VALUE ADDED


A Cool Start for Wintergreen Fund

Steven Goldberg

David Winters's new mutual fund has much of the flexibility of a low-risk hedge fund. So far, the fund has performed respectably.



David Winters, the veteran value manager, is running a new mutual fund with much of the flexibility of a low-risk hedge fund. I think his Wintergreen fund (symbol WGRNX) offers investors a great way to increase their holdings abroad while minimizing risk.

Launched last October, Wintergreen invests in stocks all over the world. The fund's charter gives Winters the freedom to sell stocks short (bet that they'll decline), invest in bonds, convertible securities and distressed securities -- and decide whether or not to hedge his exposure to foreign currencies. He also engages in merger arbitrage -- betting that already announced takeovers will be completed.

In the wrong hands, these tools can be dangerous. But Winters, 44, is nothing if not cautious. He joined Mutual Series -- the low-risk, value shop started by Max Heine and later taken over by Michael Price -- in 1987 and spent almost his entire career there. Winters says that as a student, he kept a newspaper article about Heine taped to the wall of his dorm room. No posters of rock stars for young Winters. "I started at Mutual Series when I was 25, and I was already hooked on value investing."

He rose to be chief investment officer of the Franklin Mutual Series funds before leaving last spring in a bitter parting that neither side wants to discuss publicly.

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He's running Wintergreen, Winters says, in much the same style as Mutual Discovery (MDISX), which he piloted to a 10% annualized return in his past five years on the job. Discovery usually has two-thirds of assets in foreign countries, and it invests in more stocks of midsize and small companies than the other Mutual Series funds. Despite that, Discovery has been one-third less volatile than the average stock fund. (You can only buy Franklin Mutual Discovery if you're willing to pay a sales charge; the no-load version of Discovery is closed to new investors.)

Wintergreen currently has $250 million in assets, making it more maneuverable than Discovery. Even so, Wintergreen still has 35% in cash. As always, Winters is being deliberate in putting money to work. So far this year, the fund is up a respectable 6%. "If we can do well with lots of cash and own securities that we don't think have any risk, we love that formula," he says.

No risk? Well not much. Consider HSBC Holdings (HBC), the London-based global financial bank. Started in Hong Kong, HSBC does a big percentage of business in emerging markets. "It's a very conservative way to play emerging markets," Winters says. "Management is opportunistic and careful." It sells at about 12 times the average analyst's estimated earnings for this year of $7.36 per share, according to Thomson First Call. And the stock yields 5%.

Another favorite is Weyerhaeuser (WY), the largest U.S. timber owner. Winters calls the firm a conglomerate. It consists of a homebuilder, a wood products company, a packaging company and "a lousy paper business." Compared with other timber plays available through publicly traded stocks, "nothing is cheaper," Winters argues. Meanwhile, the company is restructuring its paper business. "Weyerhaeuser is a treasure trove; it's conservatively and well managed." It trades at 17 times analysts' earnings estimates for 2006 of $4.23 per share.

A third Wintergreen holding: Anglo America (AAUK), a London-based natural resources giant. With operations in 64 countries, many of them in Africa, it produces platinum, diamonds, gold, coal and other industrial materials. Anglo American also owns 45% of diamond giant DeBeers. "On a sum of the parts basis, Anglo American is probably worth 25% more than it trades for," Winters says. While the commodities it mines have become increasingly precious in recent years, Winters believes the diamond business will permit Anglo American to evolve more into a luxury-goods firm, which would reduce its cyclicality. It trades at about ten times 2006 earnings estimates of $2.08 per share.

There are a couple of questions marks about Wintergreen. Most important, Winters always worked previously with a group of analysts and managers at Mutual Series. So far he's hired just one analyst, Dan Geary, to assist him. But he promises that more hires are on the way.

The other negative: The fund has an extremely high expense ratio of 1.95%. Winters says that figure will trend down as assets grow, but he defends it. "Our competition for investment opportunities, as well as the kind of research we do, is as much the hedge funds as plain vanilla mutual funds. We've tried to create a hybrid here where we have the transparency of a mutual fund and the flexibility of a hedge fund."

A expense ratio of nearly 2% annually is hard for me to swallow. But given Winters' record, I think his fund is worth taking a chance on -- and seeing whether he delivers.

Opinions expressed in this column are those of the author.



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