Morningstar - Q3 2020 - 62

Investors

Staying the Course
Mark Hillman is committed to
a concentrated approach.

UNDISCOVERED MANAGER

Laura Lallos

In every issue, Undiscovered Manager profiles
a noteworthy strategy that hasn't yet been
rated by Morningstar Research Services' manager
research group.
Sailing and serendipity have played key roles
in Mark Hillman's life. He met his future
wife, Melba Quizon, at Tufts University's dock
during sailing team practice. The meeting
was perhaps unsurprising given their shared
interest, but it actually was a close call:
Melba was a freshman and Mark had just returned
as a senior-after taking more than a year off
to work as a sailmaker.
Sailing also features in the inception of the
Hillman Value HCMAX mutual fund in 2000. It all
started during a race in which Hillman
was the tactician for Pete DuPont. He heard a
competitor on another boat yell, "Mark, you have
amazing performance, but you need a
mutual fund!" Hillman just laughed; he figured
a fund wasn't an option for his then tiny
shop, where he ran separate accounts. But it
turned out his admirer was the owner
of fund administrator Nottingham, which agreed
to waive startup and administration fees for
the young fund.
As Hillman says, it was a "lucky break"-
but that shouldn't belie the years and effort that
led to that moment.
When Hillman set out to manage money in the
late 1980s, he went all in. He'd been working
as a retail financial consultant at a brokerage firm,

62

Morningstar Q3 2020

and he didn't like the quality of investment
products available or how they were marketed.
He had his own ideas. "Being very independentminded, I thought the best thing to do
would be to put them into practice myself,"
he says. "So, I did."
With Quizon in his corner-and her banking
career to help support the family-Hillman
established an independent advisory shop in 1990
with two clients. "It was quite a leap, but I
had a lot of confidence in my ideas. I believed that
if you build it, they will come," he laughs.
However, while performance was strong, he says,
asset growth did not follow. He merged that
firm with another small startup in 1993, but even
with combined resources, the firm still didn't
build a significant asset base.
In 1998, Hillman struck out on his own again,
and this time was the charm. "My clients rallied
around me," says Hillman, and they helped
establish the business by referring others. Today,
Hillman Capital Management, based in
Bethesda, Maryland, has about $200 million in
assets. Half of that is in separate accounts, with
the Hillman Value mutual fund approaching
$100 million at the end of June, after doubling in
size over the past year.
While the fund isn't rated by Morningstar's
manager research analysts, it has a Morningstar
Quantitative Rating of Gold. (Morningstar
applies a machine-learning model to funds not
on the analyst coverage list to create a rating
analogous to the Morningstar Analyst
Rating.) At the end of June, the fund had a 5-star
Morningstar Rating, reflecting high returns
achieved with average risk relative to other funds
in the large-value Morningstar Category.

A Competitive Edge

Hillman benchmarks his strategies against
the Russell 1000 Value, and he won't
invest in a stock unless it is undervalued relative
to its fair market value, which he assesses
using discounted cash flow, price/sales ratio,
or price/book ratio. But valuation is not
his starting point. His approach isn't about finding
the cheapest stocks; it's about finding
the best companies and buying them when they
become cheap.
Hillman is wary of his own bias: If he knows
a company is deeply undervalued, he
may be predisposed to like it. "I don't want to
know anything about valuation until after
we've decided the company has a sustainable
competitive advantage."
This priority is informed by growing up in
a family that owned a small retail pharmacy chain
that struggled in the 1980s to compete against
larger chains with stronger purchasing power and
better brand recognition. Early in his career,
Hillman read Competitive Strategy after
Quizon received a copy through a training program
at Bank of Boston. The classic business
strategy text by Harvard professor Michael Porter
clicked with Hillman's personal experience: "It
dawned on me that this was what our family
business had to deal with."
Hillman's firm is itself a small company up against
considerable competition, particularly as
investors increasingly opt for low-cost index funds.
An index-beating track record helps differentiate
it, however: The composite separately
managed accounts and the mutual fund all beat
their Russell 1000 Value benchmark by wide
margins over the trailing three-, five-, and 10-year
periods through June.
An unabashedly active approach also sets
the firm apart. Hillman's oldest and most
focused strategy, Focused Advantage Value Equity,
targets only 20 stocks. To meet the needs
of clients who wanted greater diversification,
Hillman started the Advantage Value
Equity strategy, but that too is relatively
concentrated at 45 stocks. The mutual
fund splits the difference, holding roughly 33
Morningstar - Q3 2020

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