Report Release Date: 3 Feb 2010
Analyst: Thomas Lancereau
Executive Summary
People: Langerman and Brugère-Trélat are both experienced and very well versed in the firm's distinctive investment approach.
Parent: Franklin Templeton is a major asset manager worldwide. Overall, it acts in investors' best interests.
Process: The fund is managed from the bottom up, in a very valuation-sensitive style, paying little attention to the index.
Performance: The fund has built a good record of cumulative outperformance against the category.
Price: The fund's TER is higher than the category median, which is disappointing given the firm’s large assets under management.
Morningstar Opinion
Despite the recent change in managers, we think Mutual Global Discovery retains most of its appeal over the long run.
Peter Langerman and Philippe Brugère-Trélat took over the reins of the fund in Dec. 2009 following the departure to PIMCO of previous co-managers Anne Gudefin and Charles Lahr. Although sudden manager departures are rarely a good thing for investors, we think there is little reason to be overly concerned here. Langerman is CEO and CIO of Mutual Series and is one of the most senior members of the team. So is Brugère-Trélat, who has successfully run the Elite-rated Franklin Mutual European fund since 2005. They make very effective use of the 15-strong team of managers/analysts with whom they share investment ideas and research.
We don’t expect any change whatsoever in approach from the newly named managers. The fund remains managed using Mutual Series’ well-proven, highly valuation-sensitive approach. Portfolio construction is purely bottom-up and stock selection focuses on those stocks that trade at a significant discount to intrinsic value. The managers use discounted cash flow and sum-of-the-parts analyses to identify such firms while still paying close attention to management's quality and attitude toward shareholders. Such a distinctive approach leaves little room for benchmarking and the portfolio differs markedly from both indices and peers. For example, as at the end of last year almost half of the invested portfolio was in consumer goods-related stocks that the team favours for their safe dividend stream. In contrast, exposure to Japan remained marginal as they don’t consider the overall investment culture to be very investor-friendly.
As protection of shareholders' capital is paramount in this absolute-return approach, cash is allowed to grow in the absence of sufficiently attractive opportunities. It reached a historic high of 55% in March 2009, and although it has decreased since then, it was still much higher than most peers at close to 20% at the end of 2009. Most of it was held in US dollars, which, combined with investments in US stocks, means significant currency risk, so we feel the fund is more suitable as a supporting player for European and Asian investors.
As expected, the very high cash balance hurt the fund’s relative returns during the rally of 2009, and given the managers’ style, investors should be prepared for some periods of underperformance, particularly in momentum-driven markets. However, the fund has done a fantastic job of protecting its shareholders during the 2008 downturn, beating 96% of its competitors. Since launch, the fund has outperformed its Morningstar Global Large-Cap Blend Equity category by a comfortable margin, and we don’t expect the change in managers to alter the fund’s risk/return profile.
This doesn’t mean we will be complacent; any further manager departures would be a cause of concern. But at this time the team remains adequately resourced in our opinion, while experience is clearly above average. In brief, we think the newly appointed duo is talented while the maintenance of a coherent and distinctive approach bode well for the future. The fund retains its Superior rating.
*Returns are in USD terms.
To learn more about the fund, please click here.
To read the full report, please click here.
