The Apostle of Investing
By James A. Anderson
As a fund manager, Mark Mulholland has taken the road less traveled. He has chosen an odd name for his offering: Matthew 25 (MXXVX ), from the New Testament. The fund is run not from Boston or San Francisco, but from Jenkintown, a middle-class Philadelphia suburb. His office isn't a luxurious suite, but a room on the second floor of his home.
Eight years ago, the former stockbroker was studying to become a Catholic deacon, but he says the Church turned him away upon learning he was married and the father of four young children. A disappointed Mulholland still wanted to contribute to the general good and got his inspiration from reading the Bible -- specifically the Gospel According to Matthew. In the 25th chapter was a parable about a man who, before departing on a long journey, left money with his servants. When he returned, he saw some had invested the money while others let it remain idle. The master rewarded the investors and sent the others packing.
Mulholland says he got the message: Perhaps the best way to serve the community would be to apply one's skills to creating wealth. "Matthew had something of a capitalist streak to him," says Mulholland. In 1995, he went forth and began the fund with about $500,000 of his family's money. By the end of 1996, he had brought in enough friends to have $1 million under management.
HARD TO LABEL.
Matthew 25 is up to $29 million in assets and is starting to piece together a good track record. Not only did it join BusinessWeek's A list of top-ranked funds last month, but it has also posted an average annual return of 15.1% over the five-year period ending Apr. 4, compared with 13.2% for the Standard & Poor's 500-stock index. Last year, when the S&P 500 slid 9.1%, Matthew 25 finished the year up 3.6%. And in a tough 2001, the fund has held its own, down just 1.8%, compared with a 14.3% drop for the S&P 500.
Morningstar tags Matthew 25 as a mid-cap blend fund, although Mulholland's portfolio includes names like AT&T (T ) and Dell (DELL ). Matthew 25's quirky lineup and small portfolio of just over 20 stocks makes it hard to label. Mulholland says fewer stocks help him know the companies he owns intimately. It also means his positions are often 5% or more of the fund's assets, compared with the 1%-to-2% stakes a lot of fund managers prefer.
Right now, the portfolio manager has gravitated toward financial companies, which now constitute about 60% of the fund's assets. Mulholland's largest holding is Freddie Mac (FRE ), where he has invested about 18% of the fund's money. Besides the mortgage lender's shares, he has made investments in bond insurer MBIA (MBI ), credit-card lender Advanta (ADVNA ), and Stilwell Financial (SV), the company that runs Janus mutual funds. Matthew 25 carries a 10% weighting in small-cap banks Willow Grove Bancorp (WGBC ) and Commonwealth Bancorp (CMSB ).
"In this environment, financials are going to do well," says Mulholland. "Lower interest rates are helping, and I expect that now that the big institutions have seen their share prices rise, there will probably be a big acquisition spree to come along soon."
Mulholland has also put considerable money in tech shares, including Advanced Micro Devices (AMD ) and Intel (INTC ). There's even a 7% weighting in the preferred stock of beleaguered West Coast utility PG&E (PGE ). Such investments make at least one analyst a little guarded: "Its bets are highly concentrated, and that could lead to considerable volatility at times," says Morningstar's Catherine Hickey.
Mulholland says it's not hard to pin down his investing style -- it's strictly long-term. He looks for stocks to hold for at least five years. "I'll even stick with my mistakes two to three years for a turnaround," he says. From there, the portfolio seems to split his favor between value and growth shares. In some cases, he's willing to buy into companies he feels are underappreciated. In most others, he says he's looking to get in on a company that has a good business, a history of solid earnings growth, and skillful management. "In the markets, you make most of your money in what we'd call extreme situations," he says. "In some cases, that's in a company whose management is top-flight. Other times, it's when you've found a stock that is way underpriced."
In a tip of the hat to Warren Buffett, Mulholland says he likes to look at companies one by one -- and devote enough time so that he can understand the business and get a sense of management's abilities. He says he's sure to examine around 3,700 companies a year, looking for a few concrete clues. First, he wants a company that has given shareholders good gains and at the same time has good impetus for increasing earnings in the years ahead. He likes management to have a large stake in its stock, and he's willing to pay for dependable earnings growth.
Morningstar reports the manager's expense ratio was a respectable 1.2% last year, compared with an average 1.4% for funds in Matthew 25's investment category. Although it helps that Mulholland's mortgage helps to cover the bill for Matthew 25's headquarters, perhaps more credit is due to Mulholland's tendency to stick with stocks he likes. Last year, he shuffled only 20% of the fund's portfolio. In comparison, the average mid-cap blend fund ran stocks through a revolving door, with a 99% turnover last year.
An example of a stock Mulholland likes is MBIA (MBI ), the leading insurer of municipal bonds. "I first noticed the company in the early '90s," he says. "Around that time, top companies were reporting an average profit per employee of around $30,000. MBIA was an extreme case, however, with almost $400,000 per employee." It doesn't hurt, Mulholland says, that CEO J.W. Brown has been a great leader: "When he took over, he put $16 million of his own money in the company's shares. That's a forceful way of saying he intended to run things as a long-term shareholder."
Mulholland started buying into MBIA in August, 1998, when the stock was priced at $60 a share. Over time, he has paid an average $81.10 for the stock, which closed on Apr. 6 at $75.10 a share. "Four years down the line, this could be a $150 stock," he predicts.
Snowmobile maker Polaris (PII ) is another favorite. Mulholland says he's impressed with the job Chairman W. Hall Wendel has done. "This company has been a consistent wealth builder," he gushes. "They have a great line, and they're still working hard to develop new products, such as their line of all-terrain vehicles." Another plus is that Polaris has historically invested a lot in stock buybacks. Matthew 25 started buying into Polaris in October, 1998, when the stock was $25.44, and has paid an average of $34.22 a share for the company, which closed on Apr. 6 at $44.50.
One big disappointment in Matthew 25's portfolio is AT&T. Mulholland says he bought TCI, the cable-TV operator, back in 1996, but held onto his stake when Ma Bell took over. He always thought highly of TCI Chairman John Malone and even had a favorable impression of AT&T CEO C. Michael Armstrong. But Mulholland says AT&T just hasn't been clear about its direction of late. The company has hinted about floating stock for its operations, but Mulholland feels management has muddled around some.
"We heard that cable was going to be floated last fall, and at times there's word that long distance would be bundled with it," says Mulholland. "The fact is management has just vacillated too much, which isn't doing much for the stock." Mulholland says he has scooped up depressed AT&T shares over the past 12 months, and has paid an average $21.01 a share over time for the stock, which closed Apr. 6 at $20.50.
Mulholland sets his sights on the day when his fund hits $100 million and he can move it out of the house. Until then, he says he's proud of how he has kept his small shop accessible. He brags that he personally knows the majority of his shareholders and that his family still holds a 5% stake in the business. "I don't really want to get to a point where I'm a man moving levers behind a curtain, like the Wizard of Oz," he says. "We try to get the returns of the big funds, yet I'd say it's nice to be in contact with shareholders." If things keep up, he'll need that new suite soon.
Anderson teaches journalism at the City University of New York
Edited by Patricia O'Connell
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