Share this
Twitter
Myspace
Digg
Del.icio.us
Reddit
Slashdot
Furl
Yahoo
Technorati
Newsvine
Facebook
Export PDF
Print
E-mail
Tags
BY WARREN BOROSON
NEWJERSEYNEWSROOM.COM
BOROSON ON MONEY
So, what's the best mutual fund family out there?
A formidable contender is domiciled right here in New Jersey: the Franklin Mutual Series Funds in Short Hills, which manage a cool $75 billion in assets.
There's a simple reason why these funds are so admirable. They have been consistent winners – ever since they were launched by the legendary Max Heine back in 1949, some 61 years ago.
Their strategy is simple, too. Buy good stocks when everyone else avoids them like the plague and they're selling for a song – then wait until investors come to their senses – then sell those stocks for a grand opera.
The trick, of course, is to do intensive research. As the funds' former chief investment officer, Michael Price, once said, "We really kick the tires."
The chairman, CEO, and president of the funds is Peter Langerman. He first joined Heine Securities Corporation (predecessor of Franklin Mutual Advisers) in June 1986. He served as CEO of Mutual Series beginning in 1998 and as chairman of the fund boards beginning in 2001, before leaving in 2002 to serve as director of New Jersey 's Division of Investment, overseeing employee pension funds. He rejoined Mutual Series in 2005.Langerman graduated magna cum laude from Yale University, earning his BA in Russian studies. He holds a master's degree in accounting from New York University Graduate School of Business and received his Juris Doctor degree from Stanford University Law School.
Mutual Series is an unusual place: Lunch is always free (so employees remain in the office), and dress is informal - even on non-Fridays. Even Langerman wasn't wearing a tie when I had the opportunity to speak to him recently.
Q: Has the funds' investment strategy changed over the years?
Langerman: It's the same strategy. The world changes and opportunity sets may change, but the underlying strategy hasn't changed. I think that's one of the hallmarks of this place. Last year we celebrated our 60th anniversary, and one of the things we talked about was that the strategy hasn't changed since the first day. The basic strategy of looking for undervalued securities, ones that are beaten up and aren't on everybody's top list of hot things to own, that's what we do - and the whole emphasis at looking at distress, merger-arbitrage, those are the things that might have been called different things, or described differently, but the fundamental building blocks of Mutual Shares have remained.
I think that's important for us to have that discipline and to let our investors know that that's what we do and what we stand for, and I think that's a large part of why we've been able to be reasonably successful over a long number of years.
Q: What about the current turmoil in Europe?
Langerman: It's there, it's real. And I wouldn't underestimate it - it's troubling, an and it'll probably in some sense get worse before it gets better because we haven't seen the end of the problems. And in terms of solutions, it's easy to say, Greece, cut your budget deficit, and Spain, cut your budget deficit, but it's very difficult to do. Greece has been hiding a lot of stuff for years, and I wouldn't be surprised if there's more of that. And we even had the U.K. prime minister come out and say, by the way, we inherited a budget that's really worse than they led us on to believe. (It sounded like New Jersey. Chris Christie said the same thing.)
Those problems are very real, and how do you solve those problems? Well, you can either try to grow your way out of them – which is awfully difficult to do, especially in this kind of environment – or you've got to make cuts. But who wants to make cuts? Politicians have to get re-elected.
So, there's real trouble, but I think that we've come a pretty long way from where we were a year ago. There's still some talk of a double-dip recession, and it's possible, but we're not in the business of making macro-calls and the like. But a year ago we were very close to a collapse of the financial system and utter paralysis and panic. But you saw a recovery in that a lot of financial institutions were able to re-capitalize their balance sheets and come back to sort of normal degree of being able to operate, and I think that was very positive.
