When Bill Nolin was in elementary school, his father quit his job to start a steel-fabrication business. “This business was in our lives daily, whether it was my mom running the accounts, or my dad coming home at 5:30 p.m. with the pickup truck loaded with boxes to ship or me helping him put on the labels that my mom had prepared and going to the UPS store,” says the manager of
Principal Blue Chip (ticker: PBLAX).
The business wasn’t just a job to his parents. “It was something they loved; a passion or calling,” he says. “And they worked on it 24-7.”
Nolin, 51, seeks that kind of “owner-operator” passion from the executives of the companies in his fund. He invests in businesses still run by their founders, or at least where executives behave like founders—those who think long-term and have significant insider ownership. “Most of corporate America is not run that way,” he says. “Especially, mid-cap and large-cap companies are run by what we call cash-paid-for CEOs: people who don’t have a large ownership stake and are mostly paid employees. At such companies there is a strong pressure from Wall Street to get results immediately.” Such short-termism leads to executive decisions “that aren’t good for the business, but good for the CEO” who is seeking a quarterly bonus.
But Nolin’s results are unquestionable. Blue Chip’s 14.1% five-year annualized return beats 94% of its peers in Morningstar’s Large Growth category, as well as the 12.4% return of its benchmark, the Russell 1000 Growth Index. And it has done this with less volatility than both. Nolin also runs the older
(PEMGX), now closed to new investors, which has trounced 95% of its peers in the past decade. (Although Blue Chip carries a 5.50% load, large brokers such as Fidelity and TD Ameritrade often waive that commission.)
Nolin is chief investment officer of an 11-member boutique subsidiary of Principal called Aligned Investors, which manages $32.3 billion, including Blue Chip’s $5.1 billion. He and co-manager Tom Rozycki, 40, are supported by six investment analysts devoted exclusively to the Aligned subsidiary. Blue Chip was launched in 2012 as an offshoot of the boutique’s mid-cap fund. “What we noticed over time was our successful mid-cap companies eventually became too large to own in our mid-cap strategy,” Nolin says. “It made sense to start a strategy where we could invest in these larger companies.” Some of the “graduates” from the mid-cap fund to Blue Chip have included supermarket company
(COST), fast food restaurateur
(YUM), and cellphone-tower giant
(AMT), Nolin says.
Note: Holdings as of Dec. 31. Returns through March 2; three- and five-year returns are annualized.
Sources: Morningstar; Principal Financial Group
One graduate, which MidCap sold after 16 years but Blue Chip purchased last November, is tax-software company
(INTU), which sells TurboTax and QuickBooks. “QuickBooks and TurboTax are both so dominant,” Nolin says. “People are trained in [the software] and don’t want to switch.” The rise of the so-called gig economy is increasing the number of self-employed Uber drivers, etc., who need QuickBooks to itemize their mileage and depreciation expenses, he adds. “There’s a long runway for QuickBooks,” he says, noting that there are 48 million small businesses and self-employed Americans, and only a 7% penetration of that market for the online software. Meanwhile, Intuit has begun providing live video-chat advice from its accountants to take market share from
(HRB) for those who need more hands-on service.
Nolin attributes much of Intuit’s success to its dynamic founder Scott Cook, who remains chairman of its executive committee. “He still works with the people at Intuit because he’s a fanatic about making it easier for people to use their products,” Nolin says. “That’s how you end up being 15 times larger than your nearest competitor.”
One metric Nolin employs to analyze whether a company’s executives are truly owner-operators is an “aligned ratio,” comparing their stock ownership to their annual salary and other benefits. “At the typical public company, the ratio is in the range of three to six times, so maybe a CEO owns $6 million worth of stock and gets paid $2 million a year—three times,” says Nolin. “A lot of our companies, the ratio is 20 to 1, and we have several that are 50 or 100 to 1, and some that are 2,000 to 1.”
(AMZN), the fund’s largest holding at 8.5% of its portfolio as of the end of 2019. According to the latest Securities and Exchange Commission filings, founder and CEO Jeff Bezos has an almost 56 million-share stake—worth $105 billion at a recent $1,884 share price. His 2019 base salary, without any bonus, was $81,840 and his total compensation was $1.7 million—a 62,218-to-1 ratio.
But a high ratio isn’t enough. Aside from Amazon’s retail and cloud-computing dominance, co-manager Rozycki says the company’s more recent forays into internet advertising are being undervalued by the market. “Amazon has this built-out advantage in its retail business and now the ability to layer on something that produces royalties on top of that retail business in the form of advertising,” Rozycki says. “That’s extremely profitable.” He likes royalty structures that allow companies to collect fees with little additional operating costs. For instance,
(HLT), another fund holding, charges 5% fees to hotel franchisees using the Hilton name.
Nolin doesn’t just expect insider ownership from his investments’ CEOs; he practices what he preaches. In the latest addendum to Blue Chip’s prospectus, you’ll find he and Rozycki each have over $1 million invested in the fund, the highest investment amount disclosable by SEC rules. “I personally don’t want to say how much over a million, but it’s much, much more than a million,” Nolin says. “In addition to owning it personally, I own it through my 401(k) and a co-investment [vehicle] here at work. Tom does the same.” As do all of the fund’s analysts. That way, the team at Aligned Investors not only seeks owner-operators, they think like owners, too.