Beating the odds

Not everyone is hurting from the recession. These Kellogg alumni are running profitable firms that are on track for growth this year

By Rachel Farrell

	Scott Fearon '83, president of Crown Capital Management, says that sticking to "poorly analyzed, poorly followed smaller companies' stocks" has helped his hedge fund deliver positive annual returns for 18 years in a row.  Photo © Sam Willard

Scott Fearon '83 didn't know that CDOs were going to turn toxic in 2008. But he did know better than to touch them with a 10-foot pole.

"It's the same old story throughout the generations," says Fearon, the president of Crown Capital Management, a Marin County, Calif.-based hedge fund firm. "People have lost money when they were reaching for yield or investing with people or in stocks that they weren't that knowledgeable about."

Fearon is one of several Kellogg alumni whose businesses are performing well this year. They explain how their firms have managed to thrive despite a down economy.

Slow and steady wins the race

Unlike many hedge funds, Crown Capital Management was up 1.7 percent last year, and has delivered positive annual returns for 18 consecutive years. But Fearon says he hasn't changed CCM's portfolio, which includes 100 short investments and 30 to 50 long investments in publicly traded companies. In fact, he stopped taking new investors more than 10 years ago, yet still manages $220 million for 90 different investors today. Fearon is confident that this strategy will keep his company in a good position, regardless of the market conditions.

"I'm a traditional hedge fund, and that means I own stocks and short different company stocks," he explains. "So even if the whole system comes tumbling down — meaning, if the GDP were to get to -8 or -9 [percent] in the first half of 2009 — I honestly believe that I would make so much money on my short investments that it would offset what happens in my long investments, and I would have another up year."

Fearon was never tempted to invest in the mortgage-backed securities that other investors couldn't seem to get enough of. Instead, he has always stuck with what he knows best: "the poorly analyzed, poorly followed smaller companies' stocks," he says. That is, "companies with market caps below $2 million, or with annual revenues below $1 billion that have little to no coverage by Wall Street analysts. I never invest in S&P 500 companies."

Robert Korajczyk, the Harry G. Guthmann Professor of Finance, praises Fearon for his investment practices. "There are a lot of funds that, when the cost of leverage has gone down and volatility has been low, really exposed themselves to the possibility that they could lose a lot of money when things change," says Korajczyk. "Scott has structured his portfolio to avoid that kind of problem."

An emphasis on customer-centricity has helped Northern Trust Corporation cope with the economic downturn, says William Osborn '73, chairman and director of the bank.  Photo © Charlie Westerman

Fearon knows his strategy has caused CCM's growth to be slower than that of some hedge funds. "But measured growth makes a lot more sense than runaway growth," he says. "Hey, could I have grown this thing into a firm with 30 to 40 employees? Very possibly. Would I have gotten a lot more money for myself? You betcha. But would I have been pushed beyond my expertise? Absolutely. "

A client-centric approach

Of all the industries at risk for bankruptcy in this economy, banking is certainly at the top. But if you're going to work in banking, Northern Trust Corporation isn't a bad place to be.

That's not to say that Northern Trust hasn't paid the consequences of the market conditions (its net operating earnings dropped 22 percent between 2007 and 2008), but it is in a better position than most of its peers. In 2008, Northern Trust had "a very good year when most banks were not making any money — in fact, losing a lot of money," says William A. Osborn '73, chairman and director of Northern Trust Corporation. "And our earnings power and business and asset quality is extraordinary, compared to the rest of the industry." Osborn says that the bank has increased its loans by 20 percent this year, and its $30 billion portfolio has only $100 million in non-performing assets, "which is quite unusual," he explains. According to the Northern Trust Web site, as of Dec. 31, 2008, the bank had $82 billion in banking assets, $3 trillion in assets under custody, and $575.5 billion in assets under management.

Like Crown Capital Management, Northern Trust "has a very focused business strategy," Osborn says. The bank specializes in investment management, asset fund administration, and fiduciary and banking solutions for corporations, institutions and affluent individuals worldwide. In addition, the bank never got involved in subprime mortgage lending, or any other high-risk investments for that matter. "We're very conservative with the management of our own risk and balance sheet," he says. "We haven't gone into a lot of the higher-risk securities to try to get yields like many other banks did."

Despite Northern Trust's size, Osborn makes an effort to get to know his employees and clients throughout the U.S. and abroad. He spends about 50 percent of his time visiting clients and prospects so that he can develop an intimate understanding of their needs. "You can have market studies and consultants, but there's nothing better than first-hand knowledge of your clients' businesses," Osborn explains. "It helps make certain that you are working on helping your clients for the future. And if your clients do well, you'll do well."

Value-added service

	"Everything we do [helps] build revenue and save dollars over time – which in this economy is more relevant than ever," says Mark Shapiro '80, president and CEO of Gladson Interactive.  Photo © Dan Dry

Gladson Interactive is in the right place at the right time. The Lisle, Ill.-based provider of label contents and digital product images services an industry that is in a good position right now: consumer goods manufacturers and retailers, which include drug stores such as CVS, grocery chains like Safeway and manufacturers such as Procter & Gamble. Even better, the company provides a service that's vital to its customers' success. It supplies product data, which helps retailers determine how their shelf space is allocated and managed, and provides product photos and information, which retailers use on their Web sites.

These services are particularly important for companies during a recession, explains Mark Shapiro '80, president and CEO of Gladson Interactive. "They need our data in order to respond quickly to changing conditions," he says. In fact, when pitching a new client, Shapiro has data to prove that Gladson's services deliver a substantial return on investment. "[We show them] 'Here's how our services help you sell more or spend less,'" says Shapiro. "So everything we do [helps] build revenue and save dollars over time — which in this economy is more relevant than ever."

As companies reevaluate their marketing spend, more are turning to the expertise of firms like Gladson Interactive, Korajczyk says. This is "a growing area," he notes. "People want to make sure that, if they're spending money on resources, they're spending it wisely."

Gladson Interactive performed well in the second half in 2008 and today is "on plan and well ahead of a year ago," Shapiro says. But he isn't getting overly confident. "This is the most volatile, uncertain environment I've ever seen," he says. "We are planning for the worst and hoping for the best."