Soon after the Korean crisis in 1998 people were seeing their dentists and asking to have gold removed from their teeth to sell, recalls Anne Gudefin, the co-manager of the Franklin Mutual Global Discovery fund. While the countrys economy may have been battered, that was the time to buy shares, she says.
For example, in 2000, Gudefin bought shares of the South Korean company KTNG at 16,000 won (8.46) per share, and later sold them for 90,000 won. We multiplied the investment by [a factor of] 5.5. When dividends are included, it would be closer to 7.
As the global financial crisis has depressed stock prices worldwide, it might be reasonable to assume Gudefin is buying shares again, but this is not the case. With a cash level of 54%, less than half of her $508.05m (335.43m) fund is invested in equities.
In 2007 the fund was quite invested but then she started selling stocks and had cash in the fund. At one stage over 60% of the portfolio was held in cash. We resisted investing earlier, she says.
According to the funds fact sheet, the investment objective is to provide investors with long-term capital growth by investing in global equities and their equivalents with minimal restriction in terms of capitalisation, sector or country.
But Gudefin says the time is not right Its just a matter of being patient. There will be a number of opportunities to come. In the meantime, she says she can always find stocks with a dividend yield of 5% to 8%.
Over the year to May 2009, the fund fell by 20.4%, compared with a 30.3% fall for the equity international sector, according to Trustnet. Over the past month, the fund gained 4.7%, compared with an overall sector gain for the equity international sector.
The approach is totally bottom up. I dont care about industrial or geographical breakdown, says Gudefin, who has managed the fund since it was launched in October 2005. She is also the senior vice president of Mutual Series and portfolio manager of the Mutual Qualified fund.
While Franklin Templeton Investments is well known for investing in emerging markets, most of Gudefins portfolio is invested in developed markets. At the end of March, 21.4% was invested in America, 20.4% in France, 16% in Britain, 9.8% in Germany, 6.7% in Hong Kong, 4.4% in Switzerland, 4.1% in South Korea, 3.3% in Norway, 2.5% in Denmark and 2.3% in Japan.
I dont exclude emerging markets but the value has to be there, she says. I also pay a lot of attention to corporate governance, which is more difficult to find in emerging markets.
The Global Discovery fund usually holds 70-80 positions. The biggest holdings, at the end of March, were British American Tobacco with 2.63%, Imperial Tobacco Group with 2.25%, and Lorillard with 2.16%.
The bulk is invested in undervalued equities, she says. In normal market conditions, 80% of the portfolio is made up of undervalued stocks and the rest of distressed and merger arbitrage stocks.
The in-house definition of distressed securities is shares in companies that have fallen in value because they are in financial distress or bankrupt but which have a chance to survive. Distressed securities often present compelling investments, she says.
However Gudefin adds she has no interest in companies like Woolworth, which went bankrupt because of a bad business model and bad balance sheets.
Merger arbitrage, which is widely regarded as a hedge fund strategy, focuses on stocks that become undervalued because of the risk that the merger deal will not close on time, or at all. And corporate takeovers often create arbitrage spreads.
Positions aimed at merger arbitrage include US Tobacco, Wrigley and Anheuser-Busch. Good companies with bad balance sheets will come, but we have to be extremely patient, she says.
When I select holdings, I look for companies that have a good business, a good management and a good price. She looks for a number of catalysts to unlock deep value.
These catalysts can be a new management team that puts a restructuring programme in place, divesting non-core and non-performing assets. On the balance sheet side, she looks for signs that a company is reducing leverage. Mergers or acquisitions, spin-offs, and share purchases are other possible catalysts she takes into consideration.
Gudefin tends to invest in companies with a healthy cash flow. We have been quite demanding in things that we want in terms of liquidity.