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The ABCs of Global Value Investing

January 30, 2006

Value investor David Winters is smiling, for a good reason: He outperformed S&P 500 Index by about 10% per year during 2001 to 2004. And now he is running his own show: Wintergreen Fund.

On January 26, 2006, a freezing cold winter evening, he fired up some sparkling investment wisdom at a professional seminar organized by New York Society of Security Analysts (http://NYSSA.org). And on his way out, the sharp-eyed Winters bent over the floor and picked up a dime and a penny like a magician while all the other analysts including this author stood by without noticing the existence of such a hidden treasure. "This is the start of my next million!" Winters exclaimed.

As manager of the recently launched Wintergreen Fund, David Winters honed his craft under legendary value investor Michael Price since 1986 at Mutual Series which was purchased by Franklin Templeton in 1996. After Mr. Price and other longtime professionals left the firm in the early 2000s, Winters held positions as president, CEO, and CIO, in addition to managing or co-managing a handful of portfolios, including Mutual Shares TESIX and Mutual European TEMIX.

Going Against The Hedge Fund Fad

While my shoe-shine boy is contemplating starting a hedge fund after reading about Joel Greenblatt's "Magic Formula", David Winters chose to launch a highly regulated mutual fund when he could have easily joined the hedge fund party. Some people scratch their heads and ask: "Why?" To me, this decision is a no-brainer: Most of David Winters' investors and followers at Franklin Templeton Mutual Shares are not accredited investors and multi-millionaires. Why abandon that loyal retail following? Why kiss up to the highly institutionalized hedge fund crowd who are usually not patient enough with Winters' typical 3 to 5-year investment horizon? A regulated mutual fund is where David Winters's professional expertise lies. Above all, I feel David is a genuinely nice guy who loves receiving little "Thank you for making us rich!" letters from widows and orphans. For years, David watched stars like Michael Price, Marty Whitman and John Templeton on the side line, and he said to himself: "Maybe I could do that, too."

"Mutual fund is a truly democratic way. You can invest your friends' money. It is nice to be able to do a nice job for people who need the money," said Winters. Launching a mutual fund is a smart contrarian move against crowd thinking, and it is obvious when well explained. David Winters is sticking to the same thing that he has been doing at Mutual Series for nearly 20 years.

If David Winters started a hedge fund, he would have to turn away all those widows and orphans who invested with him at Mutual Shares. You would know that David Winters is not that type of man when you see him calling the names of his friends and saying hi to everyone with warm enthusiasm and a shining smile. A loyal man sticks to his knitting. David Winters is doing just that.

In fact, the decision to start a mutual fund is already yielding results for him. David Winters said: "Taking a look at the list of new investors coming into the Fund, it's like I almost know the phone numbers of those guys."

Have Money, Will Travel

The "magic formula" for David Winters' global value investment strategy seems to be:

(1) Travel the extra mile far and away from the crowd and from home;

(2) Go to all kinds of places where no one is willing to go, and

(3) Do the dirty work that most people find too complicated.

Like Peter Lynch, David Winters shows a willingness to travel far and away to search for a bargain anywhere around the world. He talked about his war stories about traveling to little-known companies in Canada and Netherlands, visiting all the subsidiaries and manufacturing divisions, and bringing home loads of annual reports and documents to dissect.

David Winters made a name for himself by venturing into unloved and underappreciated areas of the market where there are still ice on the water. He went beyond cheap equity to include distressed securities and bankruptcy situations.

Going All Over The Map

Wintergreen Fund's prospectus clearly shows David Winters' willingness to travel anywhere to find the fallen dimes and pennies. He is allowed to invest in companies of all sizes, hold a variety of assets including debt and convertible securities, and allocate up to 100% of its assets to foreign holdings. He also makes room for special situations such as shareholder activism, arbitrage, and distressed debt. He is also allowed to short stocks and to participate in private equity deals.

By looking at the long list of what they could do with money, Wintergreen is more like a hedge fund than a mutual fund. ``If you love investing, you want to have a palate with as many colors as possible,'' he said.

The Nine Colors Of Value Investing

On the prospectus of Wintergreen Fund, David Winters listed nine colors or key elements of global value investing, from A to I. The list is what he likes to refer to as the ABCs of global value investing:

  • A: Activism and Arbitrage. If the Fund takes an activist role, it will seek to influence or control management, or invest in other companies that do so when the Investment Manager believes the Fund may benefit. Arbitrage opportunities will typically involve securities of companies involved in restructurings (such as mergers, acquisitions, consolidations, liquidations, spinoffs or tender or exchange offers) or that the Investment Manager believes are attractively priced relative to an economically equivalent security of the same or another company.
  • B: Bankruptcy. Securities of companies that are, or are about to be, involved in bankruptcy.
  • C: Cash and Convertibles. Cash equivalent instruments and debt securities or preferred stock convertible into common stock.
  • D: Distressed Companies. Securities of companies that are, or are about to be, involved in reorganizations, financial restructurings, or bankruptcy.
  • E: Equities That Are Undervalued. Securities trading at a discount to intrinsic value.
  • F: Financings. Securities of companies that are, or are about to be, involved in financial restructurings, or participation in such financings.
  • G: Global Value. Securities of both U.S. issuers and non-U.S. issuers, including securities of issuers in emerging markets.
  • H: Hedging. Hedging strategies designed to reduce potential loss as a result of certain economic or market risks, including risks related to fluctuations in interest rates, currency exchange rates, and broad or specific market movements may be used. The Fund will primarily engage in forward foreign currency exchange contracts. The Fund may also engage in other currency transactions such as currency futures contracts, currency swaps, options on currencies, or options on currency futures, or it may engage in other types of transactions, such as the purchase and sale of exchange-listed and OTC put and call options on securities, equity and fixed-income indices and other financial instruments; and the purchase and sale of financial and other futures contracts and options on futures contracts.
  • I: Integrity of Management. Evaluating management ability and incentives to deliver superior returns to shareholders.

Yes, some of those strategies sound risky on surface. But let's take look at David Winters' track record with Mutual Discovery (TEDIX), which he managed for more than five years and handily outperformed its typical world-stock peer under his tenure. The fund averaged more than 10% per year over his tenure (compared with a loss of 1% per year for its average peer). And it was one of the least-volatile in the world equity category. It seems that David Winters achieved his attractive tradeoff between return and volatility risk by picking up different categories of bargains and combining unrelated investments with returns uncorrelated with the market.

After being beaten at the art of finding pennies on the floor by David Winters, I kept my eyes wide open, looking for pennies all over the train on my way home. I didn't find any. But I picked up a Daily News left on a corner seat. Retail value: 25 cents! Feeling a little bit better, I immediately turned to the business pages to see where David Winters might be beating me to it again.


Rating: 3.5/5 (26 votes)

Comments

throwerw
Throwerw - 3 years ago
global value ideas in foreign markets:

www.gvinvesting.com

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