Top Mutual Fund: Sticks To Its Contrarian Approach

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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 invest.

IBD: What reminders do you have of this fund's history?

Langerman: We still have the original portfolio hanging in our board room.

IBD: How have things changed?

Langerman: 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 philosophy is.

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 term.

IBD: That core is deep-value oriented, right?

Langerman: 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 performance.

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.

IBD: 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?

Langerman: 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.

IBD: Why didn't market chaos make things easier for you by trashing share prices of a lot of attractive companies?

Langerman: We look at undervalued securities and complement that with distressed securities.

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.

IBD: 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?

Langerman: We're still very large players and predators in some large restructuring as we speak. It's an important part of what we do.

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.

IBD: How do you divide work among yourselves?

Langerman: 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 discussion.

IBD: Huntington Ingalls' ( HII ) earnings-per-share growth has accelerated for three quarters. What was your thesis as of your latest holdings disclosure?

Segal: We've owned it almost since its spin-off fromNorthrop Grumman ( NOC ), 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.

IBD: What's your thesis forCaterpillar ( CAT ), in which you've boosted your stake in the past year?

Langerman: 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.)

IBD: WasWells Fargo ( WFC ) troubled when you began your stake?

Langerman: 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 beaten up.

But Wells Fargo has excellent management. And it's not in controversial areas. It's not a trading bank or investment bank.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

Referenced Stocks: HII , NOC , CAT , WFC

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