Franklin Mutual Shares Fund is part of an exclusive club.
The $16.8 billion portfolio, which opened on July 1, 1949, is
one of only 48 funds tracked by Morningstar Inc. that was open in
1949 or earlier and still exists.
Mutual Shares' average annual return of 13.18% over that
entire period through June 30, 2014, is the No. 1 performance
among those 48 survivors, based on preliminary Morningstar data.
The S&P 500 averaged 9.64% in that span.
The fund was famously run by noted value-style investor
Michael Price from mid-1977 through late 1998. Franklin Templeton
in 1996 bought Heine Securities, investment adviser to Mutual
Series Fund Inc., from Price.
Lead manager Peter Langerman has been at the helm with
co-manager David Segal since May 19, 2005. Deborah Turner became
a co-manager on Aug. 1, 2001. Langerman is president and CEO of
Mutual Series, which has $76.5 billion in eight funds, including
Mutual Shares. He's also a manager of $25.5 billion Franklin
Global Discovery .
IBD caught up with Langerman, 59, Segal, 44, and Turner, 48,
in their offices in Short Hills, N.J., to discuss how they
What reminders do you have of this fund's history?
We still have the original portfolio hanging in our board
How have things changed?
I go back a fair ways. When I started, Max Heine (co- founder of
Mutual Shares), who was at the creation of Mutual Shares, was
still around and still quite active, as was Michael Price. So
there's some linkage there.
We've tried to adapt to a changing world and technologies, and
adapt the way we do business. We've tried to keep the essence of
what the Mutual Shares investment group is and what its essential
We recognize that the world changes. A lot of companies come
and go. You can't just stick your head in the ground and say
we're never going to change. But you have to have a certain core
and stick to that to be a successful investor in the long
That core is deep-value oriented, right?
It involves finding securities trading at a significant discount
to their intrinsic value.
It's a bottom-up approach. Part of our analysis focuses on the
downside: how things work at a company, why is there a
(share-price) value gap, and what can go wrong from where we are?
We look to limit our downside and skew buys to upside
We aim for a long-term approach that's less volatile than the
overall markets, and which creates value for shareholders. We
don't look for the hot stock of the day.
Despite the fund's stellar record since inception, in the past 10
years the fund tops only 64% of its peers. Why has that period
been tougher for the fund?
In the past 10 years we went through what was, everyone hopes, an
unusual time that included the financial crisis. We had a number
of years in which the macro environment was quite dominant.
We watch for things that companies are doing to improve
operations, capital structure, the return of capital to
shareholders, their buying and selling of businesses. Those
things are difficult in radical periods of crisis. That makes it
more challenging for investors like ourselves who focus on
specific companies, not the macro.
Why didn't market chaos make things easier for you by trashing
share prices of a lot of attractive companies?
We look at undervalued securities and complement that with
In the financial crisis, there was some availability of that
merchandise. But traditional corporate restructuring was not all
that plentiful and hasn't been.
In the last few years, until recently, the merger and
acquisition market -- another place where we look for potential
investment opportunities and which fits well with our
event-driven focus -- was fairly dormant.
When we have more (merchandise) in those areas, it tends to
set up the fund more because not all that many mutual funds look
at those kinds of faces and places. It made those periods more
difficult for us to use our expertise.
Michael Price maintained a network of experts in bankruptcies,
which gave him insight into which companies had the best chances
of springing back. Has that remained a strength of the fund?
We're still very large players and predators in some large
restructuring as we speak. It's an important part of what we
Michael Price was also known for engaging with management,
being an activist shareholder, pushing for shareholder rights. We
still engage in dialog with managements.
The core of what we do was being done in the 1980s and '90s.
The whole bankruptcy concept goes back to the Max Heine days,
when he bought bankrupt railroad bonds.
How do you divide work among yourselves?
Our analysts are assigned responsibilities on a global basis by
sector. Debbie follows food, tobacco and retailers. Dave follows
autos, miners, defense. And we have about 25 analysts.
We sit together, with the one exception being our guy in the
U.K. and we have someone in India. Everyone else sits together at
headquarters. It's an open environment, with lots of
Huntington Ingalls' (
) earnings-per-share growth has accelerated for three quarters.
What was your thesis as of your latest holdings disclosure?
We've owned it almost since its spin-off fromNorthrop Grumman (
), about three years.
The story that gave us our opportunity was that manufacturing
operations -- shipbuilding -- were not performing well. After the
spin-off, there was a lot of investor skepticism that management
could turn it around.
We met management and learned that they had a logical plan to
turn around the business. They had five ships that were
problematic and would take about two years to build and get out
of the yard. Then they had new ships.
Our average price is in the mid-30s. (Now it's trading in the
mid-90s.) Margins are up quite a bit due to management executing
on their restructuring plan.
What's your thesis forCaterpillar (
), in which you've boosted your stake in the past year?
It has significant exposure to areas like China and mining.
Longer than a year ago, there were issues like China's slowdown
and mining's slowdown. Caterpillar became unloved (by many
investors). Buying it in the low 80s, we felt there was limited
downside risk and that it should be worth 120. That story is
being played out. (The stock is trading around 109.)
WasWells Fargo (
) troubled when you began your stake?
Many of our buys are contrarian plays. The market hates them. We
bought Wells Fargo in the mid-20s. (Now it is trading in the low
50s.) We've owned it about three years. A lot of financials were
But Wells Fargo has excellent management. And it's not in
controversial areas. It's not a trading bank or investment