Valley Forge Fund: How a One-Man Mutual Fund Beats the Rest
Ben Baden

Valley Forge fund has risen to the top of U.S. News's large-value fund ranking

You've probably never heard the name Bernard Klawans. For four decades, the 89-year-old former aerospace engineer has managed a mutual fund single-handedly. Klawans has never had any formal training in money management or finance, yet he has been able to outperform some of the greatest minds in the fund business. The aptly named Valley Forge fund (VAFGX) has weathered some of the worst market climates since its launch in 1971.

Over the past 10 years, Valley Forge has returned almost 6 percent on an annualized basis. That lands it in the top 5 percent of all large-cap value funds during that time period. The S&P 500, by comparison, has lost almost 1 percent.

"Valley Forge fund has made the pros look like chimps over the last decade," says John Rekenthaler, Morningstar's vice president of research. "It's a useful reminder that investment insights don't always come with one type of resume. His is an unconventional resume, but he's certainly beaten almost all of the Harvard and Stanford MBAs over the last decade."

Klawans doesn't believe formal training is necessary to become a mutual fund manager. In fact, he's helped others start funds -- 32 to be exact. "I'm just a good businessman, that's all," he says. "I've got a lot of discipline."

[See Value and Growth: Why Investors Need Both.]

While he was working at General Electric in the '70s and early '80s, Klawans applied to become a registered investment advisor. He says he was only the 12th person ever to do so in the United States. To get started, he put $25,000 of his own money into Valley Forge. That amount has grown to about $1.6 million, all of which is still invested in the fund, he says.

Klawans' investing style is quite conservative.

He says he only invests in well-known names, such as his former employer GE. If he believes the market is headed south, he's not afraid to pull money out. At times, Klawans will move upwards of 50 percent of the fund's assets to cash. When the financial crisis hit in 2008, he virtually abandoned the stock market. "The market stunk, so I got to 64 percent in cash," he says. "I lost a couple of shareholders that said, 'You're not doing anything,' and I said, 'It's because the market stinks.' While the average large-cap value fund and the S&P 500 index each plummeted about 37 percent that year, the Valley Forge fund (VAFGX) only lost about 20 percent.

[See 3 Ways to Invest in the Small-Cap Rally.]

Klawans says his stock-selection process is simple.

"If you buy them low and sell them high, you make money," he says. "I'm pretty conservative, so I only deal with the big stocks." Currently, the fund holds 28 stocks, according to Morningstar. The rest of the fund's assets (about 21 percent) are invested in cash. About a quarter of Valley Forge's assets are in the consumer goods sector, in companies like Kimberly-Clark and Coca-Cola. The fund's largest holding is 3M.

Valley Forge's assets are approaching $15 million (the highest ever), according to Klawans. In the past, he didn't do any advertising for the fund. "It was a play-toy for me," he says. Last year, he hired some outside help to aid in marketing the fund, but he still makes all the buy-and-sell calls himself. He estimates that the fund is now seeing inflows of about $500,000 per month.

In the '70s and '80s, says Rekenthaler, lots of one-man shops sprouted up in the mutual fund industry because average investors wanted to manage their own money. (It was also a lot cheaper to get started back then.) "Most of these other funds, either the performance was poor and they got tired of running the fund and they merged it out of existence, or the guy who founded it passed on," he says.

Klawans' investing style worked well during the last decade.

It paid to be conservative in the 2000s because the returns of the broader stock market were low over that 10-year period. Klawans sticks to well-known, blue-chip companies, and he stays away from some of the more growth-powered names that can be found in sectors like technology. "He looked really old-fashioned in the '90s with huge cash positions and no technology and got left far behind," Rekenthaler says. "The last decade has been something of a redemption for him."

"It's a very grounded fund," Rekenthaler says. "Grounded works both ways. ... When everything is bouncing around, you want to be grounded. On the other hand, it doesn't fly when others fly."

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