Matthew 25 Fund Inspired by Scripture Returns 27%
When the Matthew 25 Fund fell 40 percent in 2008, it kept Mark Mulholland awake at night.
Mulholland, the founder and sole manager of the mutual fund -- named after a Bible passage -- says he would lie in bed thinking about the damage he had done to his investors, particularly the elderly whose nest eggs might not recover before they died. The assets he managed dwindled to $22 million from $115 million, Bloomberg Markets will report in its May issue.
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What Mulholland didn’t worry about were the stocks in his portfolio.
“The companies we owned were so cheap that barring a total collapse of the economic system, I knew at some point we were going to make a lot of money,” he says.
That time has come. Mulholland, 53, bought smartphone maker Apple Inc. (AAPL) in 2008 for $80 to $128 a share. He also hung onto his investment in companies such as Sidney, Nebraska-based Cabela’s Inc., (CAB) a retailer of hunting and fishing products, and Medina, Minnesota-based Polaris Industries Inc. (PII), which makes all-terrain vehicles.
The rebound in those stocks helped propel the now-$452 million fund to gains that beat the Standard & Poor’s 500 Index by a wide margin. The fund returned 13.1 percent annualized during the five years ended on Feb. 15 compared with 4.7 percent for the S&P 500 (SPX). Matthew 25 (MXXVX) gained 26.8 percent over three years and 25.4 percent in one year.
Being No. 1
Those results make Mulholland’s fund No. 1 in the U.S. diversified stock category in Bloomberg Markets magazine’s annual ranking of mutual funds.
“Mark is the best investor around that no one has ever heard of,” says Steven Roge, a Beverly, Massachusetts-based financial adviser who owns shares of the fund.
The ranking of stock and bond funds includes U.S.-domiciled funds with more than $250 million under management as of Feb. 15. Funds are ranked by total returns for one, three and five years and by their Sharpe ratios for three and five years. The Sharpe ratio measures the performance of a fund adjusted for risk. Each of the five measures is given equal weight.
Like Mulholland, the managers of other winning funds in the ranking capitalized on the steep decline in 2008 and 2009 by loading up on a range of investments, from homebuilding and bank stocks to risky mortgages.
For Chuck Myers, manager of the $5.3 billion Fidelity Small Cap Discovery Fund (FSCRX), the biggest bargains were homebuilders, which in 2008 were selling for less than the value of the land on their balance sheets, he says. Buying them helped Myers’ fund secure the top spot in the small-cap equity category in the ranking, with a 25.8 percent return for one year and an average return of 15.6 percent over five years. The fund was also No. 2 in diversified U.S. equities.
“I wanted to position myself in stocks that were the cheapest possible compared to normal earnings,” Myers, 37, says.
The rally in stocks, with the Dow Jones Industrial Average (INDU) exceeding its 2007 all-time high in early March, has reduced the number of such companies, he says.
Investors rewarded Small Cap Discovery with $1.3 billion in new assets in 2012. In January, Fidelity closed the fund to new investors.
International stocks followed their U.S. counterparts skyward beginning in 2009, helping Bill Nygren’s $785 million Oakmark Global Select Fund (OAKWX) tie for No. 1 in the global equities list.
Not If But When
“We knew it was not a question of if but when the global economy would recover,” says Nygren, 54, who runs the fund with David Herro.
The Oakmark fund gained an average of 9.4 percent annualized over five years and 17.7 percent for the year ended on Feb. 15. The $5.3 billion Old Westbury Global Small & MidCap Fund (OWSMX) shared the No. 1 spot in global equities, with an average five-year return of 9.3 percent.
Nygren, who focuses mainly on U.S. companies, and Herro, an international specialist, each contribute ideas to the Oakmark fund, which holds about 20 stocks. The fund had 16 percent of its money in bank stocks as of Dec. 31.
“We think this is still one of the cheapest sectors out there,” Nygren says.
For bond fund managers, there was no more lucrative investment than the mortgage securities whose collapse brought the financial system to its knees in 2008.
