A Missoula investment advising company has found success by investing in companies that empower employees to make decisions without fear of punishment by their managers while fostering a culture of cooperation.
Front Street Capital Management in Missoula created the Tarkio Fund, a mutual fund which now holds $9.5 million worth of investor money. It recently was rated the top mid-cap core fund (a fund that invests in mid-sized companies with market capitalizations generally between $2 billion and $20 billion) in the nation by the Wall Street Journal, out of 948 mid-cap funds in the past 12 months. And out of 6,361 U.S. mutual funds categorized as either small-cap, mid-cap or multi-cap, Tarkio ranked sixth. Those types of rankings by the Wall Street Journal usually are reserved for huge, well-known wealth management firms in large cities on either coast, so for a Missoula company with five employees it’s a pretty big deal. The rankings mean the fund has been good for its investors, financially, but it also means their money is being invested in companies that treat their employees well.
“It’s a pretty cool philosophy,” said development manager Jeremy Brown. “We look for companies with a long-term outlook that is willing to eschew short-term quarter-by-quarter performance in order to make the company more competitive in the long-term. And the company allows employees to make decisions and make mistakes, so then the company gets better and the company can continually improve over time better than its peers.”
Brown said over time, these companies develop a culture where employees can solve problems and make the company better.
“This philosophy is known as kaizen, a Japanese word for ‘continual improvement’ made famous by the Toyota Corporation,” Brown explained. “It seems to work, and it has worked for these guys for over 30 years and that’s the philosophy the fund is built on.”
Russ Piazza, Front Street’s portfolio manager, co-founded the company with Michele Blood in 2006. He received a bachelor’s degree in finance from the University of Montana, and started his career in California but soon moved back to Missoula.
“We look for companies that are incrementally improving all the time,” he said. “They are learning organizations, and they get better every day.”
The Tarkio Fund invests in companies like Costco and Cognex Corporation, a company based in the Midwest that specializes in robotic vision systems and makes things like barcode readers. The fund's one year performance ending on June 30 was 39.03 percent, and is at 16.02 percent since its inception. Front Street charges a 1 percent annual management fee.
Piazza said he considers himself a “ridiculously long term investor” and that provides several benefits.
“I can hear about a company and say ‘hey these guys are it’ and you can fool me for a quarter or a year, but after three or five years or 10 or 15 or 20, eventually I’m going to figure it out,” he said. “That’s really the beauty. You can actually know who these companies are, and most important is how they behave when things are not going well.”
Piazza said he is able to find success with the Tarkio Fund by knowing which companies are poised for long-term growth even when they experience short-term difficulties.
“When things aren’t going well, it’s a catch-22 in your favor because those are the times when we can pile in when stock is cheap and buy everything,” he said. “We do all our research ahead of time and so we have total conviction. So when the stock price craters, you have the confidence to go in and go in hard. We want to buy it when it’s cheap, not when it runs back up again. It’s more about discipline than IQ. This has worked for 35 years.”
Brown said they’ve found that companies that empower workers tend to get better over time, out-compete their competitors in times of prosperity and weather downturns better.
He also said running a fund far away from the financial hubs like Chicago and New York give them an advantage.
“Surprisingly or not, we think living and working in Missoula gives us an advantage over the thousands of other mutual funds, since we are less apt to be influenced by the crazy swings and sensitivities of Wall Street,” he said. “We just stay focused on the quality of the culture of our companies, and we use volatile stock price swings to our advantage to buy our great companies at great prices.”
Brown said their target investors aren’t extremely wealthy people, but small investors that don’t mind volatility in the short term.
“If I’ve got five or 10 grand, I’m not too worried if a fund goes down over a couple week period or a quarter,” he said. “We like to target small investments because people tend to stick with us through volatility and see the benefit over time. We also tend to invest in progressive companies that treat employees really well with flat management structures.”
Brown said there is a big movement in funds that invest in socially-responsible companies, and Front Street Capital’s portfolio overlaps with a lot of those.
“If you follow a company for years and years you get a good sense of whether they are doing it or just paying it lip service,” he said.