What nuggets of investment advice can investors hope to ferret out of the Bible? Plenty, if you ask Mark Mulholland, the founder and portfolio manager of the Matthew 25 Fund.
Mulholland, a lifelong Catholic, believes that the teachings of the Bible can provide not only a guide for day-to-day living, but also a foundation for investment decision-making. He even named his fund after one of his favorite passages, which he interprets as a "strong argument for investing and capitalism."
The passage he's referring to is a parable — there are three of them in Matthew 25 — that recounts the story of a servant whose master entrusted him with one thousand silver pieces. Rather than invest the money, the servant buried it for safekeeping. Later, the master rebuked and punished him for not investing it as two other more industrious servants had done. The message for investors: Don't sit on your cash. However, Mulholland takes it a few steps further, summing up the parable's deeper spiritual message like this: "Try not to be fearful," he says. "Try to find a great direction to go instead of being immobilized."
The fund, however, is not a Christian or religious fund, he says.
Wherever he draws inspiration, his fund certainly has helped shareholders. Over the past 12 months, it has ranked among the top 10 performing equity mutual funds, yielding 14.3%, according to Morningstar.
But Mulholland focuses on the long-term. It's anathema to his investment philosophy (and contrary to his interpretation of Matthew 25, which beseeches people to plan and think ahead) to think only in the short-term.
So he looks for stocks based on what they can do in the next three to five years with capital appreciation being the primary goal and income a secondary goal. "That's the sweet spot," he says of his three- to five-year investment outlook. Indeed, over the past 36 months, his fund has posted 28.2% gains, according to Morningstar's data.
Mulholland engages in rigorous microanalysis to find companies with the greatest potential to yield average to above average returns over a three- to five-year period. He evaluates some 3,000 companies a year, and much like a schoolteacher, grades each A to F.
He gives As to companies whose three- to five-year projected annual average compound returns are greater than 15%. Bs go to companies with projected returns between 12% and 14.9%. Those projected to yield between 9% and 12.5% — the average long-term yield — get Cs, while those expected to yield below 9% get Ds. Companies expected to yield negative returns get big, fat Fs.
Moreover, he grades each company on four criteria: business economics, management ability, financial condition, and stock price. The company's business prospects and stock price are given the most weight. Management — "the most fleeting" of the four criteria, says Mulholland — gets the least weight. "I'm a fundamentalist," he says. "I look at things from a fundamental standpoint of each stock."
Mulholland conducts the research and investment selection process on his own. He has three professionals who handle compliance and registration, shareholder and securities accounting, SEC and tax filings, and other administrative tasks, he says.
One of the other parables in Matthew 25 relates to the well-known Christian principle to "do unto others as you would have them do unto you." Consequently, Mulholland invests his own money "side-by-side with clients." He and his wife are the second-largest shareholders in the fund, holding more 211,000 shares worth more than $4 million. "I eat my own cooking," he says. "I recommend only what I believe in myself."
Two stocks that Mulholland believes in are Apple and Google. "I think they're beautiful," he says, because they have momentum, growth consensus and very good valuations. Apple, he says, was a quadruple "A" company when Steve Jobs was at the helm. It aced all four of the criteria he uses in his analysis — business, financials, stock price and management. With Jobs' passing in October last year, it's now a triple "A," which, he says, is still a great buy. In fact, it's the fund's biggest holding, accounting for 17.5% of fund assets. Google accounts for 5%.
Mulholland also believes in battered financial stocks. His fund holds positions in Goldman Sachs (5%), JP Morgan Chase (4%) and KKR (4%), companies that don't have great momentum now but have the potential to be average or above average growers, according to Mulholland. "If you buy those and sit on them for three to five years I think they have the potential or give tremendously higher above average returns," Mulholland says of the "Rip Van Winkle" stocks.
As of December 31, 2011, the Matthew 25 Fund had holdings in 14 companies, two limited partnerships and one real estate investment trust. The companies ranged in size from conglomerate Berkshire Hathaway, a mega-cap company and the fund's oldest holding, to Biglari Holdings, a small-, nearly micro-cap enterprise. The fund's willingness to invest in the securities of companies of all sizes expands its universe of public companies from which to find truly exceptional companies, says Mulholland.
While the fund selects its companies from a wide universe, it picks relatively few of them when compared to other mutual funds. The fund typically holds between 17 to 24 stocks, much less than most mutual funds. The median number of holdings in equity mutual funds is 96, according to the Investment Company Institute.
He cites this focused investing style as one reason for the fund's strong performance. "All wealth is created by focused investing," he says, noting that the Forbes 400 wealthiest people "became wealthy not by diversification but through meaningful investments that worked out."
Good Times Ahead
Prior to launching the fund in 1995, Mulholland ran an investment limited partnership while working at Paine Webber. While the investment partnership allowed him to build a track record, he realized that its structure was at odds with his long-term perspective. He decided to branch out on his own, leaving Paine Webber to start the Matthew 25 Fund. The mutual fund would be more "geared for long-term investing," and allow him to work into his 70s and even 80s, possibly "pulling a Warren Buffett," he said.
As Mulholland looks at the market today, he's unrelentingly optimistic. "There's nothing terribly overpriced and it's not that I always think that," he says. Mulholland believes the market and economic recovery is still in its early stages with plenty of room to grow.
His best estimate using a baseball analogy is that the stock market is in the third to fourth inning, while the economy is somewhere around the second or third.
Being a micro and not a "macro person," Mulholland stays away from endorsing specific market sectors. But he maintains that he can't find anything in the market anywhere that is glaringly overpriced.
"Anyone who has courage to buy into this market will get above average returns over the next three to five years. There's not a lot that would scare me," he says.