“… we at Wintergreen Advisers look for companies that respect and live by good governance. If we are invested and don’t see that, there’s a good chance we will ask management to change or we will ask shareholders to join us in bringing about that change.” --David Winters
If you manage a company that does not respect shareholders, you should hope David Winters (Trades, Portfolio) does not invest in your company. He likes to shake up unresponsive managers and boards of directors. It is one of the key strategies he uses to maximize shareholder value from the companies in which he invests. It is also a plus for every other investor who puts capital into these companies.
Perhaps someone should have taken that role at the Wintergreen Fund (Trades, Portfolio) and Wintergreen Advisors in 2007. After a strong calendar year in 2007, the fund took a 39% beating in 2008, a loss even greater than the S&P 500’s 37% retreat.
Winters lists hedging as one of the key elements in his approach to investing, and failure to apply good risk management in 2008 has held down his 10-year average annual returns ever since.
Who is Winters?
Born in 1962, Winters first major position in the investment industry was with Franklin Mutual Advisers LLC in 1987. There he held various positions, which eventually led to roles of president, chief executive officer and chief investment office. Winters managed the Mutual Series, which comprised a group of global and domestic equity value funds, with assets under management of more than $35 billion.
While at Franklin Mutual, he enjoyed the tutelage of the late Max Heine and Michael Price (Trades, Portfolio), both of whom he admires.
In May 2005, Winters went out on his own, along with partner Liz Cohernour, and formed Wintergreen Advisors. The firm describes itself as “an independent global money manager that employs a research-driven value style in managing global securities.”
He has a chartered financial analyst (CFA) designation.
Winters got off to a good start in the investment industry, with mentorship and an opportunity to work in a firm that managed large sums of money. He rose through the ranks quickly, no doubt the result of managing both funds and people successfully.
What is Wintergreen Advisors?
The firm is based in Mountain Lakes, New Jersey, while its subsidiary, Wintergreen Funds Inc., is based in Milwaukee, Wisconsin.
It manages a group of mutual funds, of which only the Wintergreen Fund (WGRNX) is publicly traded. It is available in both Investor and Institutional classes, according to Google Finance. This fund accounts for $448 million of the firm’s $549 million of regulatory assets under management.
In the Google Finance description, the objective listed is capital appreciation. It goes on to say the fund’s main investments are in equity securities trading at less than their intrinsic value. The equities may be American or international companies trading at a discount.
The fund also states the investment manager (Winters) may take an activist role when he hopes to influence or control management to create more value.
That last element of the description, the freedom to be an activist investor, has been responsible for much of his profile in the industry. And, it no doubt helps to start your own firm and build it up more than half a billion dollars of assets under management in a decade.
Investing strategy
In November 2016, Wintergreen, a major shareholder in Consolidated-Tomoka Land Co. (CTO, Financial), demanded four seats on the board of directors. That proposal, as the firm called it, came in the wake of a proposed share offering which would have diluted the interests of existing shareholders. Management and the existing board rejected the proposal for Wintergreen seats, and the firm filed suit in February. It subsequently issued a press release, which included these scathing words:
“Wintergreen believes that this decision to exclude the Proposal stands on hollow grounds and is yet another example of the lengths to which members of management and the Board, entrenched in their lucrative positions, are willing to go to deny shareholders the right to choose their representatives on the Board and to continue operating in an opaque and deceitful manner, at great expense to the owners of the Company, its shareholders.”
In a follow-up news release on March 8, Wintergreen declared a “Complete Victory.” It said:
“We are extremely pleased to have vindicated our rights as shareholders of CTO and are looking forward to presenting our vision for the future of CTO directly to shareholders and providing them with a real choice at the 2017 Annual Meeting.”
Such is the life of an activist investor. Winters seeks to generate extra value by pushing management in directions he believes will increase earnings and returns for his clients and shareholders. It is not a new phenomenon among fund managers, but when it can be done successfully, it is effective.
It is also one of the elements Winters uses, according to his Form ADV Part 2A, to define his investing approach:
- Activism and arbitrage: On the arbitrage side, this will typically involve securities of companies that are restructuring (mergers, acquisitions, liquidations, etc.). However, these securities must be “attractively priced.”
