the charter or policy statement that outlined how often they should trade or how frequently they should turn over the portfolio. But in his monthly correspondence, it became clear to Houge that Tippie preferred a buy-and-hold strategy. Houge would send him monthly reports—for many years via fax, his favored mode of delivery—detailing the current portfolio offerings and statistics on its performance. If he felt the number of Henry Fund holdings was getting too big, he’d respond to Houge’s report with something like “Your portfolio has really grown in the number of names, and my portfolio only has 20,” Houge said. “He had a very subtle way of telling me ‘You have too many names in the portfolio.’ ”
#6 Work with Well-Managed Companies
Tippie always emphasized the importance of researching companies. When he met with the students managing the fund, he’d ask questions like “Is the company well managed? Does it have a management team I trust to do the right thing? Is it a company operating in an industry that is going to be sustainable in terms of its cashflow and profitability going forward?” This aligns with his buy-and-hold strategy, Houge said: “If you’re going to hold the company for five to 10 years, you’d better be comfortable with the managers, because you’re going to be in a relationship with them for a long time.”
This article first appeared in a special print edition of Tippie Magazine memorializing Henry B. Tippie. Alumni are invited to update their contact information with the college to be placed on the mailing list for future print editions.