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Thriving In Bear Markets October 31, 2001
According to its manager, the fund's 3-pronged investment approach has helped it to historically outperform in bear markets.
Author : Suryati Mahmud

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( "The approach allows us to find investment opportunities regardless of the economic climate, regardless of the market environment... We've been historically known to outperform in bear markets because of this very unique approach," says Susan Potto. Referring to the investment style she uses to manage Franklin Templeton's Mutual Beacon Fund, Potto explains that it's made up of 3 methods - value investing, bankruptcy investing and risk arbitrage. They help the fund to maintain its performance even when stock markets are not performing well.


The bulk of the portfolio uses the value style of investing, which places emphasis on buying stocks that are cheap relative to the rest of the stock market. "We basically want to buy a company which is trading at a big discount to what we call the net asset value. This is simply the price a business person is willing to pay for the assets of the company or for the business. We generally want to buy stocks at 60% of what we determine to be (their) net asset value," Potto reveals. And she adds that falling stock prices can be a plus for the fund. That's because they'll often attract bidders for the company which in turn, will boost the stock price. Potto also likes companies that do not need an economic recovery for its share price to appreciate. She prefers those that for example, are selling some of their assets to streamline operations or buying back their shares.

And once a stock has reached its net asset value, it's time to sell. This determines how long she will hold a stock. "If I buy it 60 cents to a dollar, and it approaches net asset value in a week, (then) it's sold in a week. If it takes me 3 years and I think the company is proceeding on the right track, I'll hold it for 3 years," says Potto.


Bankruptcy or distress investing involves the purchase of bonds or debt instruments of companies that are insolvent or on the verge of default. Risk arbitrage, on the other hand, is about investing in companies that are in the process of being acquired or merged. These 2 investment styles aid the fund's performance in bearish times. "When equity markets are down like what we've seen in the last 2 years or 1 1/2 years, bankruptcy or distress investing can be very strong because a lot more companies are getting into financial trouble," says Potto.

In addition, both methods carry little risk for the fund, insists Potto. In bankruptcy investing, she cites her high involvement in the insolvent firm's reorganisation process as a way of ensuring that the firm will do its best to get back on track. In risk arbitrage, she minimises risk by not speculating on unannounced merger and acquisition deals and avoiding the use of leverage (debt) to increase returns. Common measures of risk lend credence to Potto's assertions. They show that the fund is less risky than its peers and the performance benchmark - the S&P 500 Index. Figures for beta, which measure the fund's volatility vis-à-vis the performance benchmark, show that the fund is only about HALF as volatile as its peers and the S&P 500 Index (as at 28 Sep 2001).


Between the end of August and the end of Sep, the short-term liquidity in the fund rose from about a fifth to nearly a third of the fund. Does this indicate that Potto is expecting more uncertainty in equity markets? "The level of cash is a by-product of the number of investment ideas and opportunities. It's not a managed number. I don't seek any sort of level specifically, and I don't have any limitations in terms of how much cash I can hold," she explains. She has 3 reasons why a significant portion of the fund is currently in short-term liquidity - (1) she sold off some of the stocks that had reached or were coming close to their net asset value, (2) one of the holdings had made a big cash payout as part of its restructuring process, and (3) more investors were putting money into the fund.

Below is a snapshot of the fund's top 5 holdings, sector and geographical allocation as at 28 Sep 2001.

Top 10 Holdings

Kindred Healthcare Inc - 1.7%; Country: US; Industry: Health Care Providers & Services
PG & E Corp - 1.5%; Country: US; Industry: Electric Utilities
Berkshire Hathaway Inc - 1.4%; Country: US; Industry: Insurance
Telephone & Data Systems Inc - 1.4%; Country: US; Industry: Diversified Telecommunication Services
AT&T Wireless Service Inc - 1.4%; Country: US; Industry: Wireless Telecommunication Services
Washington Post Co - 1.1%; Country: US; Industry: Media
Trizec Hahn Corp - 1.0%; Country: Canada; Industry: Real Estate
White Mountain Insurance Group Inc - 1.0%; Country: US; Industry: Insurance
Federated Department Stores Inc - 1.0%; Country: US; Industry: Multiline Retail
American Standard Cos Inc - 1.0%; Country: US; Industry: Building Products

Sector Allocation

Financials - 14.6%
Consumer Discretionary - 12.2%
Industrials - 8.3%
Consumer Staples - 7.0%
Telecommunication Services - 6.4%
Materials - 6.3%
Healthcare - 4.5%
Utilities - 3.0%
Energy - 1.4%
Information Technology - 1.1%


The fund is a feeder unit trust that was launched in May 1998. According to Franklin Templeton Investments, it had outperformed its benchmark and peer funds over the past 3 years. It had had a cumulative return of 51.25% against the benchmark's 10.44% and the sector average of 23.48%. The table below shows the fund's performance for other periods.

Performance Of The Franklin Templeton Funds - Mutual Beacon Fund As At 28 Sep 2001 (In SGD)

Fund (%)
Benchmark (%)
Sector Average (%)
Source: S&P Micropal and Franklin Templeton Investments; Benchmark: S&P 500. Past performance cannot guarantee future results. Indices are unmanaged and one cannot invest directly in an index.


Potto manages the fund with the help of a team that's made up of about 18 analysts and portfolio managers. Each team member follows different sectors globally and contribute ideas to the stock picks in the fund. Potto is also the Co-Portfolio Manager of the Mutual Shares Qualified Fund. Besides her fund management responsibilities, she's also an analyst and mainly covers sectors such as defence/aerospace, real estate, automobiles and automobile parts, conglomerates, manufactured diversified and office equipment. Potto graduated from Emory University with a Bachelor of Business Administration degree. She also holds an MBA in Finance from New York University.

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