Exec cannot resist starting own firm

Investment executives tend to stay at Los Angeles' Capital Group Cos., but Dale Harvey is an exception.

Capital Group is known for generous compensation and benefits, and Mr. Harvey said he had no complaints. He made his reputation there over 16 years, managing some $17 billion in equities for several of the American Funds, Capital Group's large mutual fund family with more than $900 billion in assets.

But in 2007, he decided to strike out on his own, investing several million dollars of his own money in setting up Poplar Forest Capital LLC in Pasadena, Calif.

“Virtually no one leaves Capital Group. A lot of people were scratching their heads with my departure,” Mr. Harvey said.

But Mr. Harvey, who bought his first share of stock in the ninth grade, said he wanted to be an entrepreneur and run his own business. He says he also felt frustrated because managing such a large amount of money means investing in 81 different stocks. He said that's too many stocks to track to do the quality job that is necessary.

“The Capital Group got to a size too big for me to follow my dream,” he says.

By running a boutique operation, Mr. Harvey said, he can concentrate on around 30 stocks and give full attention to a fundamental stock-picking process. He said he intends to manage no more than $5 billion, no matter how successful his firm becomes.

“We want to create a boutique firm that does an outstanding job for a select group of clients.”

Mr. Harvey is also hoping that history repeats itself. In 1983, another Capital Group portfolio manager, Howard Schow, opened PRIMECAP Management Co., also in Pasadena. The firm limits clients to 25 and manages money strictly for institutional clients including the Vanguard Group.

Mr. Harvey opened his office in a building on Lake Avenue, about a block down the street from PRIMECAP. It's not a coincidence. Mr. Harvey felt the closeness to PRIMECAP would bring him luck.

So far, Mr. Harvey has not paid himself a salary. Assets under management have grown slowly to $225 million from an initial $17 million, while the client list has grown to about 30 from an initial eight, all invested in a limited partnership. His firm also started a mutual fund in late 2009. He said about half the assets are from institutional clients.

He focuses on value stocks. “We are a contrarian investor. In a world that seems increasingly short term, we invest for the long term,'' Mr. Harvey says. “We only invest in companies that we are willing to hold for at least three years.”

Mr. Harvey's timing might not have been the greatest. He opened his firm on Oct. 5, 2007, just days before the financial collapse had a serious impact on markets.

According to eVestment Alliance, Marietta, Ga., his partnership returned -14.9% from inception in October 2007 through Sept. 30, vs. -21.6% for the Standard & Poor's 500 stock index for same period.

On a compound annual basis, from Oct. 5, 2007, through Sept 30, Poplar Forest lost 5.3%, compared to -7.8% for the S&P.

For the year ended Sept. 30, the partnership returned 5% after fees compared to the S&P's gain of 3.9%.

The highest performing stocks in his firm's portfolio for the third quarter were Oracle Corp., up 25%; Aetna Inc., up 20%; The McGraw Hill Cos. Inc., up 17%; and Baxter International Inc., up 17%. Losers were Bank of America Corp., down 9%, and Medtronic Inc., down 7%.

Mr. Harvey insists if he can outperform in a bear market he can do the same in a bull market.

“Stocks have gone nowhere in a decade; they call it the lost decade,'' he said. “This is once-in-a-generation opportunity for a rebound.''

So far, Mr. Harvey his been able to capitalize on the connections he has built serving on the board of Harvey Mudd College, one of the Claremont consortium of colleges in Southern California, and at the Capital Group.

One institutional client is the Keck Graduate Institute, a Claremont affiliate. Poplar Forest manages about one-quarter of the $40 million endowment; the remainder is run in-house, said Robert Caragher, Keck's vice president of finance and operations.

Mr. Harvey has been “very responsive to our needs,” Mr. Caragher said. He noted Mr. Harvey attends quarterly board meetings to advise the university on its in-house investments.

Another client is the family office for the Mays family, former owners of Clear Channel Communications Inc., who sold the company for more than $18 billion in 2006.

John Tippit, investment director of the family office, said the Mayses got to know Mr. Harvey at the Capital Group and were impressed with his investment process.

Mr. Tippit declined to say how much assets the family office had invested with Mr. Harvey, but said Poplar Forest is among the equity managers receiving the most money from the Mays family office.