| BUSINESSWEEK ONLINE : MARCH 1, 1999 ISSUE | ||||||||
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| PERSONAL BUSINESS
Putting the Moxie Back in the Mutuals Up in Bellingham, Wash., Gary Scott has had a lot on his mind. His retirement last year from an area police force posed plenty of financial challenges. But lately, what's bugging him most is his long-standing investment in Mutual Shares Fund, the quirky portfolio made famous by Michael Price's forays into bankruptcies, mergers, turnarounds, and other situations involving undervalued companies. ''I've seen it do so well for so long,'' says Scott. Yet he's wondering whether to dump his entire stake. The reason? Fabled value-stock picker Price retired late last year following the 1996 sale, for $610 million, of his flagship Mutual Shares and its sibling funds to San Mateo (Calif.) giant Franklin Templeton Group. Last year, Mutual Shares eked out a return of less than 0.5% even as the Standard & Poor's 500-stock index surged more than 28%. The most any Mutual Series fund managed was a 6.1% return. Mutual Discovery even lost money. In response, many longtime investors are bailing out. In the 12 months ended Jan. 27, nearly $3.8 billion flowed out of the six funds, according to AMG Data Services in Arcata, Calif. Behind the exodus are investor fears of a leadership vacuum, poor customer service, and worries that the funds have grown too large to handle. Worst, though, were the funds' uncharacteristic losses in the middle of last summer's swoon in stocks. Mutual Shares, supposedly cushioned on downswings by its style of buying deeply undervalued stocks, lost more than 17% in the summer quarter, vs. the S&P 500's decline of less than 10%. From 1987 to 1994, by contrast, the fund did better than the S&P in five of the seven quarters the index lost money. THINK AGAIN. If some of your money is still among the $24 billion now being run by Price's proteges, you've got some thinking to do. Selling out now is probably not the answer, especially if you've amassed high capital gains over the years in a taxable account. To justify that, you would have to put your finger on an alternative investment that can make up any capital lost to the taxman. New investors, on the other hand, probably should balk at the 5.75% sales charge Mutual Series now levies. Given cheaper alternatives (table, page 116), the load is a hurdle that's difficult to justify. Either way, enough has changed at the fund group's headquarters in Short Hills, N.J., that it's worth reconsidering why you own the funds--or why you might want to. Price retired on Nov. 1 to a hands-off role as chairman of the funds' board, leaving operations to Chief Executive Peter Langerman, a bankruptcy attorney who joined Price in 1986, and Robert Friedman, who came on in 1988 and serves as chief investment officer. Along with Price, who still has at least $100 million of his own money invested in Mutual Series funds, the two new bosses spent last summer reorganizing the funds. Instead of relying on a bullpen of industry specialists and analysts, each fund now has lead portfolio managers who are accountable for their performance. ''It's an opportunity for people to really show their stuff,'' Langerman says. They also insisted on slashing the number of stocks in each fund to around 200 from as many as 330. ''We had far too many positions per fund,'' Friedman says. That meant too many stocks to keep track of and too little performance boost from the funds' biggest winners. ''The shame of it,'' he adds, ''is we didn't put this portfolio process in place about a year ago.'' One thing Langerman and Friedman intend on leaving unchanged, however, is Price's shareholder activism. Under Price, Mutual Series funds took big stakes in undervalued companies such as Chase Manhattan and Olin and leaned on managers to restructure or sell out. Chase, of course, agreed to merge with Chemical Banking in 1995, and Olin in February completed its spin-off of Arch Chemicals. ''The strategy is every bit the same as before,'' says Friedman. ''In select situations, we reserve the right to step forward.'' As for new targets, Friedman will only say he feels that Europe offers plenty of undervalued companies with managements that may have overstayed their welcome. Still, Mutual Series has suffered some setbacks. At Dow Jones, which saw Price buy in and begin campaigning for better returns back in 1997, Mutual Series has recently relaxed its pressure on management despite a 28% drop in the share price since last summer. The Mutual funds still own 5% of the common stock. And a big, long-term holding in Sunbeam plunged to under $5 a share last year from $53 after questions arose about former CEO Alfred Dunlap's accounting practices. Sunbeam alone slashed 3 to 4 percentage points from Mutual Shares' 1998 total return, says Langerman, who remains at the troubled appliance maker as its chairman. Oxford Health Plans' dive to under $6 from $22 hurt, too, notes Gregory Johnson, president of Franklin/Templeton Distributors. (Oxford has since rebounded to $19.) So did an untimely bet on energy stocks. An even bigger problem, however, is the market's current distaste for Mutual's style of stock-picking. It hasn't helped that the U.S. economy is in the middle of a record-breaking peacetime expansion. That has put a crimp in the number of bankruptcy and restructuring plays that once were the funds' stock in trade. ''You've had