- Bankruptcy: When companies are bankrupt, or expected to go into bankruptcy, Winters looks for value priced securities.
- Cash and convertibles: Instruments, including debt securities and preferred stock, that may be converted into common stock.
- Distressed companies: Buying bank debt, lower-rated debt securities or even defaulted debt securities, unrated debt securities and other instruments.
- S&P or Moody’s ratings: Securities rated in the medium to lowest rating categories, including junk bonds. Investment depends on potential of capital appreciation.
- Undervalued equities: Common stock trading at a discount to intrinsic value.
- Financing: Securities of companies involved in financial restructurings.
- Global and domestic: Securities of both American and foreign issuers, including emerging markets securities.
- Hedging: Strategies aimed at managing risk, including forward currency contracts, currency swaps, options on currencies and others.
- Integrity: Evaluating how well management produces “superior returns” for shareholders.
In his Annual Report to Shareholders for 2016, Winters summed up his investment principles in three bullet points:
- Companies with good or improving economics, which means companies that bring in sales and profits from many different markets and in many different currencies.
- Management that works for all long-term shareholders, not just for its own short-term compensation.
- A security that can be bought at compelling price.
Looking at his comments about specific companies in the annual report, we can see how they connect with the elements and principles above:
- Reynolds America Inc. (RAI, Financial): A tobacco company that merged with Lorillard Inc. to create what he calls "an even more powerful cash generating business."
- Baker Hughes Inc. (BHI, Financial): Winters says the oil and gas industry is consolidating like the tobacco industry. He initiated his position in late 2015 as an arbitrage opportunity. At the time, Halliburton Co. (HAL, Financial) was trying to buy Baker Hughes, but failed, and later paid  $3.5 billion in breakup fees.
- Elbit Systems Ltd. (EMITF, Financial): An Israeli defense contractor, Winters notes military conflict is shifting toward terrorism and less conventional warfare; and Elbit has the tools governments need for these lower-intensity conflicts.
- Heineken Holding NV (XAMS:HEIO, Financial): A worldwide brewer with more than 250 brands, it is making strong moves in emerging markets. Winters also likes management, which he says manages capital effectively and has successfully tied management to performance.
Winters became known because of his activist stances. In cases like that of Consolidated-Tomoka, it has worked out well so far. Now, will his strategy for the company pay off for his funds and all other shareholders? Otherwise, we see holdings that reflect his elements and principles, including those that are value-based.
Holdings
The following chart from the Wintergreen Fund’s Fact Sheet (as of March 31), shows tobacco and real estate represent the two biggest sets of holdings:
Two of the top three holdings are tobacco companies. In fourth place is Compagnie Financiere Richemont SA (CFRHF, Financial), a luxury goods holding company based in Switzerland. Just one oil and gas company is represented, despite the optimistic tone in the annual report.
This chart from Google Finance shows the fund’s top 10 holdings, as well as the proportion of the portfolio each holds:
Tobacco is one of the few industries to have the state-sanctioned right to sell to addicts. With fewer and fewer companies in the business, it can be very attractive. It also appears Winters has confidence in Consolidated-Tomoka now that he has access to the board of directors.
Performance
This GuruFocus table shows a lot of red—compared with the S&P 500—over the past five years
Despite the relative performance numbers, Winters has racked up positive alpha in three of the four periods shown in this Google Finance table:
Despite having hedging as one of the key elements of his investing approach, Winters apparently did not have much in place in 2008 when he lost 39%. Further, had Winters not lost 39% in 2008, his average annual returns would have been 3.9% higher, giving him a substantial margin above the S&P 500 annual average.
Conclusion
Winters has had some exceptional years as an investment manager, with eight of the past 11 years providing positive returns. What’s more, four of those years delivered returns of more than 20%.
So it is a shame he is left with an underperforming portfolio on the basis of one bad year, albeit a very bad year for almost all market participants.
He obviously did not hedge or practice good risk management with the client assets for which he was responsible. Perhaps he is more of a hedger now than he was nine years ago. Still, having observed the dot-com crash a few years earlier and the many warning signs from the housing bubble, he clearly was not prepared. Unfortunately, many of his colleagues missed that train as well.
That is unfortunate because Winters has made important contributions as an activist investor, one who is improving companies not only for his shareholders, but also for everyone else in the market.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.
