Clipper's skipper jumps ship
After 21 mostly dazzling years at the helm, Jim Gipson is leaving, taking his singular style with him.
By Carol J. Loomis

(FORTUNE Magazine) – Should a mutual fund investor stay or flee when the star manager of his fund unexpectedly leaves the job? That's the puzzle currently facing investors in the well-known Clipper fund, a $5.6 billion no-load operation run successfully, and near famously, for 21 years by James Gipson, 63. He and his two chief lieutenants announced in early October that at the end of the year they will leave Pacific Financial Research, the investment manager for Clipper.

There's no scandal here. Gipson and crew simply had a contract with PFR's owner, British company Old Mutual, that expired with the parties unable to agree on renewal terms. So the men decided they would take off for other--undisclosed--pastures.

That means Clipper's shareholders are about to be rudely shorn of the manager they signed up for, whose unconventional style they presumably admire. Gipson is a patient value investor who believes in concentrating on relatively few stocks--at midyear, Clipper held 23 different issues, including Freddie Mac and Fannie Mae--and sitting with outsized amounts of cash when he can't find stocks and prices he likes. He's recently been more than 27% in cash, and in the bubble days, that proportion reached 45%. With a strategy like that, Gipson has experienced both feast and famine, including lagging years in 2003, 2004, and 2005 to date. But Clipper's long-term record is excellent: For the past ten years the fund's average annual total return has been 13.25%, almost four percentage points better than the S&P 500's.

The three independent directors on Clipper's board of four (the fourth is Gipson) are intently searching for a replacement. Ideally, says director Otis Booth, he will be "a Jim Gipson Jr." But few managers follow Gipson's far-out strategy. Meanwhile, Old Mutual has proposed putting Clipper under the wing of another value manager the company owns, Barrow Hanley Mewhinney & Strauss. But Barrow Hanley doesn't usually concentrate its holdings or sit with large amounts of cash. So Clipper's directors won't necessarily buy that plan.

A large number of fundholders--some perhaps also unhappy with Clipper's recent record--have already exited. The fund's assets have dropped by more than $1 billion since midyear, mainly because of redemptions. Other holders will surely wait and see, particularly if they have large capital gains they'd rather not take. But holders of the fund through an IRA can skip without a tax hit. Among the longtimers leaving are none other than Morningstar managing director Don Phillips and his wife, who have had their IRAs in Clipper since the mid-1980s. "It's time," says Phillips, "to move on." He may head to another value shop, Fairholme fund, which is a focus investor, like Gipson. But unlike him, it's played that game impressively over the past three years, averaging a total return of nearly 15% vs. the S&P's 5.6%.