Six-Pack of Turnaround Funds

04/04/2014 9:00 am EST


George Putnam

Editor, The Turnaround Letter

While we normally focus on individual stocks, from time to time we like to look at mutual funds that focus on turnarounds, explains George Putnam, editor of The Turnaround Letter.

Out of the thousands of mutual funds, we could only find a dozen and even in those, turnaround investing is usually not their principal objective—in most cases it is just one of several strategies that the fund manager pursues.

In some ways, the scarcity of turnaround-oriented funds just proves our assertion that turnarounds represent an inefficient—and therefore, potentially, very profitable—niche in the securities markets.

Here’s a look at six funds, where the managers are brave enough to put, at least, a portion of their portfolios in turnaround situations, and many of them have posted strong returns over the years because of that.

Columbia Value and Restructuring (US:UMBIX) seeks stocks that are generally out of favor, but it is also willing to look at special situations such as restructurings and management changes. Roughly 37% of its holdings are in the Technology and Financial Services sectors.

Fairholme Fund (US:FAIRX) is led by Bruce Berkowitz, a well-known value manager willing to take concentrated positions. Berkowitz is not afraid to pile into turnaround situations in a big way.

For example, American International Group (AIG), one of the poster children for the 2008 financial collapse, accounts for roughly 40% of the fund’s holdings. Troubled government-sponsored mortgage lender Fannie Mae (FNMA) is another big holding.

Fidelity Event Driven Opportunities Fund (US:FARNX) is a new fund (launched December 2013) that, by its charter, targets companies in reorganization, undergoing management change, effecting corporate restructuring, changing capital structure, or flirting with the bankruptcy process. The fund is still very small, but we like the strategy.

Franklin Mutual Recovery (US:FMRAX) targets special situations where the manager believes a catalyst exists to unlock the value of mispriced assets.

Distressed and post-bankruptcy stocks are included in the fund’s mandate. The fund also offers a way to play a rebound in Europe as more than 40% of its portfolio comes from across the pond.

GoodHaven (US:GOODX) managers Larry Pitkowsky and Keith Trauner developed their expertise while working for the Fairholme Fund.

Now at GoodHaven, they seek stocks that are out-of-favor because of adverse publicity, industry problems, or company specific issues. They also like special situations, including mergers, reorganizations, and management changes. Nearly 60% of the portfolio is in mid- and small-cap stocks.

Keeley Small-Mid-Cap Value (US:KSMVX) focuses on the stocks of companies that are going through major changes. Corporate restructurings and post-bankruptcy situations are among its targets.

The fund’s charter requires 80% of its investments to be in mid- and small-cap stocks, defined as being below $7.5 billion in market capitalization. Currently, Industrials, Consumer Discretionary, and Financials are roughly equally weighted and make up about two-thirds of the total portfolio.

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