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Robert Abbott
Robert Abbott
Articles (188)  | Author's Website |

Is Muhlenkamp on a Roll Again?

After a decade of dismal returns, the guru's performance has been strong over the past year

“Our work is important because money should be used for capital, and capital is used to create the tools and conditions necessary for increasing wealth and prosperity from one generation to the next. This progression applies to families, to nations and to the world. Helping our clients and shareholders increase their wealth and prosperity enables them to feed their families, educate their children and help others.” -Ron Muhlenkamp

Guru investor Ronald Muhlenkamp (Trades, Portfolio) found fame with a string of strong years, beginning in 2000, the year of the dot-com crash. He underperformed the S&P 500 benchmark in 2006, however, and over the following 11 calendar years, only two saw him finish ahead of the index.

His strong outperformance in those six years after 1999, as well as his ability to articulate what he and the markets were doing, gave him guru status. He wrote a book that came out in 2007, he has been interviewed many times by different media, made many speeches and he writes insightful quarterly reports that capture the mood of the market and economy.

While he has consistently stuck to his investment philosophy and strategy, the past 11 years suggest adaptation might have produced better returns than consistency.

Who is Muhlenkamp?

This investing guru received a Bachelor of Science in mechanical engineering from Massachusetts Institute of Technology in 1966 and a MBA from the Harvard Business School in 1968. He has also earned a chartered financial analyst (CFA) designation.

He founded Muhlenkamp & Co. Inc. in 1977. The firm began by managing private accounts for individuals and institutions. Eleven years later, it launched a mutual fund that would be available to all investors.

Muhlenkamp gained acclaim in the years before the 2008 financial crisis by delivering outstanding returns in the years 1991 through 1993 and 2000 through 2005. That led to numerous media interviews and feature stories. He also published a book, “Ron's Road to Wealth: Insights for the Curious Investor,” in 2007 and publishes the long-running
"Muhlenkamp Memorandum” each quarter, as well as other investor guides and webcasts.

Muhlenkamp became an investing guru thanks to a strong string of annual returns before the 2008 financial crisis. He has also become well known through his own writing and because of the attention received from the print and electronic media.

What is Muhlenkamp & Co.?

The tagline for Muhlenkamp's company is "Intelligent Investment Management', which is its way of saying it seeks to remove emotion from investing. They say on their website, "Investing other peoples' money is a rational profession and we apply ourselves on a continuous basis."

The firm is described as a family-owned and operated business, one which is independent of other companies. Other family members include son Jeff, who is the portfolio manager, and son Tony, who is president and chief compliance officer.

The firm operates one no-load mutual fund, the Muhlenkamp Fund (MUHLX). Its objective is to "maximize total after-tax return... through capital appreciation, and income from dividends and interest, consistent with reasonable risk."

According to the fund’s fact sheet (June 30), it managed assets of $245,896,446 and, according to its Form ADV, had total assets under management of $352,950,000 in 90 accounts (not including mutual fund unitholders).

The Muhlenkamp Fund makes up about 70% of the company’s total assets under management; this suggests institutional investors are no longer key clients. If members of the Muhlenkamp family and company staff have invested significant amounts of their personal capital in the firm and the fund, then even non-family investors may no longer have a big stake.

Philosophy and strategy

On the firm’s website, Muhlenkamp and his associates say their goal is to maximize total returns after taxes and inflation.

Within that context, they try to buy good companies that are on sale, basing their pricing on Benjamin Graham’s fundamental security analysis. They execute on this strategy by seizing on opportunities that become available when markets periodically misprice assets.

In describing their activities in the Form ADV Part 2A regulatory filing, they say “continuous portfolio supervision, based on a thorough knowledge of investment fundamentals, economic value and a sense of time, is the key to successful investing.”

Moving on tactics and process, Muhlenkamp says his firm invests mainly in equity securities listed on major exchanges. Occasionally, they also invest in over-the-counter securities as well as mutual funds, ETFs and fixed-income securities.

In a break with some value investors, including Warren Buffett (Trades, Portfolio), Muhlenkamp says they do not believe in holding forever. Instead, they look to the cyclicality of industries and companies and to market history to try to deeply understand the values of securities under different conditions. However, they do not apply those historical evaluation methods directly to current-day markets.

Muhlenkamp and his son Jeff review the world and American economies in the July 2017 issue of the "Muhlenkamp Memorandum." That leads to three actions (or inactions) they are currently taking:

  • Selling assets that have reached what they consider to be full value and to invest in undervalued companies—when they can find them. They are comfortable holding cash when undervalued stocks are unavailable.
  • Bonds are not in their portfolio(s) or on their shopping list because they are overpriced when considered in relation to inflation.
  • They are gradually selling holdings that are most exposed to cyclical aspects of the American economy.