The U.S. has got continuing issues. That we stepped back from the brink of catastrophe last year doesn't mean that we've solved all our problems. We've solved them temporarily, but the longer-term U.S. issues are not as imminent as perhaps European issues, but they're going to hit us. We collectively -- U.S., Europe -- have to have the wherewithal to do what's necessary -- or else we ourselves will have those kinds of issues. I look at New Jersey -- I happen to live here - and the math doesn't work. We're spending too much and borrowing too much, we're kidding ourselves, putting Band-Aids on things, and we need to make some changes.
Q: Medicare, Social Security?
Langerman: Of course, those enormous liabilities out there that will bankrupt the system at some point in time, and to me it is inevitable that something has to give. We cannot grow our way out of the problem. So it's a matter of when and how much, and how painful it's going to be, and hopefully we can do it without there being a revolution in the streets. The U.S. has gotten out of its problems in the past by printing dollars - but that's not a very palatable solution.
Q: Have the problems in Europe changed your strategy? Not long ago you had around half your assets invested abroad.
Langerman: We still have a significant amount invested in non-U.S. companies. But it's a bit of a misnomer these days. You have a differentiation between U.S. companies and non-U.S. companies. But many of the companies that we own, even if they're U.S.-based, have a significant portion of their assets in non-U.S. environments. And vice versa. So there's a bit of a semantic fallacy there.
Having said that, our assets are pretty well split between the U.S. and non-U.S. I would say that over the past year, the proportion of U.S. vs. non-U.S. has increased. I wouldn't say that we're not investing so much in Europe because we concerned about top-down issues – it's more a question of what the valuations are like. And there are some fine companies that we own in Europe whose stocks reflect – or more than reflect – some of the near-term. But we've also, over the last year, bought some U.S. financials. So we have added more to the U.S. side than to the non-U.S. side, but we still have half of our assets, give or take, in non-U.S. companies. Most of that is Europe, but there's a chunk in Asia as well.
So, no, it has not changed our strategy. This year Europe is down a lot more than the U.S. But for the bigger picture, there are lots of good opportunities for us these days. Sure, there are concerns, but generally speaking companies globally have come out of the 2009 experience fairly chastened and in many cases in decent shape. They took the opportunity to clean house in a sense, cut expenses, improve their operations.
Q: David Marcus of Evermore says he's finding bargains in Europe now.
Langerman: He's a good investor, but I'm sure that the bargains he bought a month or so ago are maybe 15% cheaper today. That doesn't mean that they're not bargains. I would agree that there are some really interesting companies trading at very attractive valuations. But that doesn't mean that they won't get cheaper.
Q: I was shocked to learn that Vanguard Wellesley Income's biggest holding recently was British Petroleum. It's a very conservative fund.
Langerman: BP has gotten crushed, but that's the kind of name that, as value investors, we'll look at. Our job is to try not to be emotional, but to look at stocks from a value perspective. The issue there is trying to get your arms around the liability side - what are the ultimate costs. It's an enormous, important company that generates a huge free-cash flow. But if the dividend stayed intact, I would be very surprised.
Q: I have the impression that we're awash in value investors these days, so that it's harder to find screaming values - although you have the advantage of being a deep-value investor.
Langerman: I don't think it's harder. You're right that the traditional Graham & Dodd approach has been -- at least nominally -- embraced by many others. But if you think about it in the context of the geographical set in which those concepts get employed, now it's the world and not just the U.S. It's even Asia. But the universe has expanded dramatically, and human nature is such that there are always going to be value plays. People don't like certain things – so, there are always going to be value plays. Our job is to figure our which are the value plays and which are the disasters – which are trading cheaply for good reason and which aren't.
Yes, there's more competition, but companies are larger (the-bigger-they- are, the-harder-they-fall kind of thing), and there's a greater universe out there. There's no shortage of opportunities.
It's true that there are different environments. It's harder to be a value investor when everything's GREAT. That's not the case today. When everything's going up and everything seems to be rosy, those are challenging times for value investors. These kinds of times are challenging in that markets are under attack, the market's down 10 plus percent from its highs, but that's still a much better environment for value investors than when everything's going great.
