David Iben kept a low profile when he left Nuveen Tradewinds, but now the contrarian is back to running a new global all-cap strategy.
By Rob Wherry | 08-31-14 | 06:00 AM | Email Article

Call it a pit stop. Or maybe a brief hiatus is a better description. In mid-2012, David Iben suddenly departed the U.S. firm Tradewinds, a subsidiary of Nuveen he had helped run and a firm where he had carved out one of the better value investing track records in the mutual fund industry. Between 2004 and his departure, Nuveen Tradewinds Value Opportunities posted an annualized 10.8% return versus 3.8% for the Russell 3000 Value Index. (The strategy had a longer record in a separate account.) Nuveen Tradewinds Global All-Cap had a similarly impressive record during Iben's six-year tenure.

Rob Wherry is associate editor of Morningstar Advisor Magazine

Iben didn't remain idle for long. He moved across the country to Tampa, Fla., from Los Angeles, not to work for a competitor but for Jeffrey Vinik, the prominent former Fidelity manager who had started his own hedge fund firm. Vinik had moved his office south from Boston to be closer to the Tampa Bay Lightning, the National Hockey League team he had purchased in 2010. Taking the role meant Iben pretty much disappeared from the retail investing scene. Meanwhile, Tradewinds was struggling in the wake of his departure. More than $2.5 billion exited the firm's open-end funds in 2012, according to Morningstar data.

It wasn't all smooth sailing for Iben, either. Almost as suddenly as he had departed Tradewinds, Vinik decided to shutter his firm in order to concentrate on running the hockey team. Although surprised by the decision, Iben didn't hesitate with his next move. He and several colleagues quickly moved to start Kopernik Global Investors, which opened its doors on July 1, 2013. The firm's name was borrowed from Nicolaus Copernicus, the 15th Century astronomer and mathematician. Always a contrarian, Iben identified with Copernicus' unorthodox theory: The sun, rather than the Earth, was at the center of the universe. Iben also liked that Copernicus trusted his own observations instead of relying on conventional thinking.

Vinik didn't completely sever his ties with his former colleagues. He loaned the firm $5 million at attractive rates. That working capital partly helped with overhead and hiring. (Iben recruited several outsiders to the firm in addition to hiring 16 of Vinik's 19 employees.) In November, the new firm launched Kopernik Global All-Cap . Vinik was one of its first investors, putting $15 million of his own money in the strategy.

Despite a new town and a new firm, one thing didn't change for Iben: The way he picked stocks. Flexibility has long been his hallmark. Iben has always crafted portfolios without much regard to standard benchmarks. His new fund isn't any different, with its mandate giving him wide latitude to invest across regions, countries, sectors, and the market-cap spectrum. He and his team are traditional value investors, focusing on stocks with competitive advantages, strong or improving fundamentals, and attractive valuations.

"It's in my DNA," said Iben of his strategy. "We view ourselves as appraisers of businesses. Our philosophy is to never pay more for something than its intrinsic worth."

The larger question is whether that process will enable him to quickly pick up where he left off. Many investors have already made up their minds. The fund took in more than $430 million since its launch through May.

"It is an intriguing fund," said Albert Brenner, who helps oversee $5.2 billion as the lead on the asset-allocation strategy at People's United Bank Wealth Management in Bridgeport, Conn. Brenner is keeping the fund on his radar. "We aren't believers in the efficient market hypothesis, and he obviously isn't, either."

Initial Success
Nuveen Tradewinds Value Opportunities had stood out from the beginning. Performance certainly helped. The fund landed in the top quintile of the mid-blend peer group in each of its first six calendar years. But that wasn't the only reason it got noticed. While most peers invested solely in the United States, Iben had as much as a one-third exposure to stocks outside North America. He peppered the portfolio with convertibles. In addition, he built a roughly 30% to 40% exposure to basic materials companies, more than 4 times the peer group average. He eventually shifted from base metals to precious metals. Gold miners he believed were trading for less than their tangible assets were prominent in the top 20 holdings on a regular basis.

"We bought what the market had left behind," Iben said.

Such positioning brings with it certain risk. Commodity prices are prone to swings. And if his big bets went south, the fund likely would be bringing up the back of the pack because the portfolio looked nothing like a typical benchmark or any peers. Indeed, the fund's R-squared, a measure of the percentage of a fund's movements that can be explained by movements in a benchmark index, was routinely in the 50s and 60s, which are low scores. (The average mid-blend fund was in the high 80s; an R-squared of 100 means all of the fund's movements can be explained by the behavior of the index.)

The moves proved prescient. Gold prices were just starting to improve as the U.S. economy recovered from a bear market and investors wanted a hedge against inflation fears. Emerging markets such as China and India were just starting to demonstrate their economic thirst for all kinds of natural resources. In 2006, the fund gained 25.1%, more than 11 percentage points ahead of the mid-blend category.  AGCO , Bema Gold, Lihir Gold, and Maxtor were among the fund's top performers that year.

While the fund's early performance was above average, it was the housing bust and the subsequent downturn where Iben excelled. He had kept the fund's exposure to what he thought were overvalued financials to less than 5% of the portfolio heading into 2007. The fund's average peer had 4 times that amount. As the market started turning south, that lack of exposure insulated the fund. Iben then stood by his materials positions and began buying or adding to energy stocks, especially coal producers such as  Arch Coal and  Peabody Energy that were enjoying higher sales as Chinese demand surged. While some of those holdings cooled off in the second half of 2008, the underweight to financials and health-care holdings such as  Amgen helped the fund post a 32% loss that year. That loss was 7 percentage points less than the mid-blend average.
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Rob Wherry does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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