Two Top Managers Put on the Gloves

As an investor, you entrust your money to others--such as corporate managements and boards of directors--and expect them be good stewards of your capital. You expect them to run the business in a thoughtful and responsible manner, ultimately resulting in a profitable experience for you and other shareholders.

Sometimes that delegation is a beautiful thing. After all, those closest to the operations of a business can be keen practitioners with the interests of shareholders (a category that often includes themselves) at heart. As Wintergreen Fund WGRNX manager David Winters said at the annual Morningstar Investment Conference last week, "People matter."

But what happens when they surprise you, and not in a good way? Or you find yourself disagreeing more and more with their tactics? Most mutual fund managers and other investors simply sell the stocks or bonds and walk away. It's a viable approach and often the easiest and most painless way to go.

But mutual funds can be such big stockholders that they are often in a good position to demand better behavior from the companies that they own. And as two mutual fund managers recently showed, more-daunting tactics are not unheard of. It's too soon to tell whether or not their maneuvers will translate into higher returns for the funds that they lead, but we appreciate how engaged the managers are in these instances.

Third Avenue Sues MBIA Corp.
Third Avenue Value TAVFX manager Marty Whitman made a bold investment in MBIA Incorporated MBI when seemingly few others would. A shareholder of MBIA's common stock for more than 10 years, Whitman participated in that firm's January 2008 capital raise by buying bonds of subsidiary MBIA Corporation, after mark-to-market accounting on its underlying portfolio had taken a big toll on the company's capital base.

At that point, Whitman wrote about the fund's investments in MBIA and MBIA Corporation's surplus notes as a distressed situation--something with which he has had success over the years. Although Whitman recognized the problems within MBIA, he thought the capital infusion would help rectify the situation, and he had long been attracted to the firm's municipal-insurance operations--a good, steady, profitable business.

Whitman's opinion of the firm changed quickly after what he calls a "plain-vanilla fraudulent transfer" on the part of MBIA Corporation on Feb. 18, 2009, and, following the lead of several hedge fund investors, Third Avenue sued. In Third Avenue's view (according to Third Avenue's April 6, 2009, complaint), MBIA Corporation "moved all of the healthy, income generating U.S. public finance insurance business, $2.1 billion in cash, and another $2.9 billion in unearned premiums to MBIA Illinois, while purporting to leave behind and "ring fence" in MBIA Corp. all of the "toxic" structured finance bond insurance and credit derivative business." Third Avenue wants MBIA to either rescind the transfer or to otherwise compensate the funds. Since Third Avenue's suit, a sizable group of banks, including JP Morgan and Morgan Stanley, have filed a similar complaint.

Whitman's portfolio-management practices don't normally include lawsuits, but he does note that the distressed-investing world is a "confrontational business." And although lawsuits against one's own portfolio holdings aren't common, they have occurred. Legendary value investor Jean-Marie Eveillard, for example, once sued one of his larger holdings.