Mark Mulholland of Matthew 25 Fund

S&P Rank: 5 StarsKeeping His Investment Lamp Trimmed

Quick Take: A self-described devout Catholic, Mark Mulholland says he named the Matthew 25 Fund Inc (MXXVX) that he runs for a chapter in the bible to reflect his belief that being kind and charitable needn't prevent a person from excelling at business. "That's my take on capitalism," he says.

Investors have seen their faith in the $74 million fund rewarded with returns that have topped those of its peers in recent months and years. It was up 16.2% through November this year, while the average all-cap value fund gained 10.6%. Mulholland's fund returned 11.8%, on average, for the five years through last month, compared with similar funds' 7.7% gain.

In picking stocks, Mulholland looks for profitable, growing companies of any size whose shares are reasonably priced. He buys only a handful of stocks, limiting the portfolio to less than 25 holdings.

The Full Interview:

Mark Mulholland is willing to buy stocks that have been punished by the market if he thinks a company's prospects are promising.

That kind of confidence is illustrated by his latest investment. Mulholland, manager of the Matthew 25 Fund, bought a stake in Pfizer, Inc. (PFE) today when shares of the drug maker took a hit after the company reported finding an increased risk of heart attacks in patients taking its Celebrex painkiller.

Because of the news, Mulholland says he expects the stock to be "choppy for at least the next three months." Looking out three years, however, Pfizer appears attractive because it's developing a "great" pipeline of potential new drugs, Mulholland says. He was also drawn to the company, he says, because of its history of generating robust returns on capital and repurchasing its stock.

"To me, it looks like a cheap, long-term growth stock," Mulholland says, adding he expects to gradually buy more shares on days when they dip.

As a rule, Mulholland, who views all investing as value-oriented, likes to snap up stocks at bargain basement prices and hold them as they appreciate. Experience has shown him that owning growing businesses whose shares are reasonably priced is the best way to amass wealth.

Mulholland hunts for stocks trading for what he thinks a company is actually worth, or at a discount to its intrinsic value. He wants to find profitable companies with little debt and strong cash flow. He favors companies that use their cash to pay dividends or buy back stock.

The fund manager owns companies of all sizes, but he doesn't buy many. After considering about 3,500 stocks, Mulholland ultimately puts only 14 to 23 into his portfolio.

"The only thing diversifying does is reduce your downside," says Mulholland, who argues that concentrating the fund enables his winners to make significant contributions to its performance while facilitating research.

One stock he has bought more of this year is Federal Agricultural Mtge`C` (AGM), which provides mortgage financing to U.S. farmers. Mulholland began adding to the position after the company announced in August that it would repurchase up to 10% of its stock and followed that up in October by declaring its first quarterly dividend.

Although Farmer Mac has been hurt because of recent accounting problems at similar companies, like Federal Natl Mtge (FNM), Mulholland expects that cloud to lift.

Farmer Mac has grown by 20% or more over the last five years, according to Mulholland, who thinks it can continue to expand its bottom line by 15% over the next four yours.

Mulholland cites bond insurer MBIA Inc. (MBI) as one of his favorite stocks. The company is the "price leader" in its field, and its shares are attractively valued, he says. In addition, MBIA's average profit per employee is more than $1 million, compared to about $35,000 for other U.S. companies, he says. The stock now ranks third in the portfolio.

The fund's No. 1 stock is Polaris Indus (PII), a manufacturer of all-terrain vehicles, snowmobiles, and motorcycles and related parts and accessories that Mulholland has owned since 1998. Mulholland says he won't buy more shares because he expects the stock's payoffs to decrease. "But it's still such a great business that I'm just going to ride it," he says.

When it comes to selling, Mulholland will trim a position or eliminate it from the fund if a company's financial condition deteriorates or its shares become pricey. For example, he unloaded some preferred stock of PG&E Corp. (PCG) in September and October because it had run up.

"I generally don't sell or buy real quickly," Mulholland explains. "I do it over time."

The fund's turnover rate bears that out. It clocked in at 23.5% for the year ended in November, versus 79.4% for similar funds.

Looking at the overall stock market, Mulholland expects it to end 2005 in the black. He based that outlook on his belief that valuations will be reasonable while corporate earnings will remain healthy.

"It takes a while for belief in bull markets to build to where people are willing to consistently put money in," Mulholland said. He added, "I'm kind of glad this year wasn't a rip roaring year. That gives me hope that next year and the following year can be pretty strong."

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com

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