Quick Take: To manage a global mutual fund with an opportunistic bent, it can’t hurt to have an international upbringing and experience at a hedge fund. Such is the case with Anne Gudefin, lead portfolio manager of the $8.3-billion Mutual Discovery Fund/A (TEDIX) since May 2005. Raised in France and Switzerland, Gudefin studied in Paris and New York and worked for hedge fund Perry Capital, before joining Franklin Templeton as an analyst in 2000. When long-time manager David Winters left the fund, Gudefin inherited his title, though she stresses that the departure hasn’t changed the fund’s strategy.
Now based in London, Gudefin runs the fund together with New York-based assistant portfolio manager David Segal. The team draws on the research of 15 of the firm’s analysts, who include two specialists in merger arbitrage and four in distressed debt; the other analysts cover business sectors either on a global or regional basis, depending on industry.
Returns for the one year period were 15.3% as of Dec. 31, 2005 (compared with global equity peers’ 10.8% average), and 21.6%, annualized, for three years (versus the peers’ 19.1% average).
The fund’s top country allocations as of Sept. 30, 2005 comprised U.S., 26.6%; U.K., 11.7%; France, 7.6%; South Korea, 5.5%; and Canada, 4.8%.
As of Nov. 30, 2005, the fund’s top sectors were consumer staples (32.0%); financials (25.9%); materials (13.4%); consumer discretionary (9.9%); and industrials (5.8%). The fund’s five largest individual holdings comprised British American Tobacco ADS (BTI), 2.84%; Weyerhaeuser Co. (WY), 2.55%; Orkla ASA, 2.28%; Berkshire Hathaway`A` (BRK.A), 2.24%; and KT&G Corp. 2.19%.
Although the fund delves into areas traditionally seen as speculative — distressed debt and merger arbitrage — it does so with calculation. Volatility as measured by standard deviation is a comparatively low 8.80, versus the global equity peer average of 11.19. The fund’s expense ratio of 1.42% is in line with the peers’ 1.48% average.
The Full Interview:
S&P: How would you describe your investment philosophy?
GUDEFIN: We consider ourselves a deep value fund — we’re trying to buy a dollar of assets for 60 cents. This limits our downside — and we’re all about capital preservation. We have a three-pronged approach, focusing on undervalued equities, distressed debt, and merger arbitrage. It allows us to capitalize on the life cycle of a company. When the equity markets come down and companies go bankrupt, we can buy distressed debt.
Meanwhile, merger-and-arbitrage investments are uncorrelated to the overall market. When a deal is announced, we buy the target when it is trading at a discount, if our analysts feel that the risk/reward ratio is good enough.
The fund doesn’t have any geographic limitation, so we can go wherever we find value. Sector-wise, market cap-wise, and in terms of geographic breakdown — it’s all driven by the ideas we find.
Right now, we have more than 82% of our assets invested in undervalued equities, 7% in reorg or distressed bonds, and about 1% in arbitrage.
It’s a cyclical business. In 2002, about 20% of the fund was in distressed bonds and merger-and-arbitrage. But a lot of money has gone into these opportunities for the last 12 months. The risk/reward ratios are not as interesting, so we don’t have as many investments there.
There’s about 10% cash in the fund. At the end of the year, I got some inflow. On average our cash stake would be a little over 5%.
S&P: What are your buy and sell criteria for stocks?
GUDEFIN: The most important criteria is free cash flow yield, because it includes the company’s margins, financial structure, capital intensity, and tax structure. If I can get good businesses with high barriers to entry that generate high single-digit or double-digit free cash flow yield, I will buy them. Then when the yield becomes mid-single digit, I would sell. I have to be general here — it’s more difficult than that in practice.
We don’t have any restriction in terms of market cap. If a company is very cheap, I would have some with $1 billion market cap, but not that many. I would prefer to have larger companies. For example, in Korea, I can find companies trading at a P/E of just one or two. But if it has less than $1 billion in market cap, a $50 million position would represent 5% of the company. From a risk perspective, it’s easy to buy 5% of the company, but it’s much more difficult to sell.
I am extremely careful not to make investment decisions based on macro data. I don’t want to bet on, say, U.S. interest rates or growth in China. I want companies with an internal catalyst that will realize value almost independently of what the economy does.