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8 Tenets of Choosing a Mutual Fund for The Southern Company Employees

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When hiring active managers, some advisors look for the star rating on Morningstar rather than using the criteria TRG recommends. We believe that advisors and investors should focus on active managers who skillfully allocate capital to their best investment ideas. Passive investment options are widely available to investors who want market returns with low fees. Active managers must add value and act in clients’ best interests by allocating capital to attractive investments to increase risk-adjusted returns and justify fees. We propose an alternative method to the Morningstar rating system that we believe provides structure that protects downside while maintaining significant performance upside.

“Wide diversification is only required when investors do not understand what they are doing. Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”

– Warren Buffett, Berkshire Hathaway

We want Value managers that fit the following criteria. They are:

  1. At least 10 yr performance history
  2. Low expense ratios.

  3. A single manager or a clear lead manager because it demonstrates ownership of fund and avoids group think

  4. Manager does not over diversify and is a best idea or focus fund

  5. Ability to go to cash/high cash positions- Shows that a manager can wait for better ideas if none are available and is actively searching for the best opportunities

  6. Consistently low P/E ratio on holdings (ex. S&P 500 P/E = 25)

  7. Managers who eat their own cooking- meaning that they have their own money in their fund

  8. Low turnover rate - demonstrates convictions in holdings

We will briefly cover each of the 8 criteria below:

1. Long term survivability: A minimum of 10 years of performance history gives us a long term look into how the manager performs through varying market cycles. We prefer to see at least one market crash and rebound to see how the manager reacts and makes their investment decisions.

2. Low cost of management:  We expect low cost management of the fund just like we would expect low cost management for a company. The more value that can be driven from the fund the more profitable the fund is for its managers and its shareholders. High expense ratios can be one of the biggest drags on returns (see table below), but quality managers with low turnover and high conviction may be able to achieve over-performance at a lower cost.

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*For illustrative purposes only, not indicative of any specific investment product.

3. Single Vision and Responsibility:  Single managers, or a team with a clear lead manager, are less likely to be convinced and/or moved from their originating ideals. When a lead manager makes a decision he/she alone is responsible for that decision. When a committee of managers make a decision, it is difficult to place blame or praise (identify ownership) for an investment decision. Lead managers by definition have more riding on their decisions and thus spend more time during the due diligence portion of their investment hypotheses.

4. Does not Over-diversify:  Volatility-aversion of investors and lack of in-depth research influence fund managers into creating over-diversified portfolios, diluting the alphas of their best ideas. This leads to the widespread underperformance of mutual funds compared to their benchmark indices after deducting the expenses and fees. Our definition of risk, defined as “permanent capital impairment”, forces us to disregard short-term volatility and focus on making the best investment decisions based on fundamental research.

“There is no sense diluting your best ideas or favorite situations by continuing to work your way down a list of attractive opportunities.”

-Joel Greenblatt, Gotham Capital

5. Holds cash when deals are unavailable:  Good managers stay true to their ideals and hold fast when markets do not provide good investment opportunities. In elevated markets we see good value manager’s portfolios having increasing cash positions. When managers cannot find good companies to re-invest their capital into, they will hold cash because they are unwilling to deviate (drift) from their investment objective. For example, some fund families will not allow their managers to go to cash mandating that they stay fully invested at all times. This may force managers to buy into companies that they don’t feel as strongly about and may force them into buying a larger basket of investments. This dilutes the best ideas while their investors are often left paying a higher expense ratio due to additional trade and turnover costs.

6. Focus on finding “On Sale” companies:  Value mangers are always trying purchase companies at a price that is lower than what their intrinsic value is. One way of identifying these companies is through the Price to Earnings Multiple. A low market price in relation to a company’s earnings signifies a cheaper price than if the market realized the company’s intrinsic value. In a white paper by Tweedy, Browne Co, they identified that (as a group) stocks with low valuations (P/E, P/B, and P/CF) and high dividend yield consistently outperform their counterparts over the long term.

7. Eat their own cooking:  We place high importance on whether or not a manager has any of his/her own money invested along-side their shareholders. If the manager’s compensation is only tied to the size of the fund, there is little incentive to beat the benchmark and keep costs down. In fact, a study by Morningstar found that 85% of balanced-fund managers who succeed when having $1 million in their fund, versus 32% if no stake [4]. We find it hard to invest with a manager who does not believe in their own product.

8. High Level of Conviction:  Low turnover signifies a high level of conviction in the positions within the fund. When a manager has low turnover he/she is not transitioning in and out of specific positions because he/she is confident in their research and investment hypothesis.

“It talked about a couple of studies, including the best-performing fund from 2000 to 2010, which was up 18% a year even when the market was flat. The average investor in that fund went in and out at the wrong times on a dollar-weighted basis to lose 11% per year. Meanwhile, the statistics for the top-quartile managers for that decade were stunning: 97% of them spent at least three of those 10 years in the bottom half of performance, 79% spent at least three years I the bottom quartile, and 47% spent at least three years in the bottom decile.”