five years of growth [stocks] outperforming value and five years of large caps outperforming small caps,'' says Johnson. ''It's a very challenging period for any value investor.'' None of the Mutual managers is willing to say when value stocks will come back into vogue. But their faith is steady. ''We have a style that makes eminent sense,'' says Mutual Shares and Mutual Beacon Co-Manager Lawrence Sondike. ''Our day will come.'' Reflecting that faith, Mutual Series is looking far afield for cheap but promising investments in markets where bankruptcies and economic distress are the norm. For example, David Winters, co-manager of Mutual Beacon, recently traveled to Japan in search of bargains. One stock he likes there is Kita Kyushu Coca-Cola Bottling Co. Langerman says the firm is looking around in South Korea as well. ''Today, it's harder to find those totally undiscovered names,'' Langerman adds. ''There are other value managers out there.... You are a victim of your success because other people say, 'Hey, that works! That's very interesting! We're going to look at that area.' But that's not to say that there are still not tremendous opportunities.'' UNGLAMOROUS. So instead of Dell Computer, Yahoo!, or Cisco Systems, their portfolios are filled with such names as BTR Siebe, a recently merged British industrial concern that Mutual European Fund manager David Marcus favors. Together, BTR and Siebe trade at about five times Marcus' expectation of cash flow this year. Chicago-based Telephone & Data Systems, which is set to spin off its cellular subsidiary, Aerial Communications, is another unglamorous outfit the funds enthusiastically own. Sondike reckons TDS trades for about half the value of its assets. Then there's Lockheed Martin, the world's No. 1 arms maker that has been beaten down in these peaceful times from almost $59 a share last year to as low as $35. Johnson acknowledges that in adddition to value investing being out of favor, the fund company hurt investors and itself with lapses in customer service. ''I called them up, and all I got was a bunch of PR talk,'' complains Bill Colwin, a shareholder from Huntington, N.Y. ''They didn't tell me anything. [The service rep] told me someone would call me back, but no one ever called back, and that was three months ago.'' (Langerman himself did call Colwin in January after BUSINESS WEEK alerted him to Colwin's complaint.) ''SEAMLESS.'' Johnson blames such lapses on the challenges of uniting the Templeton group of funds that Franklin purchased in 1992 and then the Mutual Series funds. But now that the funds' back-office operations are unified, he claims that service is on the mend: ''We've made it one seamless fund family.'' Yet none of these reforms, nor the firm's value-stock fervor, was enough to persuade one influential investor from bailing out recently. Ken Gregory, an Orinda (Calif.) investment adviser, removed Mutual Discovery from the model portfolio for his $400 million in client accounts. ''They have a real strong team, but I think they're running too much money,'' Gregory explains. ''I'm just not that confident that they will be really great going forward.'' A better bet, he thinks, is Longleaf Partners Fund. Likewise, Ronald Roge, a Bohemia (N.Y.) financial adviser with $100 million under management, has liquidated his clients' holdings in Mutual Qualified, once a core investment. His alternatives include Tweedy, Browne American Value and Tweedy, Browne Global Value, both of which rely on close analysis of stocks trading beneath the fair value of their assets. Are the investors who are abandoning Michael Price's successors right? Smaller alternative funds exist, but fund size isn't everything. Fidelity Magellan manager Robert Stansky made that point in 1998 as his $84 billion fund beat the S&P by five percentage points. In any event, Mutual Series hasn't grown large enough to cause major concerns. Just 28% of the money now in the funds represents accounts opened since Franklin took over. If you're still tempted to bolt, consider a bit of history. ''In '89, we were up only half of the market; in 1990, we were down worse than the market,'' Friedman recalls. ''People were saying, 'Oh, value is dead. You don't want to own value. You want to own large caps.''' Then, over the next seven years, the flagship fund's average annual return outpaced the S&P, 20.4% to 19.8%, while taking on less risk. ''The very nature of 'value' is to be contrarian,'' Friedman argues. ''You're buying something other people don't want, rather than buying something everyone wants. You have to wait until there's a psychological adjustment in the market's mind as to the worth of something. I think that's exactly where we are now.'' In the past few weeks, he adds, two Mutual Series holdings, LucasVerity and Morton International, agreed to takeovers, sending both stocks soaring. And Michael Price? He's shunning publicity. But with so much of his net worth still tied up in his former funds, he has to be glad to see their better-than-average start this year. ''It's like a relay race,'' Marcus says. ''Michael handed us the baton, and we can either stand there and look at it or run with it. We're running with it.'' If they can pick up the pace, they'll have no worries about shareholders running the other way. By Robert Barker EDITED BY AMY DUNKIN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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