Wintergreen Fund's David Winters embraces the unloved and keeps management on its toes.

    Maybe it's the powerful sense of movement, or the thrill of taking a low-key, less-traveled route to an unfamiliar destination. For whatever reason, David Winters has been enamored with just about every aspect of railroads ever since he was a child. "From steam engines to little trains to big trains, I'm fascinated with all of it," says the 44-year old Winters, who still enjoys riding the rails in his spare time.
    As chief investment officer at Franklin Mutual Advisers, Winters took that attraction a step further by investing in a number of outwardly dowdy railroad companies that Wall Street shunned. To Winters, they held an appeal that extended beyond childhood fantasies. "Some of them had a lot of excess real estate, while others stood to benefit from efficiency gains," he says. "Their stock prices reflected none of that."
    Investors in the Mutual Discovery Fund, which he managed from early 2000 until May 2005, profited when those railroads sold their valuable real estate assets or when larger companies took them over. Those investments, plus a diverse lineup of other bedraggled securities of companies with hidden virtues, helped the fund compile a 9.5% annualized return during his management tenure, compared to a loss of 0.7% for the average world stock fund.
    More recently, he has become fond of companies that generate ample cash and have businesses that are able to raise prices without too much consumer resistance during inflationary times. "The world has woken up to the possibility of inflation and one of the best ways to protect an investment is buying a business that can raise prices, or one that it is less price sensitive because it caters to what people want," he says.
    One of his favorite holdings, Swatch, is the company behind a number of high-end watch brands such as Omega, Blancpain, and Longines. Winters figures the company could be worth two times what it trades for. And in the past, acquirers have paid top dollar for status watch companies.
Even if it remains independent, the Swiss company's snob appeal has staying power in any economic environment. "Watches have become a fashion statement and one of those status symbols that become more attractive as they get more expensive. Many consumers are willing to overlook price for cache," he observes.
    As for Winters, he'd rather stick with a good workhorse brand that he doesn't have to worry about losing. "I don't own an expensive watch and I am not into status symbols," he says.
    As an investor, Winters learned to value price over panache from famed value investor and shareholder activist Michael Price, who joined Heine Securities in 1975. In 1988, a year after Winters joined Heine as a research analyst, Price took over as sole owner and built the Mutual Series brand while managing its flagship fund, Mutual Shares. In 1996 he sold the firm to Franklin Resources of San Mateo, Calif. Winters was named director of research at Franklin Mutual Advisers in 2000, and was promoted to president and chief investment officer in 2001. In addition to managing Mutual             Discovery, he led the Mutual Series global and domestic equity value funds totaling $35 billion in assets.
    After years of working at a place many viewed as the house that Price built, Winters took the ultimate step toward an independent identity when he formed Wintergreen Advisers in May 2005, and opened the Wintergreen Fund in October. The fund's name was the brainchild of Wintergreen Advisers' CEO, a former general counsel at Mutual Series who now handles business and regulatory issues. "Wintergreen is a flavor with a nice connotation. It's easy to pronounce. And green is the color of money," he says of the name.
    Like some mutual fund managers who leave firms for greener pastures, he might have opened a hedge fund. "I can understand why others might want to go the unregulated route, but we wanted to do this with belts and suspenders," he says of his decision.
    His go anywhere investment style would certainly have been a good fit for a hedge fund structure. Wintergreen's mandate allows him to invest in securities of both U.S. and foreign issuers, including those from emerging markets. Its manager can use hedging strategies, sell short, and engage in arbitrage of securities of companies involved in restructurings. Stocks or bonds of distressed companies and even those working through bankruptcy are also fair game. So are corporate managers, who Winters sometimes challenges by taking an activist role through proxy battles, frequent contact with management or speaking to the press.
    At times, the fund may be heavily invested in cash. According to Winters, the percentage of assets in the fund devoted to cash was "somewhere in the mid- to high-twenties" at the end of June-significantly lower than the 47% level six months earlier, but still very high for a stock fund. He says that as the market comes down, he will deploy more of that money into securities.
    Finding undervalued securities that trade at a discount to what an outside buyer in an arms-length transaction might pay remains Wintergreen's core strategy. "When Wall Street collectively falls in love, valuations become tertiary. And when something falls out of favor, selling begets more selling. We try to take the emotion out of the process by figuring out what a company is truly worth."
    Winters seeks to capitalize on the difference between a stock's price, which is often driven by Wall Street whims, and a company's intrinsic value based on measures such as assets, cash or long-term earnings outlook.
    "Creating a portfolio is like making a string of pearls that are worth more than the market recognizes," he says. "It's a very compelling story when I can buy something wonderful, at half the value of the underlying business, that has good management pulling the oars in a direction we'd like to go."
In the past, Winters has been known to help move those oars in what he considers a favorable direction. "My style is simply to think and act as an owner," he says. "And part of doing that is acknowledging my right and obligation as a fund manager to take a stand on matters that affect shareholder value."
    After keeping a low profile for several months, Wintergreen Advisers filed a Schedule 13D with the Securities and Exchange Commission in May to disclose a 12.3% stake in Consolidated-Tomoka, which he describes as "an old timber company that owns 11,800 acres of land" in Daytona Beach, Fla. He insists his relationship with the company's management has been nonconfrontational thus far. "This is an asset play with interesting long-term appeal," he says. "We want to encourage management to stay focused on properties, manage cash flow, and engage in activities that will enrich shareholders."
    Foreign securities of developed markets, which Winters believes are still less efficient and less well analyzed than those in the U.S., account for about half the portfolio. A majority of those holdings are unhedged-a strategy that he says is effectively shorting against the dollar, which he believes will weaken further against other currencies over the long term.
    A favorite foreign holding, Imperial Tobacco, has ample pricing power and strong management, as well as a history of paying dividends and buying back stock. Its overseas location in the U.K. eliminates litigation risk. The underlying quality of its business is high, and its stock trades at a low valuation relative to the company's intrinsic worth.
    Winters cites oil and gas company Pogo Producing Co. as a holding whose performance has proved disappointing. "It trades at a massive discount to what it would be worth in an arms-length transaction, and that discount has widened since we bought it," he says. But things could improve if a big round of corporate mergers in the oil patch comes to pass, which Winters views as likely. He calls Pogo "a bite-sized morsel for a larger oil company."
Fund holding Anglo American, a dominant maker of diamonds and platinum that owns 45 % of diamond miner De Beers Group, is restructuring out of bankruptcy as management considers shedding its packaging and base metals divisions. The stock is trading at a big discount, and management is buying back a lot of it.
    The classic appeal of its products should help keep the company on solid footing even in just about any environment, says Winters, who observes that "Chinese women are convinced that they need diamonds to complement their jade, and boys will always like buying diamonds and platinum for girls."
Although years of economic recovery have left little opportunity for bankruptcy or distressed security plays, Winters is "optimistic about the future of bankruptcies. At some point interest rates will rise, the credit cycle will turn, and we'll get some big, fat, slow pitches."