A couple of years ago, I came across a mutual fund unlike any other. I can’t own it because I live in Canada; however, those living south of the 49th parallel can and should consider the ING Corporate Leaders Trust Series B (MUTF:LEXCX) for their investment portfolio.
Buy-and-hold investors will love its simplicity (in practice, despite the fund’s wrinkles), but most importantly, it has been providing stellar performance since 1935.
Before getting into any comparisons, though, let’s talk about those wrinkles.
While compared to open-end mutual funds, LEXCX really is a grantor trust, which provides investors a pro rata ownership in the trust’s total assets based on the number of participations held. Participations are offered at a price equal to the net asset value next determined after an order is received, similar to a mutual fund.
In layman’s terms: You own a small piece of each of the companies held in the trust. When you own a mutual fund, you own units in the mutual fund corporation itself and not the companies held by the fund.
This particular grantor trust was created on Nov. 18, 1935, with the objective of seeking long-term capital growth and income in 30 of the leading American blue-chip corporations of the day. Governed by the Securities Act of 1933, no new stocks can be purchased, and the holdings only change because of spin-offs or mergers. Gold investors might be familiar with this type of investment, as the iShares Gold Trust (NYSE:IAU) also is a grantor trust. It’s as buy-and-hold as they come.
The final difference is how the trust is structured. Each stock unit is composed of one share of all 22 companies held by the trust. Once enough cash accumulates through new buyers, dividends, etc., to purchase 100 stock units, the trust buys 100 shares in the 22 existing holdings. Those stock units are held within the Trust Fund. Any dividends and other cash distributions are held within the Distributive Fund.
Twice yearly on June 30 and Dec. 31, any cash in the Distributive Fund is reinvested in additional participations based on the net asset value of the trust unless a participant requests cash. Actual shares in the companies are only purchased, however, if there’s enough cash in the Trust Fund and Distributive Fund combined to purchase 100 stock units, or 2,200 shares.
While the ins and outs seem complicated, it’s really just a passive investment — hence the 0.49% expense ratio.
As mentioned earlier, LEXCX started with 30 companies and it’s now down to 22. The three most recent changes to the portfolio are as follows:
- Burlington Northern (part of the trust) was acquired by Berkshire Hathaway (NYSE:BRK.B) in 2009 for $44 billion in cash and stock. The trust received Class A shares, which then were converted to Class B shares. At that point, there were 20 companies.
- Marathon Oil (NYSE:MRO) spun off Marathon Petroleum (NYSE:MPC) on July 1, 2011, bringing the total to 21.
- Fortune Brands split into two companies in October 2011 — Beam (NYSE:BEAM) and Fortune Brands Home & Security (NYSE:FBHS) — bringing the total to 22.
And now, on to the comparisons.
ING Corporate Leaders Trust vs. Peers
The ING Corporate Leaders Trust has no turnover and is a large-cap blend fund. Without looking at performance, I’ve selected three funds for comparative purposes; one with low turnover, another with average turnover and a third with above-average turnover. Each of the funds are much larger in terms of net assets, and all three are actively managed. In addition, I’ve provided comparisons to two passively managed index funds.
|Avg. Annual Total Return*|
|ING Corporate Leaders Trust||LEXCX||$815M||0%||0.49%||10.78%|
|Davis New York Venture Class||NYVTX||$21.5B||8%||0.89%||4.89%|
Equity Class A
|SPDR S&P 500||SPY||$105.1B||3.7%||0.09%||7.41%|
|SPDR Dow Jones
|* Average of 3-year, 5-year and 10-year annual total return Info via Morningstar through Aug. 15, 2012|
As I suspected, the ING Corporate Leaders Trust outperformed all five funds. In fact, if you go to pages 16 and 17 of its prospectus, you’ll see that a $10,000 investment on March 16, 1941, was worth $12.4 million as of Aug. 15, 2012. There’s absolutely no portfolio management, and yet it outperforms both passive and active funds over the long term.
Investors should have two questions at this point. Firstly, why has it done so well for so long and secondly, can it continue to outperform indefinitely.
Let me answer the first one by suggesting that successful investing is about sticking with your best ideas and forsaking all others. It’s also about keeping it simple, stupid. This fund has few moving parts with less opportunity to make mistakes.
As for the second question, I’m obviously unable to predict the future. However, the list of 22 companies is a who’s who of American businesses providing products and services used by most of us on a daily or frequent basis.
Interestingly, even though many of the companies in the ING fund have been around for more than 70 years, only six — Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Procter & Gamble (NYSE:PG), DuPont (NYSE:DD), General Electric (NYSE:GE) and AT&T (NYSE:T) — are components of the Dow.
LEXCX has a portfolio that Warren Buffett would be more than comfortable owning. And it truly is a fund like no other.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.