Fund Focus: Marc Heilweil's Five-Star Instinct Beats the Spreadsheets
Few people have heard of this Atlanta-based lawyer-turned-investor who has set foot on "the geographical" Wall Street only "three or four" times in his life -- most recently on the morning before our lunch in mid-April. And even fewer people invest with him, whether it's in the $35 million Marathon mutual fund that he has run since March 2000 or in the $350 million in separate accounts that he has managed for high-net-worth investors since 1977. And no analyst at Morningstar or any other fund-tracking firm covers Marathon because it's too small.
Yet Heilweil's few clients are loyal, and they've stayed with him through the financial crisis. His large-cap blended value-and-growth equity fund beat 98% of its peers in 2008, when it fell a mere 23.33% while the Standard & Poor's 500 Index plunged 37.0%. For the past 12 months, the fund has grown a mere 37.82%, falling behind 94% of other large-cap blend funds. Heilweil reckons the other funds grew faster by loading up on the stocks that he has shunned -- financially distressed, often poorly run companies that tend to lead a rally after a market crash. Nevertheless, Marathon has truly distinguished itself over the last 10 years with a total return of 6.14% on an annualized basis, which was better than 97% of its peers. This track record has earned it a five-star rating from Morningstar, the highest grade that the Chicago-based fund-tracking firm can bestow upon a mutual fund.
Even more compelling than Heilweil's investment returns are the methods by which he has achieved them. At the age of 64, the Yale Law School graduate admits that he never learned how to "operate" a spreadsheet, leaving such electronic wonders to his two-person investment staff. The file cabinets in his Atlanta office are crammed with hard-copy annual reports and other documents that he spends his days poring over. He rarely travels, instead waiting for executives of companies to pass through town.
Creative Ways to BuyWell-Run Companies Below Market Value
So how does Heilweil pick stocks? "There's no metric," he says. "I don't rely on projections. I'm a business investor. I'm looking for good business models and good managers."
Heilweil is essentially investing on instinct. That has led him away from airlines and textile companies, which he considers generally badly run. And it has led him to pharmaceutical companies like GlaxoSmithKline (GSK), consumer non-durables like Coca-Cola (KO), and lubricant manufacturers like Graco (GGG).
His instincts also led him to go against the herd and bet on luxury goods during the recent financial crisis. He bought Tiffany & Co. (TIF) for $20.96 a share in November 2008. Investors had sold the stock down by 62.64% from $56.10 in October 2007 on fears that the market crash would kill the renowned jeweler's sales. But the stock has more than doubled since he bought it, trading at $49.48 after hours on April 21. "It's the 'blue box' draw. They do well at marketing that image around the world," he says.
Heilweil finds creative ways to buy well-run companies below market value. One such stock was Exxon Mobil Corp. (XOM), which he has long regarded as overpriced. So when the world's biggest oil company announced last December that it was going to acquire natural gas producer XTO Energy (XTO), and that XTO shareholders would receive 0.7098 shares of Exxon stock per share of XTO stock, he jumped at the chance. "I bought XTO to own Exxon," he says. He paid $46.82 for XTO shares earlier this year, and by April 21, it had risen to $48.40. That was 70.3% of Exxon's share price of $68.92. Considering the lower price he paid for XTO, he says, he expects he'll end up having paid "not too large a premium" for Exxon.
Heilweil is a long-term, buy-and hold investor. Marathon has a low turnover rate of 42%, meaning that less than half of the 77 stocks and handful of bonds in the portfolio get replaced in a given year. That draws the attention of senior managers of the companies that Marathon owns, making it more likely that they will return Heilweil's calls than those of fund managers who switch stocks more frequently.
Low turnover has the added benefit of keeping trading costs down. But Marathon is so small that after covering other costs, such as regulatory compliance and compensation for the analysts, there's not enough fee revenue left to pay the portfolio manager. "I have not made a dime from the fund," he says, explaining that he supports himself by managing money for his high-net-worth clients. There's nothing left over for marketing, either. As a result, despite Marathon's performance, this five-star fund could remain an undiscovered gem for many years to come.