Independent investment counselor Marc Heilweil has been managing money since 1977, primarily for clients who have a minimum of $2 million to invest. In late March, 2000, Heilweil opted to bring his eclectic, contrarian style to the mutual-fund-owning masses by launching Marathon Value Portfolio (MVPFX). With just $19.75 million in assets, the fund is classified as a large-cap blend portfolio by Standard & Poor's.
Marathon Value typically holds between 70 and 75 equities, plus a scattering of short-term fixed-income issues in lieu of cash to reduce volatility. The fund's three-year standard deviation -- a measure of volatility -- is 9.91, vs. 12.98 for the average large-cap blend fund. Its expense ratio is 1.25%, compared with 1.04% for its peers.
So far, the fund has been easy on the downside, losing less than its peers. For example, in 2002's down market, it shed 11%, vs. a loss of 22.2% for the average large-cap blend fund, and 22.1% for the S&P 500-stock index. For the three years ended Sept. 30, Marathon Value registered an average annualized return of 17.29%, vs. 14.93% for its peers, and 16.71% for the S&P 500. Given the portfolio's superior risk-adjusted returns, it's ranked 5 Stars by Standard & Poor's.
As of Sept. 30, the fund's top holdings were Pharmaceutical Product Development (PPDI
, 2.5% of the fund), IBM (IBM
, 2.1%), Sasol Ltd ADR (SSL
, 2%), Kimberly-Clark (KMB
, 2%), and Mitsubishi Tokyo Financial ADR (2%). Its top sectors were financials (13.6%), consumer discretionary (12%), health care (11.4%), technology (10.8%), and industrials (10.8%).
Carol Wood of Standard & Poor's Fund Advisor spoke recently with Heilweil about his investing strategy. Edited excerpts of their conversation follow:
How would you describe your investment philosophy?
It's designed to be a one-size-fits-all fund for people who don't want to decide whether to buy small- or large-cap, or value or growth, stocks. We try to buy from all categories, including some international. We attempt to get the best values within all sectors of the equity markets.
It's a contrarian, longer-term approach -- fundamentally based, but not formulaic. I'll go where I think the best values lie, regardless of particular indicators.
Tell me about your process of finding stocks. What's your universe?
My universe is the world. I've been managing money full-time since 1977 and have built up a large knowledge base about companies. I have three financial analysts behind me, and one of them does financial models, though I'm not model-driven or very concerned with short-term dynamics. I'm personally managing the fund and doing all the stock selection and trading.
I combine a qualitative outlook toward companies with a price discipline. I'm not following the stocks as stocks, but as a "business buyer." I occasionally buy bad businesses at the right price, but most of my companies are those that I've screened for their business strategy and fundamentals and management quality. I usually like to follow the company for a while before I buy it.
As long as management continues to execute and the stock doesn't become a "market darling," I'll hold those stocks. Sometimes, I'll react to bad news and quickly give up on a company. But usually we sell only if a stock becomes a market darling and is overvalued relative to that company's normal price-earnings ratio. For example, although the fundamentals for energy are very good, we're looking at our energy holdings more carefully now because valuations are starting to warn of cyclicality in the business.
Can you name a company that you bought in the face of bad news?
I added to our IBM shares after it had an earnings disappointment in the first quarter of 2005. The stock is now a large holding. I've followed IBM for many years, and think their consulting business, the largest part of their business, is slowly coming back to life.
They've done a good job of getting out of commodities. What's interesting about IBM is that, as opposed to just being a body shop, they can keep their consultants busy, moving them over to work on technology and software when things slow down.
How are the fund's assets typically allocated?
Historically, we've had about 10% to 15% in cash or cash equivalents. If the market fell apart, I would use that cash and go to a more traditional 4% level. Our prospectus allows us 10% foreign equities by cost. We're about 12% international now.
So typically you have 80% to 85% total equities?
Yes. We invest most of our cash in fixed income and manage it aggressively to pick up a little more yield. We don't use money markets, but asset-backed securities on triple-A mortgages and other short-term bonds, like step-up
We're not trying to be a balanced fund, but to be less volatile than the typical fund. Occasionally, we'll buy an undervalued bond with equity-like returns to boost returns. We have about 2% of assets in bonds bought for investment purposes.
The asset-backs turn over about every three months. Because of the tranches they're in, they're the first to pay off. Our actual stock turnover is only 20%.
Are there any areas or sectors that you avoid?
"No" is the real answer. I avoid what's hot. Right now, I consider the small-cap sector somewhat overvalued relative to the rest of the market. But we still have small-caps in the portfolio. We even have a microcap or two.
How do you manage risk in the portfolio?
By price discipline and careful research. Since we aren't formulaic, before I'll buy anything, I want to understand the risks of that business. Of course, sometimes you get hit with unanticipated risks or lawsuits.
General Electric (GE), for example, is probably at risk for global recession. A lot of their businesses are still cyclical, and they also have credit risk from financing operations. While those operations are well run, they certainly would have exposure to a downturn.
Could you single out a holding and tell me how it reflects your investment style?
Kimberly Clark is a defensive company that I believe is somewhat undervalued for a consumer nondurable company. They've gotten out of pulp and are spending in areas with greater growth and margin, like health care. They've made a major movement into health-care products like gowns and disposable instruments. I like the relatively low p-e and the fact that Wall Street has not been enamored of it.
I've spent a lot of time talking to employees and suppliers, and consider it a high-quality company at a reasonable price. The worst thing is that they have these periodic price wars with Procter & Gamble (PG), and that's a rough road to hoe.
Are there any recent additions to the portfolio?
We've owned IMS Health (RX) for a while. The company has agreed to a takeover by VNU [the Dutch media group], though the deal is opposed by some VNU shareholders. We added to our position because the arbitrage is enormous, and the stock is selling at a small premium. We think there's an attractive risk/return potential.
What accounts for the fund's relatively high, stable returns, and do you expect them to continue?
Obviously, I don't know that our outperformance of the S&P will continue. A lot will depend on the kind of market that we face. We expect to underperform in speculative bull markets.
One of the reasons I've stuck with large-caps is because I want to be able to say that our performance, our style, is replicable. It's part of my transition strategy.
Are you planning to leave the fund?
No. I want to continue working, but my firm is going to outgrow Marc Heilweil at some point. The transition I'm talking about is going from a one-person firm, where I do just about everything in the investment arena, to building a firm that's not institutional but gets beyond the "lifestyle firm."
Do you plan to change the fund's strategy or to have a co-manager?
Do you have an outlook for the market and for your asset classes?
I'm a market agnostic. I don't wake up thinking the market's going to go up 50 or go down 50.
I don't think the market is extraordinarily attractive. I wouldn't be surprised if in the next year we had an extraordinary buying opportunity brought about by a credit crisis in the mortgage/finance area.
But with the exception of small-caps, I don't think any areas of the market are widely overvalued. As long as interest rates stay where they are, the market is reasonable.