Peter Langerman, chairman, president and CEO of Mutual Series, part of the Franklin Templeton Investments fund family, employs an investment philosophy focusing on investments in distressed securities, “merger” arbitrage opportunities and undervalued stocks.
Mr Langerman seeks to identify undervalued stocks trading at a significant discount, while understanding and limiting downside risk. He seeks catalysts to unlock value, such as corporate restructurings, spin-offs and share buybacks.
Mutual Series has a long history of shareholder activism, and Mr Langerman recently led the company’s activities with Time Warner, Sovereign Bancorp and Arcelor.
Mr Langerman discusses his investment strategy with FT.com readers and answers questions on his global outlook and the role of shareholder activism in an online debate below.
(Mutual Series may have positions in markets discussed)
How do you think shareholder engagement works in countries where the legal system and cultural practices do not support activism? For example in civil law countries where families control paramount through holdings of dual-class shares?
Christine Knowles, Prague
Peter Langerman: When we analyse companies, the governance rules are a critical part of the equation. However, we are also finding that many corporate regulatory environments are moving, some slowly to a more transparent system.
Companies now must compete in a global market place for capital and I believe that trend over time will force companies to be more responsive to shareholders. However in the interim one does have to understand each of the regulatory environments in which one invests so as not to get caught in a value trap.
How crowded do you feel the space is for shareholder activism deals? What does one do in this environment to unlock value?
Joseph Andelin, UT, US
Peter Langerman: Shareholder activism has been around for along time, although there is now more talk about it. I believe that there are many companies both in the US and abroad that will continue to be interesting targets for activists.
The key is identifying companies whose assets are worth significantly more than the market is giving them credit for and whose managements are not taking the appropriate steps to shrink that value gap.
Although some 25 years ago I graduated with an economics degree, I am quite green when it comes to understanding how any of the investment markets work. Could you recommend a couple of books that might provide me with both a macro view of the markets, and perhaps one or two books that would provide me with a more specialised or micro view of the markets, such as the penny stocks or perhaps something less risky that might be worthy of a learning curve?
Norah Bird Hamilton, Alberta
Peter Langerman: I would recommend The Intelligent Investor by Ben Graham as the bible for value investors. I would also suggest you go back and read the annual reports from Berkshire Hathaway/Warren Buffet that can be found on the company website. By the way I wouldn’t suggest starting with penny stocks as they tend to trade less on fundamentals than on speculation.
In the Netherlands current discussions are going on about the role of the active shareholder (read hedge funds) against the interests of the long term shareholders (pension funds). The argument is that by unlocking value, a company is often forced to sell part of its activities destroying its long term potential. This is negative for the long term shareholders. Do you agree with this view, or do you believe that short term gains are beneficiary to all shareholders?
Jurjen van den Broeke, Netherlands
Peter Langerman: I believe that there are many times that managements use the cloak of “short terms investors” to hide behind real problems at the company. If managements and boards are doing the right things there is a consistency of approach for both “short term” and “long term” shareholders. It is management’s job to convince its shareholder population at large that they are appropriate stewards of the company’s assets.
Do you consider bringing and/or bring class action litigation against the directors of the companies you invest in to achieve your goals? Either way do you agree tort reform in the US is seriously overdue and reduced litigation costs might see the US competing again against London for new listings?
Douglas McBean, Edinburgh, Scotland
Peter Langerman: If we determine that managements and/or companies have behaved in a fashion that has damaged us, we certainly would consider bringing litigation. While there is an enormous amount of litigation in the US system, one of the benefits is that it does tend to focus managements and boards on their obligations.
I am a manager of the investment department at a Japanese insurance company. Japan has a good market in distressed securities, merger arbitrage opportunities and undervalued stocks. Where do you think the next fruitful market will be?
Toshio Matsui, Japan
Peter Langerman: We have been spending a fair bit of time looking at Japanese companies and believe that Japan will be a fruitful place for us over the next several years.
Many companies are becoming more interested in being run for the benefit of shareholders and a bit more transparent in their disclosures. We also see the beginnings of some interesting merger and acquisition activity.
We hear a lot about BRICs over in this part of the world. I appreciate that those areas will be volatile in the future - in that context do you think an investor would profit from investment exclusively in Brazil, Russia, India and China over the medium to long term? If so, how would you advise the small investor to make his investment? Could you recommend specific fund management groups?
David Stuart, Leeds, UK
Peter Langerman: My colleague at Franklin, Mark Mobius, manages a BRIC fund and that is one of his many areas of expertise. Mark has been active in developing markets for many years and is an outstanding manager. At this point those markets are not ones in which we at Mutual Series spend a lot of time although occasionally we find investments there that meet our value parameters.
As a non-expert in those markets I think that there are some tremendous opportunities because of the fact that they will be growth areas for many years to come.
I have a number of FTSE 100 investments: pharma, retail, and telecoms stocks. Where do you think this market is heading in the next 12 months?
John Coupe, UK
Peter Langerman: At Mutual Series we invest on a bottoms up basis not based upon a macro, top down view of the market. Therefore we don’t spend a lot of time trying to predict where the market is going in the near term.
I would say that we own in our portfolio some names in the pharmaceutical sector, as well as a number of telecom stocks, so we like those.
After tackling the activist investors for last few years Time Warner recently announced that it would spin off the Cable business. As an individual investor how does it benefit me? I haven’t seen any disclosure regarding whether the existing Time Warner shareholders well get a piece of the new company. Can you help us understand how a small investor should adjust his portfolio if the activist investors are on the door steps of a company in which you have invested?
Peter Langerman: With regard to Time Warner, it does appear that the company is taking steps consistent with many of the recommendations which the activist group recommended last year, and we are encouraged by that. “Small investors” just like large investors should pay attention to so called activist investors but following them in the marketplace is no guarantee of investment success. You still have to do your own investment analysis.
How do make profit from share buyback schemes?
James Namwanja, London, UK
Peter Langerman: When companies are buying back their own shares, it is presumably because the company thinks that its stock is the best use of its capital. Companies are sometimes incorrect in their judgment on this, but it is a strong sign to shareholders about the value of a company’s stock.
I have heard that in the next few years, the outlook for the dollar is bad and that we should be investing in foreign currencies. Which currency do you think holds the best prospect?
Peter Langerman: Again we are not in the business of trying to predict short term movements in the markets for stocks or for currencies. By and large we hedge our exposure to investments in non-US securities. However we do have a longer term view that the dollar will continue to be weak against most foreign currencies.