Q: How would someone build a diversified portfolio out of the various Mutual Series funds?
Langerman: The reality is that our funds have the same underlying philosophy. Each of the funds is diversified in and of itself, with 130 or so positions, but the reality is there's a defensive underlying philosophy, providing hopefully substantial capital appreciation over long periods of time, with modest risk/volatility, et cetera. We don't leverage our portfolio, we're not looking to buy high-growth names that have a lot of downside risk. We don't shoot for the moon.
Still, the similarities between our funds are greater than the differences.
People have called our funds "all weather" funds. Ours are the kinds of funds one can hold in virtually any kind of environment and feel reasonably safe.
But if you're looking for growth stocks or emerging-market exposure or some traditional fixed-income exposure, that kind of diversification you're not going to find in our funds.
We try to satisfy a broad set of objectives, but there are many things we don't do. For those other things, I can promote a lot of funds within our Franklin Templeton family.
Q: If a beginner were interested in owning just one Mutual Series fund, which might he or she choose?
Langerman: The Global Discovery Fund has the broadest mandate.
Q: Good. I own that.
Langerman: It's the proverbial go-anywhere fund, so that has more flexibility than, for example, Mutual Shares, which is primarily in the U.S.-based investments.
Q: Are your shareholders more likely to keep their funds than other shareholders? Do you have numbers?
Langerman: It's more anecdotal, I would say. We ourselves don't do that kind of analysis. I'm very aware of the inflows and outflows, and if you look at the period of time when it seemed that the world was coming to an end, in '08 and first part of '09, we had our share of redemptions, but they were less than the industry average by a pretty substantial margin.
Q: What do you think of growth investing?
Langerman: It depends on how you define it. There are excellent growth managers, people looking for companies that trade at high multiples, but with a good underlying business, projections, and fundamentals, and these people have a good feel for how businesses will do over the next three, five, ten years. That's certainly not our style. Some people see that we sometimes own stocks that growth managers own. But there are names that can fall into both categories.
To me, it's always about finding the right manager. Style is important, where you are is important, but a great manager, someone who's really smart, who gets it, and understands markets and how to look at companies, can be very successful as a growth manager and very successful as a value manager.
Q: My hypothesis is that value managers are more patient.
Langerman: I think that that's probably right - sounds right to me. Value managers are used to buying things that other people don't like, so almost by definition you've got to be somewhat patient. Usually it's a turnaround situation of some kind. Occasionally there's instant gratification, but more often there's a process that has to happen for companies to turn themselves around, for market sentiment to change. Value people are probably more often buying things on the way down than on the way up.
Q: A survey I did found that the worst mistake growth managers make is usually buying too late, and the worst mistake value managers make is buying too soon.
Langerman: I'm not surprised.
Q: It's no longer possible to buy Mutual Series funds without a sales charge, since 1996, when Franklin took over?
Langerman: No. But if you have a good financial adviser, it's like having a good investment adviser. Someone can add a lot of value – perspective, handholding. So it's worth it if they're good at what they do.
Q: The fact that some advisers might steer clients toward Mutual Series funds is something in their favor. What lessons can the average investor learn from the success of the Mutual Series funds?
Langerman: A fund should have a particular style or discipline – it doesn't mean that they do exactly what they've always done. The world changes, companies change. But I think that if you have a reasonably well-articulated style and philosophy, and you communicate that to your investor base, and it's a style that has proven itself, I think that's a large part of why we've been successful as a fund group. You stick to your discipline.
Q: What do you think of the New Jersey economy?
Langerman: I'm a resident of New Jersey, and without getting too political, I think that we were on a road that was going to end badly. We needed to make some changes. I'm optimistic. I think collectively – the legislature, the governor, the citizens – need to recognize that where we were going was not sustainable.
Q: A final question: Will you come to Ridgewood in October and give a talk?
Langerman: Boy, how can I turn down Ridgewood in October?
Readers are invited to send financial questions to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
