VALUE ADDED


Catch This Great Value Fund Now

Steven Goldberg

Despite one of the best long-term records among large-company value managers, Excelsior Value & Restructuring fund still remains largely undiscovered. But note that manager David Williams will probably remain at the helm only through 2008.



Many analysts think energy stocks have had it. And many see emerging markets as ripe for a fall. David Williams, lead manager of Excelsior Value Restructuring (symbol UMBIX) begs to disagree. About 20% of his fund is invested in energy stocks, another 7% is industrial materials stocks, and 9% is in emerging markets.

It pays to listen to Williams. He's one of the great ones. At 64, he's been a money manager for 32 years. His Excelsior fund has beaten Standard Poor's 500-stock index 11 of the past 13 years. Over the past ten years through October 31, the fund returned an annualized 14% -- an average of almost six percentage points per year better than the return of the SP. It ranks in the top one percent of large-company value funds over those years, and it's one of the Kiplinger 25 recommended funds.

I wouldn't worry a bit that the fund is lagging this year. Through November 9, the fund trailed the index by less than one percentage point. The main reason is that the market has taken down Williams's energy and industrial-materials stocks.

As the name of his fund implies, Williams hunts for undervalued companies, and he prefers those involved in some kind of restructuring or turnaround -- or that are in a consolidating industry and likely to be acquired. He almost always buys stocks with dents, stocks that nobody else loves. Then he waits patiently for them to recover. On average, he holds stocks for eight years. And he is not reluctant to buy more of a good stock as it declines. "There's always a reason why a stock falls, but investors tend to overreact and sell stocks down to very cheap prices," says Williams.

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The tricky part of what Williams and his team do is determining which companies have the right stuff to bounce back. That involves meeting with corporate executives and studying their business plans. Much of the work is numbers-driven, but some involves sizing up the character of the executives. Says Williams: "A lot of times they try to pull the wool over your eyes, but you can often sense that."

A former Navy helicopter pilot, Williams likens managing money to flying aircraft. "You don't have to be brilliant. You do have to have common sense and good instincts." Like most first-rate managers, Williams has a well-thought-out investing philosophy that he adheres to even when it's temporarily out of favor. That discipline is essential to his success. Plus, despite his huge success as a manager, he's modest enough to continue learning from his mistakes.

As for when he sells stocks, "I like to hold onto a stock as long as it's reasonably priced and the company continues to improve. When one of those things changes, I sell. I make a lot of mistakes, and especially in the first year or two, if a company isn't doing what I expected, I sell." He also sells once a company's restructuring is complete, and after a company is taken over. "My biggest mistakes have been made by holding on to the new company after a takeover." He cites Global Crossing, which took over a company he owned, as a particularly bitter example. Global Crossing later filed for bankruptcy reorganization.

Why the optimism on energy? Williams doesn't place much faith in big picture economic forecasts, but he doesn't see the global economy falling into recession. Consequently, he doesn't see demand for energy declining much. More important, shares of energy companies are cheap. Not only are they trading at low price-earnings and price-to-cash-flow multiples, but they're trading for less than the value of their proven oil and gas reserves -- even assuming oil prices fall a bit further. "Unquestionably, the best values on Wall Street are energy stocks," Williams says. "They're selling at 10% to 15% below the value of their proven reserves."

Cheap share prices and the advantages of scale in the energy business means that takeovers will likely continue in coming years. One of Williams's favorite stocks, Devon Energy (DVN), has been an acquirer of smaller oil and gas companies. But Williams now sees Devon as a target. "Someone will eventually take it over." Williams expects the company to earn $6 to $7 a share next year, giving it a single-digit price-earnings ratio, and he says it's trading at 20% less than its proven reserves. ConocoPhillips (COP), another favorite, "is very cheap when you compare it to ExxonMobil or the other majors."

The fund has 13% of assets overseas -- and all but a smidgen of that is in emerging markets. Why invest in such a risky arena? Williams's answer is consistent: "Emerging markets are cheap." And the economies are growing rapidly. Favorite stocks include Brazilian energy company Petrobras (PBR) and Panamanian airline Copa (CPA). True, South America has turned left politically. But so far most of the leaders have been fairly accommodating to business.

The bad news for investors is that Williams plans to retire at the end of 2008. Two co-managers, Timothy Evnin and John McDermott, are now on the fund. Evnin, 41, joined U.S. Trust 20 years ago, the same year Williams did, and is being groomed to take over. Will he have the skill and instincts that Williams has? I don't know. The fund becomes a big question market after Williams leaves.

But for now, Williams's fund is one of the best mainly large-cap value funds you can buy. It's eclectic -- not many other domestic value funds own such a big slug of emerging markets. And Williams buys stocks of small, medium and large companies. Indeed, he buys some growth companies, too. Expenses, at 1.05%, could be lower, but they're not unreasonable. Assets in the fund and private accounts total only about $12 billion. Surprisingly, given Williams's first-class record, this fund remains largely unheralded.

Steven T. Goldberg is an investment adviser and freelance writer.



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