Fayez Sarofim: Houston’s Billionaire Wizard Investor (Part I)

One day when I was in the medical center in Houston and I looked outside and noticed a building that was called the Fayez Sarofim Research Building. I thought there must be some capitalist behind it. I did some research and found it was donated by billionaire investor Fayez Sarofirm. What interest me was that Fayez made a name for himself buying high quality stocks and has been investing since 1958 which is pretty long term in the investment world. Sarofim’s motto is to never sell. However, as I did more digging I found a very different side of the Sarofim family such as $250 million divorces, having children with between different people, an ex-wife who climbed a mountain and then died, estate battles, and even drug use. Sometimes the truth is stranger than fiction.

Fayez actually came from a wealthy Egyptian family and came to the United States in the 1940’s and earned his degree from University of California at Berkeley and an MBA from Harvard. His firm was founded August 1958.

What is interesting is the number of clients that Fayez seems to have lost over the years. According to data from his website. According to this performance posted on the website it seems as if the number of portfolios decreased from 270 in 1998 to just 95 as of 2012. The assets have also decreased from $57 billion in 1998 to just $22 billion as of 2012. The firm use to (not sure if they still do) manage the pension funds of companies like General Electric and Ford along with the endowments of Rice University and the University of Houston).  There was this story last year from the Houston Chronicle that the firm might lay off people. This ADV form discloses biographical information of many of the employees who work at Fayez Sarofim (educational background, prior work experience, etc).  Many of the employees have been with the firm for many decades which is rare these days. What is also interesting is the company has many entities like Sarofim Trust, Sarofim International Management Company, Sarofim Advisors Group, Sarofim Realty Advisors, and The Sarofim Group.  The company according to this Morgan Stanley statement has 21 employees.  According to the same document Sarofirm after fees over the past 10 years has under performed the market 4.67% (versus 8.01% in S&P 500). This Fortune magazine story from 1992 discusses how “Successful investing is the result of judgment and discipline”.  During the early 1990’s he had outperformed the market.  In 1993 he was worth $300 million according to this article.  From 1983-1992 Sarofim outperformed 94% of all money fund managers.  In 1993 however he moved into the bottom 20% because of Phillip Morris. Sarofim got a personal phone call from the treasurer of Phillip Morris to say everything was okay and the company could still pay out its dividend. Fayez likes stocks with low price to earnings ratio, high return on equity, and decent dividend yields. NASDAQ actually has a website that discloses all of the firm’s holdings here.  The biggest holdings are in Phillip Morris, ExxonMobil, and Coca Cola. Fayez even helped an artist invest according to this 1999 story from the New York Times.

Sarofim owns multiple properties in Houston. According to property records he owns a 14,700 square foot home in River Oaks worth around $11.4 million. Also he owns a 8,700 square foot house in Houston that is worth $5.4 million. However, it seems like all this wealth comes at a price. (Part II Keeping up With theSarofims: Divorce, Drugs, and Lawsuits) 

Billionaire Index: Outperforms S&P 500

Dr. Joel Shulman of Babson University has published a recent study in Institutional Investor’s Journal of Index Indexing which shows that an index of companies that billionaires managed by individuals on the Forbes billionaires list. I for years have been wondering how an index would have done. Dr. Shulman has done the research and the results. Let’s look at what he found.

When the “Billionaire’s Index” was compared to a benchmark of the S&P 500 the Billionaire’s Benchmark outperformed the S&P 500 over time. From 1996-2011 the Billionaire Index increased a staggering 400%. The S&P was up over 104% during this same period (dividends not included). If you started with $1,000 in 1986 and updated your portfolio every year to match the new Forbes billionaires list you would have ended up with $5,000 by 2011. If you had invested in other benchmarks like the Russell 2000, Russell 3000, or the S&P 500 you would have $2,500 or less. It should be pointed out the Billionaire Index is riskier than indexes like the Russell 2000 or S&P 500. As investors know you should never put all your eggs in one basket.

People often complain how the top 1% keeps getting richer. However, now there is a way to join them. In fact as a shareholder you are part owner in their business! The only problem is I haven’t actually seen a Billionaire’s Index listed on any of the exchanges. Right now Dr. Shulman works for EntreprenuerShares which has some funds yet doesn’t offer a Billionaire’s Index. One problem is that if people knew the Billionaire’s Index returns were very good they would start investing in it which might actually reduce the return. Since the index has only existed in theory and not in practice it is hard to tell how it would have actually done.