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David Winters, Wintergreen

A successful entrepreneur and world-class investor, Winters achieved both by taking an eclectic approach.

Bridget B. Hughes, 08/04/2008

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David Winters always liked trains as a boy, so you might say it was his childhood pastime that led him to Richmond, Fredericksburg & Potomac Railroad dividend obligations early in his career at Mutual Series. He remembers seeing the train once as a kid. But something bigger caught his attention as an investor. Reading the company's annual report, Winters found that RF&P had no debt and lots of cash. What really clinched it for him, though, was its 350 acres in Alexandria, Va.--on the books at 1830s prices. (The railroad was chartered in 1834.) Winters says a sum-of-the-parts analysis showed the company was trading at a "massive discount."

His experience with RF&P didn't stop there. Years later, in 1990, CSX CSX embarked on a takeover of the company. Winters, as shareholder activist, worked to get a better price for RF&P investors.

Learning from Legends
Winters still likes the railroad. Train pictures and models populate his office in Mountain Lakes, N.J., and last summer, he vacationed by Amtrak. He still likes asset plays, too: Consider that the fund he started and manages, Wintergreen Fund WGRNX, invests in Consolidated- Tomoka Land CTO, which has thousands of acres in east-central Florida on the books at dated prices. And he still takes on corporate managements; as a large shareholder of Consolidated-Tomoka, he's been forceful and persistent in his requests of that company's management and board of directors.

Winters hasn't changed his investment approach over the years either. He wants to limit downside risk but provide lots of upside, and he searches for passionate, competent management. His quest for the "trifecta"--a good business that can grow over time, is run by a good management team, and is trading at a discount to its value--has been a constant.

That approach might sound simple, but it's hardly easy, especially considering that Winters' investment universe is the world and Wintergreen's portfolio is concentrated. One of the things that sets him apart from other managers is a willingness to search far and wide in his pursuits--something he learned when he started his career in 1987 at Mutual Series working under value legends Max Heine and Michael Price.

"One of the keys to security analysis that I learned from Michael was to look at debt and equity investing as a continuum, and to look at the company from various perspectives of what could be rather than just what was there in front of us," Winters says. "That search for possibilities led quite naturally to a host of investment techniques and tools including activism, bankruptcy, convertibles, and distress."PAGEBREAK

Through the years, Winters has thus tended to build more-eclectic portfolios. Never have they looked much like any market index or the vast majority of other portfolios. In the late 1990s and early 2000s, for example, his training led him to play the tobacco-company consolidations around the world, even as many investors were running away from tobacco on fears of big legal settlements. The early 2000s, too, brought opportunities in distressed investing, or investments in firms going through bankruptcy. For example, Winters' charge at the time, Mutual Discovery TEDIX, had invested in the bonds of bankrupt British cable firm NTL.

All the while, Winters' portfolios have been centered around cheap stocks that have often fallen out of favor with investors or that have been largely ignored, such as Washington Post WPO, part of Wintergreen's portfolio. Media stocks have been hard-hit, but Winters sees value in the firm's education services, through its Kaplan unit, which accounted for half of that firm's revenue in 2007.

Tobacco also still plays a big role in the portfolio but, in some cases, for different reasons. Japan Tobacco, for example, Wintergreen's largest holding with nearly 10% of assets, is a favorite for its cash generation as well as for some savvy financing moves its management made when it bought U.K. tobacco firm Gallagher. Winters says the market hasn't yet caught on to this yet.

Running His Own Firm
Winters says he never felt constricted at Mutual Series or forced to focus on marketing, but he had his own ideas of how a mutual fund company should be run. In 2005, Winters left Mutual Series, after 18 years, and started his own firm.

"I had an epiphany," Winters says. "We wanted to create an investment company, not a marketing firm. We wanted maximum flexibility, not to be an index-hugger."

There are differences between running your own mutual fund company and being part of a larger organization, says Liz Cohernour, Winters' business partner and chief operations officer. "However independent different branches are, there's still a lot of time spent connecting through the parent," says Cohernour, who had also served as general counsel at Mutual Series under Price and later Franklin Templeton.PAGEBREAK

Even in building his own firm, Winters went against the grain. First, the very fact that he started a mutual fund, instead of going the hedge fund route, in the wake of the mutual fund trading scandal earlier this decade made him unusual. Complaints by established mutual fund companies about new regulations and higher costs didn't scare him off. Then, he went no-load, even though he was well-known and respected in the broker network that had sold Mutual Series funds as a part of Franklin Templeton. And he decided he didn't want to have a marketing budget or a sales department.

"One of the things I enjoyed was managing money for friends and family," says Winters, who doesn't come from a wealthy background. "I like the democratic idea of the mutual fund. The people who need the most help in the long run with their finances are people who have relatively modest means. We view every dollar as precious."

Wintergreen's investment minimum, at $10,000, is arguably too high to be truly democratic, but he is looking for long-term investors who understand and are committed to his process. "We wanted to have it be where investors find us, as opposed to really marketing to them to fit some asset-allocation desires," he says.

Advisors Appreciative
Most of the investors who have found Wintergreen appreciate Winters' flexibility and the fund's distinctions.

"I like the fund because of its ability to be wide-ranging, much like a hedge fund. He's not boxed in by Morningstar boxes," says Lewis Altfest, a fee-only financial planner in New York City. "David Winters came to one of our annual meetings, and he charmed everyone with his knowledge and his intensity."

Vern Hayden, CFP, of Hayden Wealth Management and author of Getting an Investment Game Plan, is also a fan, saying that Winters has a unique ability to pick stocks. "I don't have to understand it to use it," Hayden says. "He's smart, and I have a lot of confidence in his ability."

Altfest and Hayden have the appropriate attitude when it comes to Wintergreen. Once investors believe in him, trusting the fund, as Hayden says, "is liberating."

Bridget B. Hughes, CFA, is a senior mutual fund analyst with Morningstar.

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