A Lesson On Black-Box Investing: Kurt Lindner And The Lindner Dividend Fund

I will make an assumption that most of you have not heard of Kurt Lindner and his Lindner Dividend Fund.  Mr. Lindner created the fund in 1976.  From 1976 through 1995 the fund had recorded a 17% annual return.  This isn’t the absolute highest return in the mutual fund universe. However, it was earned without taking huge levels of risk, keeping most of Mr. Lindner’s long term investors out of the buy high, sell low club. The stated goal of the Lindner Dividend Fund was income, and while the fund also claimed that its secondary goal was capital appreciation, the return so far exceeded other income funds that Mr. Lindner became legendary. 

As a practicing CPA and auditor in the 1950s, Mr. Lindner created a numbers-driven formula for security selection that he calculated by hand.  Mr. Lindner was very secretive regarding how he selected investments, so we cannot know whether he tweaked the formula over the years.  What we do know of his investment approach came from his mentee, successor portfolio manager and future owner of the Lindner fund family, Eric Ryback. 

Peter J. Tanous interviewed Eric Ryback in 1995, the year Mr. Lindner died.  He published this interview in his book, Investment Gurus.  In the interview, Mr. Tanous was quite direct, asking:

Tanous:  Wait a minute.  There is a formula that is proprietary that guides your selection process?

Ryback:  Yes.  Absolutely.

Tanous:  That’s interesting.

Ryback:  I would be lying if I told you otherwise.

Tanous:  It’s not a black box, is it

Ryback:  It’s kind of a black box.  We put the numbers through.  All the companies go through a screening process.  We did it by hand until I bought the company three years ago, and then we put it on a computer.  Kurt was very concerned that if it went on a computer, anybody could get access to it.  We’ve tried to alleviate that problem.

Almost immediately after Mr. Lindner’s death, the fund started its downward spiral.  In 1996 Mr. Ryback transferred some of the fund management responsibility to others.  He became worried and began raising cash just as the market began the big tech rally.

In 1999 an investment consultant was hired to over-haul the fund. Fund names were changed, value was replaced with a growth mandate, and the total money at the fund shrunk from $3.5 billion to less than $1.5. Selling continued, as investors were pulling $6 million per day from the fund. As money fled, fund managers were fired and replaced with an investment committee led by Mr. Ryback. Money continued to leave the firm until it finally ended in 2004 when Hennessy Advisors, Inc. merged the remaining funds into their own, principally the Hennessy Total Return Fund and the Cornerstone Value Fund.

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Anderson Griggs & Company, Inc., doing business as Anderson Griggs Investments, is a registered investment adviser.  Anderson Griggs only conducts business in states and locations where it ...

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