Ben Strubel On Potentially Purchasing Darden Restaurants, Inc. by Ben Strubel, Strubel Investment Management
A recent conversation with my new intern as well as a few recent client calls sparked an idea for a new addition to my client quarterly newsletter.
My intern and I were discussing a family member’s mutual fund investment portfolio. During the conversation my intern wondered out loud “I wonder what [the broker who sold the funds] invested his money in? I doubt it’s the same stuff he sells.”
You may or may not be aware but I invest my own money in the same investments my clients are in. So, I plan on including an overview of my own investments each quarter. I also think this will be helpful for clients who get worried when the market heads south. They will be able to see that I’m still invested in the same stock heavy portfolio as I always was and I haven’t made any changes.
Most client accounts I manage are custodied at either FOLIO Investments or TradePMR. I’ve had my personal account at FOLIO.
Most client accounts I manage have their investments split between our dividend stock fund, capital appreciation stock fund, emerging market stocks (via Vanguard index fund), real estate (via Vanguard index fund), investment grade bonds (via Vanguard index fund), and inflation protected bonds (via iShares index fund). I have all of these same investments in my account. Some larger accounts have individual municipal or corporate bonds. It is virtually impossible for me to invest in the exact same individual bonds as clients so instead I added an investment in a municipal bond index to try to be invested alongside those clients to the best of my ability.
You also may notice I have an investment in what I call a small cap fund. This is a new quantitative based small cap fund I’m evaluating making available to clients, but first I’m testing it out myself with my own money prior to clients.
The reason is this. Have you ever heard any of those mutual fund commercials where they advertise “90% of our fund’s beat their Lipper average” or “95% of our funds are rated 4 stars or above”? Sounds like a great fund company right? Well here is the mutual fund industries dirty little secret on how they can appear to have a great fund lineup.
The first trick they use is to seed a large group of funds in secret. They register these funds with the SEC but only put their own money in to them (at least they use their own money to experiment…), no outside investors, and they do publicize any of the funds. The funds that outperform are then made public, and they get to bring their previous but private track record with them. The underperforming funds are killed off. So you start 10 funds. 9 underperform and 1 outperforms. You kill off the 9 funds and make the 1 outperformer public. Ta da! You now have a perfect track record of 100% of your mutual funds outperforming… except that it’s basically a big lie.
The second trick is even more insidious. When public funds begin to underperform the mutual fund companies will merge them with outperforming funds. For instance let’s say my mutual fund company has 4 funds. Fund A and Fund B are outperformers. Fund C and Fund D underperform. We just merge Fund C in to Fund A and Fund D into Fund B. Ta da! Once again we now can brag that 100% of our funds outperform.
While I too am raising a new fund in private like the mutual fund companies I can at least be a little bit more transparent about the process with my clients and potential investors. I can also tell you that I’m not experimenting with the validity of the strategy for the fund but rather whether it is viable and cost effective to invest in smaller cap stocks with lower trading volumes through FOLIOs twice-per-day window trading platform.
In any case without further ado here is my portfolio.
My investment breakdown is as follows:
- 42.5% in our Dividend Fund
- 42.5% in our Capital Appreciation Fund
- 5% in the test Small Cap Fund
- 2% in Real Estate (Vanguard Real Estate Index, VNQ)
- 2% in Emerging Market Stocks (Vanguard Emerging Market Index, VWO)
- 2% in Investment Grade Bonds (Vanguard Total Bond Market Index, BND)
- 2% in Inflation Protected Bonds (Barclays iShares TIPS Index, TIP)
- 2% in Municipal Bonds (iShares S&P National AMT-Free Municipal Bond Index, MUB)
As you can see I have a stock heavy portfolio as I believe our strategies for investing offer the best opportunity for long term wealth creation.
Note: I also have an older IRA account opened during grad school at Scottrade. That account is invested solely in one stock, Philip Morris International (PM) which is a stock we hold in both of our stock portfolios.
Darden Restaurants, Inc. (DRI)
We have been talking for several quarters in client newsletters about potentially purchasing Darden Restaurants, Inc. (NYSE:DRI). After hedge fund Starboard Value was able to replace the entire board of directors at Darden, we went ahead and invested in Darden at what we believe is approximately the same price Starboard paid for its shares.
For those unfamiliar with Darden, it is the parent company of Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V’s, and Yard House–with Olive Garden being by far the largest chain. The previous management team pretty much ruined Olive Garden with a combination of ill-fated ideas, poor management, and poor execution.
In September, Starboard Value released a 300+ page presentation that outlined the problems with Darden Restaurants, Inc. (NYSE:DRI) and how they were going to fix them. There is not much I can add to their thorough analysis of the issues and their proposed solutions. Instead, I’ll focus on my personal experience, why we think Starboard’s plan for Darden makes sense, and why we chose to invest alongside them.
In Lancaster, PA, we have two Olive Gardens, a newer one built several years ago and one that’s been around for at least a decade. I had the unfortunate experience of visiting both in the past few years. Every year my friends and I usually have a “Friendsgiving” sometime in November or December. Through some unfortunate circumstances, we ended up at Olive Garden twice. (It was cheap, centrally located, and could seat a large group on short notice… probably because everyone else knew it was terrible.)
For reference, my personal experiences happened long (years) before Starboard Value made an investment in Darden Restaurants, Inc. (NYSE:DRI).
Olive Garden offers unlimited breadsticks and salad. One of the things that struck me as odd during my visit was that they made no effort to regulate the amount of food they gave you. They just threw a bunch of breadsticks on the table. If you asked for more, you didn’t get just one or two more breadsticks; they just brought another whole batch. Same with the salad. It was served in gigantic communal bowls. When one person in our group wanted a little more salad, we got another bowl, which promptly went to waste minus a serving for the one person who wanted more salad. I was astounded at just how much food was wasted. It