Quick Take: Following in the tradition of high-profile manager Michael Price, David Winters and Matthew Haynes run Mutual Beacon Fund/A (TEBIX) by combining deep-value stocks, arbitrage, and distressed investing. The managers say this mix yields solid long-term returns by holding up in downturns and outperforming in rallies.
Recent results suggest this approach has worked relative to the broad market. This year through November 18, the fund rose 21.2%, versus a 19.3% rise for the S&P 500-stock index. For the five-year period through 2002, the fund rose 4.9%, on average, compared with a 0.6% dip for the index. Along with the overall strategy, the managers credit the fund's success to distressed holdings and avoiding technology stocks.
Winters and Haynes also say they've continued Price's practice of shareholder activism. A recent example is Meredith Corp. (MDP). Mutual Series' efforts led to a new member of Meredith's board of directors and a substantial jump in the company's stock, according to Winters.
The Full Interview:
S&P: What is your basic investment philosophy?
WINTERS: We are deep-value opportunists. We look for mispriced securities with limited downsides and substantial upsides. We focus on undervalued common stocks, arbitrage, and bankruptcy investing. Two things make us unusual: we're willing to hold cash, and we don't try to fit any style box category, such as mid- or large-cap value.
S&P: Since you don't follow a single style category, how would you recommend the fund's performance be judged?
WINTERS: We would say compare the fund to the S&P 500-stock index.
S&P: Why has the fund done well versus the S&P 500?
WINTERS: We try to preserve capital in down markets and outperform in market rallies. Not owning technology stocks has helped us, as have our distressed holdings. We had big home runs with companies like Calpine Corp. (CPN).
S&P: How is the fund currently positioned?
WINTERS: Most of Mutual Beacon's assets are now in common stocks, approximately 64% of the fund. About 33% of the fund is in U.S. equities, and about 31% is in foreign stocks. Our cash position is about 18%, a by-product of the opportunities we see in the market.
A large portion of our domestic equity holdings are in property and casualty insurance companies and media companies. Property and casualty insurance companies have pricing power and disciplined management. Media companies generate free cash flow, and their stocks trade at discounts to asset value.
A lot of our foreign holdings are tobacco companies. We also hold Nestle.
S&P: Why do you have sizable holdings of international stocks?
HAYNES: Many of our European holdings generate free cash flow and are rational about using it. Also, our foreign tobacco holdings have far less litigation risk than their U.S. counterparts.
S&P: Under Michael Price, Mutual Series became known for shareholder activism. Have you made similar moves recently for Mutual Beacon?
WINTERS: A recent example is Meredith Corp. (MDP), which publishes "Ladies' Home Journal" and owns some TV stations. We've filed actions against them and got someone put onto their board.
S&P: Have you recently been involved in arbitrage?
WINTERS: Arbitrage is less than 1% of the fund right now, but we think there will be more corporate takeovers. We hold Weetabix Ltd., a U.K. food company, which Hicks, Muse is seeking to buy. The stock is up over 40% since March.