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A Large-Value Fund With a Focus on Distressed Debt

Jonathan Wallace, CFA, CAIA

Jonathan Wallace: Bronze-rated Franklin Mutual Quest is one of several offerings from Franklin's Mutual Series Group that traces it lineage back to famed value investor Michael Price.

Experienced comanagers Shawn Tumulty and Keith Luh are the Mutual Series Group's specialists on distressed investing. Each of the analysts in the Mutual Series Group are sector specialists. The fund benefits from the group's skill, depth, and experience to deploy this fund's decades-old, fundamentally driven investment process that focuses on bottom-up stock-picking to uncover securities that they believe are currently mispriced by the market. When purchasing a security, they seek both a margin of safety as well as what they see as a catalyst that will trigger the market to realize the value of that security.

Falling in the world allocation peer group, this fund holds more fixed income than other Mutual Series offerings, keeping about 55% to 75% of the fund in cheap stocks and merger arbitrage with the remainder generally invested in distressed debt and cash. The fund's unique investment style can lead to bouts of underperformance. This was on display in 2017 and into 2018 when the fund's value bias and currency hedging policy were factors in fund's lagging, but this fund has delivered for investors over the long run. Since Tumulty inherited the lead role in December 2009, the fund's 8.3% annualized return through March 2018 outpaces the world allocation category average and lands in the top decile of that peer group. While the fund has slightly trailed the MSCI World Value Index over that span on an absolute basis, the fund's risk-adjusted returns are superior to both the category and that index.

Shareholders in this fund enjoy reasonable pricing as the fund's expenses fall in the lowest quintile of the world allocation pricing group. Put it all together, and despite the short-term woes, this fund offers investors a solid long-term investment option going forward.