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Digging Deep for Value

Following in the footsteps of former high-profile manager Michael Price, David Winters and Matthew Haynes run the Mutual Beacon Fund (TEBIX) by combining deep-value stocks, arbitrage, and distressed investing. The managers say this mix yields solid long-term returns by holding up in downturns and outperforming in rallies.

Recent results suggest their approach has worked. This year through Nov. 18, the fund rose 21.2%, vs. a 19.3% rise for the S&P 500 index. For the five-year period through 2002, the fund rose 4.9%, on average, vs. a 0.6% dip for the index. Based on risk and return characteristics over the last three years, Standard & Poor's gives Mutual Beacon an overall rank of 3 Stars.

Along with the overall strategy, the managers credit the fund's success to distressed holdings and avoiding technology stocks. Winters and Haynes also say they have continued Price's practice of shareholder activism. For example, Mutual Series' efforts led Meredith Corp. (MDP) to appoint a new member to the company's board of directors, and a substantial jump in the company's stock, according to Winters.

Bill Gerdes of S&P's Fund Advisor recently spoke with both managers about the fund's strategy. Edited excerpts from their conversation follow:

Q: What is your basic investment philosophy?

Winters: We are deep-value opportunists. We look for mispriced securities with limited downsides and substantial upsides. We focus on undervalued common stocks, arbitrage, and bankruptcy investing. Two things make us unusual: We're willing to hold cash, and we don't try to fit any style-box category, such as mid- or large-cap value.

Q: Why has the fund done well against the S&P 500?

Winters: We try to preserve capital in down markets and outperform in market rallies. Not owning technology stocks has helped us, as have our distressed holdings. We had big home runs with companies like Calpine Corp. (CPN).

Q: How is the fund currently positioned?

Winters: Most of Mutual Beacon's assets are now in common stocks, approximately 64% of the fund. About 33% of the fund is in U.S. equities, and about 31% is in foreign stocks. Our cash position is about 18%, a by-product of the opportunities we see in the market.

A large portion of our domestic equity holdings are in property and casualty insurance companies and media companies. Property and casualty insurance companies have pricing power and disciplined management. Media companies generate free cash flow, and their stocks trade at discounts to asset value. A lot of our foreign holdings are tobacco companies. We also hold Nestle.

Q: Why do you have sizable holdings of international stocks?

Haynes: Many of our European holdings generate free cash flow and are rational about using it. Also, our foreign tobacco holdings have far less litigation risk than their U.S. counterparts.

Q: Under Michael Price, Mutual Series became known for shareholder activism. Have you made similar moves recently for Mutual Beacon?

Winters: A recent example is Meredith (MDP), which publishes Ladies' Home Journal and owns some TV stations. We've filed actions against them and got someone put onto their board.

Q: Have you recently been involved in


Winters: Arbitrage is less than 1% of the fund right now, but we think there will be more corporate takeovers. We hold Weetabix Ltd., a British food company, which [buyout firm] Hicks, Muse is seeking to buy. The stock is up over 40% since March.

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