In Brief

A hard-core contrarian value screen, albeit one using the ‘total return ratio’ in order to combine value metrics with growth.

Background

Born in Ohio in 1931, John Neff was hired by Wellington Management in 1964 to run their newly-launched Windsor fund. The fund eventually became part of Bogle's new Vanguard operation in the early 1970s and saw phenomenal outperformance under John Neff’s tenure. He was considered the "professional's professional," because many fund managers entrusted their money to him with the belief that it would be in safe hands. Although he didn’t like the term, Neff was essentially a contrarian investor buying good companies with moderate growth and high dividends while out of favour, and selling them once they rose to fair value. He looked for both value and growth or rather "good companies, in good industries, at low price-to-earnings prices".  To identify these, his approach adds the expected future growth rate to the dividend yield, and divided by the PE ratio to give what he termed the ‘terminal relationship’ or, more colloquially, ‘what you pay for what you get’.

"It's not always easy to do what's not popular, but that's where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized”.

The Vanguard Windsor Fund was apparently very diversified, typically holding positions that were 1% of assets (although it is reported that he would go as high as 5% in an individual stock if it was extremely attractive). Neff pursued stocks of all sizes – large, small, and medium – as long as they evidenced low P/E ratios which he described as "low P/E investing". He avoided momentum stocks, observing:

“Don’t chase highly recognized growth stocks. Their P/E ratios are invariably pushed up to ridiculously expensive levels. This greatly increases the risk of a sudden collapse in the share price”. 

Does the John Neff Screen Work? 

John Neff's average annual total return from Vanguard's Windsor Fund during his 31-year tenure (1964-1995) as portfolio manager was 13.7%. He exceeded the market rate of return by more than 3.5% on a gross basis (and 3.15% on a net basis). He showed a great consistency in beating the broad market index 22 times and was regularly in the top percent of money managers.  More recent AAII data suggests…

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