Mutual Funds
Master of the Turnaround
A veteran fund manager says anyone could have compiled his spectacular record. Oh, yeah?
By Manuel Schiffres, Executive Editor
From Kiplinger's Personal Finance magazine, March 2007
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"Any baboon could do what I do," says David Williams in this interview. He's being far too modest. Very few humans have done what he has, which is to compile one of the most sterling investment records going. Since he took over the euphoniously named Excelsior Value & Restructuring fund (symbol UMBIX) in 1992, it has returned an annualized 17%. That's six percentage points per year better than Standard & Poor's 500-stock index. And by the way, Value & Restructuring whipped the index 11 of those 14 years. So let's put baboons aside and concentrate on what makes Williams tick.
It turns out that what Williams meant by invoking baboons is that he has a method of investing that has become as natural and comfortable as his own skin. So, sure, to him it seems easy. To learn about those methods, we chatted with Williams at his firm's Manhattan headquarters. We found Williams, who had come in for the day from his office in suburban Essex, Conn., east of New Haven, to be disarmingly unassuming and an investor who likes to keep things simple.
KIPLINGER'S: With a name like Value & Restructuring, you really have to be good, don't you?
WILLIAMS: You know what? It's really not Dave Williams who is good; it's a good investing theme.
Explain. We buy cheap stocks and we buy companies that are restructuring. There are a lot of cheap stocks out there, but we think companies that are restructuring have a performance edge.
Let's parse the name. What do you mean by "restructuring"? The usual suspects -- companies that are cutting costs significantly, lopping off divisions, moving manufacturing overseas, all kinds of things that make a company more efficient and productive and lead to improving profit margins.
How do you define value? I'm not reinventing the wheel. I've been doing this for 32 years and have always been comfortable using price-earnings ratios. They are simple and I understand them. But I use whatever measure Wall Street prefers. For example, with oil stocks, I tend to use the price-to-cash-flow ratio.
Does the P/E have to be low on an absolute basis, or low relative to the market or to a company's growth rate? Right now, it's mostly relative. For example, the overall market sells for about 15 times estimated 2007 earnings. So I won't buy anything for more than 13 times earnings. Of course, it depends on the industry. Thirteen times is pretty expensive for a bank, and 13 times is pretty cheap for a tech stock. At any rate, I recently bought Rockwell Automation in the high $50s and it was trading at about 13 times estimated '07 earnings of $4.60 a share. The stock had sold for nearly $80 in 2006. It went down to the $50s, and I thought that was crazy for a company with return on invested capital of something like 28%. The company has done an awful lot of restructuring, selling off some of its old-line businesses and focusing more on businesses that rely on intellectual capital [Rockwell's main lines are control systems and power systems]. It is well managed, and I was willing to pay up to 13 times earnings for a company that is much more profitable than most of the others I own.