Muhlenkamp, as well as his portfolio manager son, clearly takes a value investing approach, trying to find underpriced securities in good companies. They stick with the traditionalists in selling stocks or bonds that have reached what they consider to be full value, eschewing the hold-forever philosophy that has attracted more investors in recent years.

Holdings

Health care and technology have the two leading positions in the Muhlenkamp Fund, accounting for more than half of the portfolio, as shown in this GuruFocus chart:

Muhlenkamp Fund sectors

The following table, from the fund’s fact sheet, as of Oct.11, shows mainly companies in those two sectors:

Muhlenkamp Fund top holdings

Technology has driven the gains of many gurus over the past decade, especially the FAANG stocks: Facebook Inc. (FB), Amazon.com Inc. (AMZN), Apple Inc. (NASDAQ:AAPL), Netflix Inc. (NFLX), and Alphabet Inc.'s Google (GOOG). The portfolio also includes many health care stocks, some of which could take a sharp turn for the better if politicians can settle what will happen in the industry. Of course, failure and continued uncertainty could push prices the other way.

Performance

As noted, Muhlenkamp had a string of good years during and after the dot-com bubble burst, as shown in this GuruFocus table:

Muhlenkamp Fund dot-com performance

The fund has had a troubled history over the past 10 years, though, with an annual average return of -0.2%, well below the average 6.9% per year of the S&P 500:

Muhlenkamp Fund 10 year performance

This Morningstar chart (a 10-year comparison of the large-blend category average, the S&P 500 and the Muhlenkamp fund) shows how the latter fell behind in 2008 and has struggled since:

http://beta.morningstar.com/funds/xnas/muhlx/quote.html growth chart

Investor returns look even less impressive than the total returns over 10 years, as shown in this Morningstar chart:

http://beta.morningstar.com/funds/xnas/muhlx/quote.html investor returns

That underperformance has resulted in the loss of many clients and their capital, as shown in this GuruFocus chart:

http://beta.morningstar.com/funds/xnas/muhlx/quote.html holding history

Morningstar rates the fund as "low" on returns, "average" on risk and gives it a lowly one-star rating.

However, the Muhlenkamps have done better on year-to-date and one-year returns, which are well into the mid-teens.

This guru hit on just the right note as the dot-com bubble collapsed, giving him a series of years in which he consistently beat the S&P benchmark. Something in that formula, strategy or philosophy gave way in 2006, leaving the Muhlenkamp Fund adrift in the current bull market.

Conclusion

Muhlenkamp and his sons have been consistent in applying their philosophy and strategy since the firm’s founding 40 years ago. But would change rather than consistency have been a better approach? The last decade’s performance has shown something in their mix is not working well.

Is it timing? Could the problem be selling too soon (Muhlenkamp says he does not believe in holding forever)? Or could it be something else altogether?

In addition, if he truly has turned the corner, what will happen when this bull market collapses? With that collapse there will undoubtedly be bonanza days for value investors—value investors, that is, who have lots of cash on hand.

Without getting too far ahead of myself, there does seem to be some light at the end of that tunnel. Results over the past year and year to date suggest a return to the mean, at the least. They may not beat the benchmark this year, but delivering mid-teens returns will go some distance to keeping clients satisfied.

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.

About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995, and in 2010 added options, mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the Unseen Revolution. In Big Macs & Our Pensions: Who Gets McDonald's Profits?, he looks at the ownership of McDonald’s and what that means for middle class retirement income.

In an eclectic career, Robert Abbott was a radio news writer and announcer, a newsletter writer and publisher, a farmer, a telephone operator, and a construction worker. When not working, he has been a busy volunteer, which includes more than a decade of leadership roles at the Airdrie Festival of Lights, one of North America’s leading holiday light displays. He lives in Airdrie, Alberta, Canada.

Visit Robert Abbott's Website


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Comments

asawhney
Asawhney - 2 months ago    Report SPAM

poor return over the years?

Wall street after commission and management fee.

Mr 2/20

Mr 1.50 fpinancial planners

Mr mutual funds : 1.25-2%

corporate officers buying selling companies and pocketing by higher salaries

Warren became wealthy by holding forever and then giving back -but getting a tax deduction-dont pay them

look at thier top holding -same name ,where is the expertise?

Thomas Macpherson
Thomas Macpherson premium member - 2 months ago

No matter how you slice it, those are absolutely wretched returns. Even his 15 year record is significantly lower (by 62%) than that of the S&P500. Over that period, a $100,000 investment grew to $163,000 in the Muhlencamp fund versus $265,000 in the S&P500. A difference of roughly $100,000 or total of your entire initial investment. That's tough to explain in my eyes. Thanks for the update Bob. Best - Tom

Robert Abbott
Robert Abbott premium member - 2 months ago

Thanks for your comments, Asawhney and Tom!

Please leave your comment:


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