Daniel Ivascyn, manager of the $25.2 billion Pimco Income Fund (PIMIX), had the best results in the U.S. bond category by investing in both mortgage-backed securities and bank loans. The fund returned 12 percent a year for the past five years, outpacing the Barclays U.S. Aggregate Bond Index (LBUSTRUU), which gained 5.6 percent annualized.
Ivascyn generated some of his best returns by buying mortgage debt that didn’t have the backing of the U.S. government through companies such as Fannie Mae. The debt returned more than 20 percent in 2012. Ivascyn focused on mortgages tied to the low-priced homes that are being bought up and rented out by institutional investors.
The fund attracted more than $12 billion last year, roughly tripling its assets. Ivascyn, 44, has a message for those just coming to the fund.
“Fixed-income investors in general need to be comfortable with lower returns going forward,” he says.
Bloomberg Markets also ranked the fastest-growing exchange- traded funds, with the iShares JPMorgan USD Emerging Markets Bond fund topping a list dominated by funds in which investors seek yield above what they can get from U.S. Treasuries by buying international stocks and bonds and niche funds like real estate.
Mulholland achieved his results without much help. He handles all of the investment chores at Matthew 25 himself -- a task made easier by the fact that he typically owns fewer than 25 stocks and has a buy-and-hold philosophy. He has two part- time staff people to handle administrative chores.
Mulholland works out of an office in Jenkintown, Pennsylvania, north of Philadelphia, that is close both to his house and to the Roman Catholic church he visits twice a day to pray. The fund is named for a chapter in the New Testament gospel of Matthew whose message of hard work and humility Mulholland finds inspiring.
Mulholland’s management of his fund is strictly secular. He ranks companies with letter grades, A to F, in four categories: quality of the business, quality of management, financial strength and price. For a new stock to make it into the portfolio, it has to have a higher cumulative grade than an existing holding, he says.
Mulholland can be effusive about his favorite stocks. Speaking about Polaris, he says: “I love the company. I love being part of the business.”
While Mulholland pays attention to the economy, he doesn’t use it as a tool to pick stocks.
“Economics can tell you where you are, but it has no value in telling you where you are going,” he says.
Mulholland pays more attention to the stock market, and he likes what he sees.
“I am currently very bullish and have been since 2009 because earnings are growing, prices are undervalued and sentiment is bearish,” he wrote in a year-end letter to shareholders.
Mulholland backed up that opinion by putting more of his own money in the fund early this year. As of mid-March, he says, he and his wife owned 224,000 Matthew 25 shares -- worth about $5.5 million.
How We Crunched the Numbers
We used two Bloomberg functions to create the mutual-fund rankings. The first was Fund Screening (FSRC), which generated separate lists for global, diversified U.S. and small-cap equity funds and U.S. bond funds. The second was Fund Scoring (FSCO), which we used to create a model with five criteria: total returns for one, three and five years and Sharpe ratios for three and five years, all as of Feb. 15.
All searches included only active, open-end, U.S.-domiciled funds with more than $250 million in total assets as of mid- February. We excluded institutional-class, index, sector and market-neutral funds. For global equity funds, we limited the universe to funds with at least one-third of their assets invested outside the U.S.
In scoring the funds, we blended returns with the Sharpe ratio because that measure shows how well a fund’s return compensated investors for the risk taken. A fund that takes substantial risk to produce a high return may have a lower ratio than a fund that takes less risk and gets a lower return.
Our customized scoring model gave equal weight to the five criteria, with each fund in the same group awarded a score between zero and 100 based on their performance within the group. The winning funds were those that received the highest scores.
To rank the fastest-growing exchange-traded funds, we limited the universe to U.S.-domiciled ETFs with assets of $500 million or more as of Jan. 31, 2010. Our scoring model consisted of one-year asset growth (weighted 50 percent), two-year asset growth (30 percent) and three-year asset growth (20 percent).
To contact the reporter on this story: Charles Stein in Boston at firstname.lastname@example.org