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These Former Colleagues Are in a Value League of Their Own

Michael Price and his proteges have gone in different directions. Do great minds still think alike?

Bridget B. Hughes, 10/05/2010

It's been almost 10 years since famed value investor Michael Price left his chairman post at Mutual Series, five years after selling it to Franklin Templeton in late 1996. And it has been even longer since he stepped down from his day-to-day portfolio-management duties. But his influence remains strong. Since his departure, portfolio managers and analysts he trained and worked with have become prominent in their own right. They have followed different paths, albeit many along the same general investment road.

Some, such as Peter Langerman, remain at Mutual Series. Langerman runs Mutual Shares TESIX, among other funds. Others have launched their own mutual funds, pledging to follow the same time-tested value philosophy they learned from Price and, directly or indirectly, from his teacher, the late Max Heine. In fact, several ex-Mutual Series managers now offer mutual funds. David Winters launched Wintergreen WGRNX in late 2005 after leaving Mutual Series several months earlier. David Marcus, who worked at Mutual Series until 2000 and subsequently worked with a family's personal investments and businesses, started Evermore European Value EVEAX and Evermore Global Value EVGBX at the end of 2009. Finally, Chuck Lahr and Anne Gudefin, at Mutual Series for nearly seven years and 10 years, respectively, left in late 2009 to start up PIMCO EqS Pathfinder PATHX, which launched in April 2010.

With a handful of investment outfits plying the same strategy, including Price's own MFP Investors, LLC, investors can glean some insight from examining their portfolios, which are disclosed quarterly. (Although such disclosures can be made with as much as a 60-day lag, these investors are all long-term-oriented, often holding on to companies for multiyear periods.) How similar are the portfolios? Do they show the Price influence? Are there stocks or areas the managers all agree on?

The Rules
Let's first examine just what this uncommon strategy entails. Perhaps the most important aspect of the strategy is its one guiding principle: Don't lose money. Assessing each investment's downside is critical in all three legs of the strategy, as well as in portfolio construction. Another distinguishing characteristic is its indifference to index weightings. Sure, the funds all aim to produce index-beating returns over the long haul, but the managers are agnostic when it comes to how similar to or different from the index they look.

The portfolios can be wide-ranging and involve a variety of tools, including options and other derivatives, but primarily focus on three main areas.

One, the managers all look for stocks trading at discounts to their intrinsic value, which can be estimated by the managers in a variety of ways. Cash flow is key, as, generally, are strong balance sheets, and the managers favor corporate managements that use their capital wisely, which often means returning it to shareholders in the form of dividends or share buybacks. The funds can end up holding on to stocks in this camp for many years.

Two, the funds engage in merger-arbitrage strategies. That involves buying a company that is the target of an acquisition in an attempt to capture the spread between the current market price and the (higher) deal price. Because acquisitors generally see their share price decline after making acquisitions, this strategy can also involve shorting the stock of the acquisitor. Depending on the companies involved and how quickly deals close, this can be a shorter-term tactic.

Three, the managers look for distressed-debt opportunities, which can take a variety of forms. In its most intensive form, they might buy the bonds of a company going through bankruptcy, be appointed by the courts to the creditors' committee, work with that company's creditors to secure favorable financing, and end up swapping their bonds for stock in the new, better-capitalized company. As with merger-arb opportunities, supply ebbs and flows. Distressed debt isn't usually a big piece of the funds.

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