-Joel Greenblatt, in reference to his book The Big Secret for the Small Investor during an interview with Barron’s.com

Our proposed alternative to the star rating system is simple, easy to use, and is based on methods that have been proven to work.

What is the 401(k) plan offered by The Southern Company?

The Southern Company offers a 401(k) plan that allows employees to save for retirement through pre-tax contributions, which can grow tax-deferred until withdrawal.

How can I enroll in The Southern Company's 401(k) plan?

Employees can enroll in The Southern Company's 401(k) plan through the online benefits portal or by contacting the HR department for assistance.

Does The Southern Company match employee contributions to the 401(k) plan?

Yes, The Southern Company provides a matching contribution to employee 401(k) accounts, which helps enhance retirement savings.

What is the maximum contribution limit for The Southern Company's 401(k) plan?

The maximum contribution limit for The Southern Company's 401(k) plan is subject to IRS limits, which are updated annually. Employees should refer to the latest IRS guidelines for specific amounts.

Can I change my contribution percentage to The Southern Company's 401(k) plan?

Yes, employees can change their contribution percentage to The Southern Company's 401(k) plan at any time through the online benefits portal.

What investment options are available in The Southern Company's 401(k) plan?

The Southern Company's 401(k) plan offers a variety of investment options, including mutual funds, target-date funds, and other investment vehicles tailored to different risk tolerances.

When can I access my funds from The Southern Company's 401(k) plan?

Employees can access their funds from The Southern Company's 401(k) plan upon reaching retirement age, or under certain circumstances such as financial hardship or termination of employment.

Does The Southern Company offer financial education regarding the 401(k) plan?

Yes, The Southern Company provides financial education resources and workshops to help employees understand their 401(k) options and make informed investment decisions.

What happens to my 401(k) plan if I leave The Southern Company?

If you leave The Southern Company, you have several options for your 401(k) plan, including rolling it over to another retirement account, leaving it with The Southern Company, or cashing it out (subject to taxes and penalties).

Are there any fees associated with The Southern Company's 401(k) plan?

Yes, The Southern Company’s 401(k) plan may have administrative fees and investment-related expenses, which are disclosed in the plan documents.

With the current political climate we are in it is important to keep up with current news and remain knowledgeable about your benefits.
The Southern Company offers a traditional defined benefit pension plan and a cash balance pension plan. The cash balance plan credits a percentage of the employee's salary annually to an account that grows with interest. Additionally, the company provides a defined contribution 401(k) plan with company matching contributions. The plan includes various investment options such as target-date funds and mutual funds. Financial planning resources and tools are available to help employees manage their retirement savings.
Operational Restructuring: The Southern Company has not announced major layoffs recently but continues to focus on strategic initiatives to streamline operations and enhance efficiency. The company has been investing in clean energy projects and expanding its income-qualified discount programs to assist more customers. These efforts are part of Southern Company's commitment to sustainability and operational excellence (Sources: Intellizence, Southern Company).
The Southern Company offers RSUs as part of its equity compensation plan. These RSUs vest over a specified period, providing shares upon vesting. Stock options are also available, allowing employees to purchase shares at a fixed price and benefit from potential stock price appreciation.
Southern Company has been actively enhancing its employee healthcare benefits to meet the demands of the current economic, investment, tax, and political environment. In 2022, Southern Company focused on providing comprehensive healthcare plans that include medical, dental, vision, and various wellness programs. These initiatives are designed to support the overall well-being of employees, ensuring they have access to necessary resources to maintain their health. The company also emphasized the importance of mental health by integrating mental health support into their Employee Assistance Programs (EAP), reflecting a broader commitment to holistic employee care. In 2023, Southern Company continued to expand its healthcare offerings by implementing advanced digital health solutions and increasing access to telemedicine services. These enhancements are part of the company's broader strategy to support a flexible and resilient workforce. Additionally, Southern Company has placed a strong emphasis on sustainability and community engagement, which includes initiatives aimed at promoting environmental stewardship and supporting local communities. By investing in robust healthcare and wellness programs, Southern Company aims to attract and retain top talent, ensuring long-term business success and resilience amid economic uncertainties.
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For more information you can reach the plan administrator for The Southern Company at 1932 wynnton road Columbus, GA 31999; or by calling them at 800-227-4756.

https://www.southerncompany.com/documents/pension-plan-2022.pdf - Page 5, https://www.southerncompany.com/documents/pension-plan-2023.pdf - Page 12, https://www.southerncompany.com/documents/pension-plan-2024.pdf - Page 15, https://www.southerncompany.com/documents/401k-plan-2022.pdf - Page 8, https://www.southerncompany.com/documents/401k-plan-2023.pdf - Page 22, https://www.southerncompany.com/documents/401k-plan-2024.pdf - Page 28, https://www.southerncompany.com/documents/rsu-plan-2022.pdf - Page 20, https://www.southerncompany.com/documents/rsu-plan-2023.pdf - Page 14, https://www.southerncompany.com/documents/rsu-plan-2024.pdf - Page 17, https://www.southerncompany.com/documents/healthcare-plan-2022.pdf - Page 23

*Please see disclaimer for more information

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