An impressive strategy runs through Mutual Series, but the funds have key distinctions, as well.
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One of the most appealing attributes at the Mutual Series group of funds is a cohesive investment culture and strategy that transcends time, market conditions, and portfolio managers.
That kind of continuity should help the funds' investors set appropriate expectations and maintain a familiarity with all of the portfolios, even through manager changes (many of which have occurred here during the past 15 years or so). It's helped the four older, more diversified funds (Mutual Shares
In the past decade, which included two bear markets and during which the S&P 500 Index notched a meager 2.5% annualized return, the funds collectively have benefited from their sensitivity to valuation and focus on cash flow, dividends, and share buybacks. More specifically, hefty stakes in foreign companies, big weightings in cash-rich tobacco stocks, merger-arbitrage tactics, and occasional retreats to cash as markets peaked proved smart.
That doesn't mean, though, that there aren't meaningful distinctions among the funds, or that the portfolios don't change in substantive ways. While the past 10 years have been fruitful for all four funds, for example, performance during the more-recent five-year period has differed markedly--mostly a result of a single but important decision.
All of the investment ideas for the Mutual Series funds come from a centralized group of portfolio managers and analysts. Most of the portfolio managers still have stocks on their assignment lists; Beacon comanager Christian Correa, for example, covers Xerox
The amount of stock overlap among the four diversified funds, each of which has at least two named portfolio managers, is not surprising, but remarkable nonetheless. As of the end of December 2010, all of the funds show meaningful stakes in British American Tobacco
It's not just stock that the funds have in common. For example, for parts of 2007 and 2008 all of the funds bought index puts as a hedge against a general market decline. Although attractive merger-arbitrage deals are sometimes in short supply--as they have been over the past couple of years--the funds' managers will all participate in the same merger-arbitrage deals. At the end of 2006, all of the funds held BellSouth and shorted AT&T
Generally, the funds' behavior can also be categorized with a broad brush. Over their histories these offerings have tended to be lower-risk funds that lag their peers and indexes in market rallies--since early March 2009, they have all trailed--but that have proved resilient in tougher times.
A Personal Stamp
Despite the similarities in the portfolios, particularly among the top holdings, there are differences. The most official one comes from the funds' prospectuses and concern their geographic ranges. Global Discovery has the most latitude, with the ability to invest 0% to 100% of assets in international stocks. Quest can go 0% to 50% international. Shares and Beacon, however, are limited to 35%. In the past several years, Quest, Shares, and Beacon had been bumping up against their maximums; meanwhile, Global Discovery kept generally less than 30% of assets in the United States.
Meanwhile, the smaller funds can take advantage of opportunities off limits to their larger siblings. The research team often hunts among less-liquid smaller caps; some distressed opportunities also are of limited size. Beacon and Quest, each of which houses around $5 billion in assets, are beneficiaries. Beacon, for example, is the only fund to own Correa's $3 billion market-cap Open Text and was the only one of the four to recently invest alongside European in Porsche. Meanwhile, Quest, co-run by Mutual Series' head of distressed investing, Shawn Tumulty, has a meaningful stake (1.94% of assets) in a Vertis restructuring deal. But the others don't--or can't--participate in such smaller deals.
There's room for individual portfolio-manager decisions. Practically, these decisions have often come down to how to weight particular securities. Correa was the first to start to reshape the tobacco portion of his assignment, though tobacco stocks still represent a large portion of Beacon and the other funds. His is the only fund to be completely out of Reynolds American
Then there's the cash stake--the factor that accounts for much of the discrepancy in the funds' five-year returns. Mutual Series has no limit on how much cash can be held in each fund, and in practice, all the funds have shown a willingness to maintain large, double-digit cash hoards at times (and almost always have some level of cash). But by the beginning of 2008's fourth quarter (during which the S&P 500 Index dropped more than 20%), Global Discovery and Quest, which at the time also employed a comanager who has since left the firm, showed a cash stake greater than 20%, while Shares and Beacon recorded far lower cash levels of about 10%. In the next six tumultuous months, Global Discovery and Quest had increased their cash positions to almost 50% of assets; Shares and Beacon had stakes in the mid-teens. Those monster cash cushions helped Global Discovery and Quest survive the crushing bear market better than nearly all rivals--as well as Shares and Beacon.
To be sure, Global Discovery and Quest lagged in the rally that ensued in March 2009, as the value managers found it hard to buy stocks that were going up so quickly. Their bear-market resilience meant they've come out winners in the past five years.
Cash stakes can still vary, currently ranging from 10% to 13%, but it's unlikely investors will see cash at the 50% level here anytime soon (even though it proved a smart decision in hindsight). The current team at Mutual Series, headed by CEO and Shares comanager Peter Langerman, simply thinks the funds should be more fully invested--that in almost all environments there are enough values to be had to avoid cash stakes that large.
In their most recent interviews with Morningstar, the managers are again singing the same song. In the past year, they've all invested in a collection of health-care stocks, bringing their health-care stakes to levels not seen since the mid-1990s. The managers like big pharma, which they say is priced at having no terminal value; one of the larger holdings among the four funds is Pfizer
Finding the Best in Mutual Series
Mutual Series funds are all strong options for investors, but they do have differing characteristics that investors need to be clear on. Investors interested in the group can find the one most suitable for them by considering their own preferences and the makeup of the rest of the portfolio.
Bridget B. Hughes, CFA, is an associate director of fund analysis with Morningstar.