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Marshall Family Values
Marshall Mid-Cap Value Fund
Interview with: Matthew B. Fahey

Author: Alexander Vantchev
Last Update: , :

For complete profile and charts on Marshall Mid-Cap Value Fund
If one looks for a Lipper top-quintile value fund that's overweight in industrials, and not in financials, it is a small surprise to find one in Milwaukee, Wis. Matt Fahey, the soft-spoken manager of Marshall Mid-Cap Value fund, told Ticker about the spills and thrills of value investing.

Marshall Mid-Cap Value Fund

A: Oh, yes it does! It\'s a headache every day. Absolutely, it has pitfalls. There are some stocks where we bought at that bottom range, and it went down and we bought more, and we came to realize later that what we thought was a temporary problem was a more permanent problem. And that stock never recovers. It\'s a classic definition of the value trap.

Q: You know I was looking at Spherion (SFN)…

A: Oh, I can give you a lot more, too. [laughs] We bought that when it was $20 on $2 earnings, so it was at 10 times earnings. Later on it went to $10 on over a dollar earnings, so, fine, we bought again at 10 times earnings. And next thing we know earnings are only 70 cents. It got to a point when we realized that the management changes and all that weren’t going to cut it. And this had been in the portfolio for a while, so we made the decision to cut our losses and move on. And it is $4 today, but we can\'t claim victory because we lost money on it. It is a very good point, and no one has asked us before, but in our process, yes, we do buy on the way down.

Q: There we went to my next question – the sell decision. Now, most fund managers present their screening and filtering systems as a meticulous, time-consuming task, while the decision to sell or pare certain holding seems to be triggered immediately or takes much less time. Is that really the case? Why don\'t you take as much time when you decide to sell as you took when you decided to buy?

A: Another good question I haven\'t heard before. I would say it takes you less time on the sell process, because on the buy process you spend an awful lot of time learning the company, the management, what it earned, what it should earn, all that. You get to know the company. I would say you take less time when you decide to sell, because when you bought and held a company for some time, you get to know it much better. So, you have that in your personal account, and when it doubles, you don\'t feel like selling, right? Because it feels good. Well, our job is not to feel good. When it goes from $12 to $24 in 18 months, and now it is $23, we just go back and well, that was what we expected out of it. We trim it.

Q: Yes, but you\'re still talking about taking profits. What if it goes down instead?

A: Well, we set a price target 12 to 24 months out that assumes the worst. What we run each week is a report on where we think each stock should trade logically in the next 12 months. If we have set that range between $12 and $24, and we see that it\'s trading at $11, we go back to our report card and check our assumptions – why did we expect that range. And if all our assumptions are still valIdent, we accumulate. So, you see, it is a very important part, the setting of the price range.

Q: And how does that work for the earnings part of the valuation? Say, the company misses the estimate for a quarter or two quarters in a row? For how long can you be comfortable with it?

A: You see, when we buy stocks that are temporarily out of favor, or under-followed, it is common that when we start to build a position, the fundamentals are still negative. So, it\'s not unusual for us to be involved in a company that as a quarter goes by, it misses the number. So, they haven\'t gotten this fixed yet. And the stock goes down and another quarter goes by, and it misses again. We have to research why they did it. And if we\'re comfortable with them working on the problem, but is just a little slower than we thought, OK, I can live with that. We\'re long-term investors with long-term confidence that they\'ll fix it, this just gives you an opportunity to buy more stock. Well, the others generally will stay away from it; they\'ll say, \'We\'ll wait until they fix it.\' But for us it\'s too late. When we buy stock, we\'re uncomfortable. There\'s no doubt about it. It hurts to buy a company that does not look very good. But usually that\'s the best time to buy a stock.

Q: And you\'ll always be a value fund manager?

A: Oh, absolutely. You know, the manager of the Mid-Cap Growth Fund in Marshall funds is sitting next to me. Finding mid-cap growth companies, where earnings grow faster than the market, or revenues grow faster than the market, is his job. That\'s not my job. I am told by my management, by my board of directors, to run a mid-cap value fund. And it better look like a mid-cap value fund. And that\'s what people here internally check on. If my average P/E has gone from 13 to 20, they ask what\'s going on.

Q: And how do you interact within the fund family?

A: Of course, we exchange information. The strange thing about this industry is that stocks change names all the time. What frequently happens is that growth managers here sell stocks that aren\'t growing as fast as they wanted to. And then the stock price goes down, right? And sometimes it goes down quite a bit. And that\'s our hope, because then we look at it and we may see a good value. Mattel (MAT) in 1997/98 was a growth stock. Then it came down to $12, because its earnings weren\'t growing, its margins weren\'t growing, and at that point it became a value stock. Conversely, if you take Boston Scientific (BSX), at $45 where it is now, in my opinion it is being bought pretty aggressively by the mid-cap growth managers, and it probably should be, because it\'s growing pretty fast now. When we purchased it in 2000, it wasn\'t growing fast then in fact it wasn\'t growing at all. But in our investigation, the stock price was too low for the assets of the company, for its potential, and so we purchased it. It\'s a classic one when you had to call it a mid-cap value in 2000 at $12 a share, and three years later basically the same company, the same management, the same R&D facilities are now selling $45 a share, because it is growing fast. So, now it is a mid-cap growth stock in my opinion.

Q: Have you found more mid-cap value stocks in 2003 than in 2002, or 2001?

A: No, I don\'t think it\'s much different. But I don\'t have much choice. I have to wait for the stocks to come to me with good valuations. No.1 in our report card is valuation. If a company doesn\'t pass the valuation part, we stop working. Some people say if you really like the management, buy it. If the valuation is out of whack, it means they probably deserve it. I have no problem with that, but that\'s not how I operate. Valuation is the No.1 criterion. And don\'t you think it should be if it\'s a value fund?

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