Legendary Investor Betting on Another Stock Market Crash

By: Graham_Summers

Having studied under two legendary value investors Max Heine and Michael Price, Winters has a long history of producing outsized gains: before he was 40, he was overseeing some $35 billion in assets as Chief Investment Officer for Franklin Templeton Advisors. During this period (2001-2004), David outperformed the S&P 500 by an average of 10% a year.

In 2005, Winters struck out on his own to launch the Wintergreen Fund (WGRNX), one of the top performing mutual funds available to ordinary investors. Unfortunately, last year’s performance brutalized his returns, bringing the fund’s performance since inception to break-even. However, there is little doubt Winters will soon be back producing the large double digit gains his investors are used to: in 2006 he returned 20%, in 2007 it was 21% and year to date he’s up 10%.

With this kind of track record, Winters is one of my favorite investing legends to watch. Which is why I was absolutely floored to see his latest Quarterly holdings revealed a total of $116 million (15% of his $748 million portfolio) in US Treasuries all maturing between October 2009 and March 2010.

As you know, short-term Treasuries are primarily used as safe haven investments during periods of market volatility. Investing in them otherwise offers little if any reward (short-term yields currently stand at 0.14%-0.26%). So if someone’s loading up on short-term Treasuries today, they’re likely doing it out of fear, NOT greed.

The Wintergreen Fund’s prospectus gives us some insights as to what David Winters might be thinking:

The Investment Manager may keep a portion, which may be significant at times, of the Fund’s total assets in cash or invested in high-quality short-term, money market instruments, corporate debt, or direct or indirect U.S. and non-U.S. government and agency obligations, when it believes that insufficient investment opportunities meeting the Fund’s investment criteria exist or that it may otherwise be necessary to maintain liquidity.

For example, when prevailing market valuations for securities are high, there may be fewer securities available at prices below their intrinsic value. In addition, when the Investment Manager believes market or economic conditions are unfavorable for investors, the Investment Manager may invest up to 100% of the Fund’s assets in U.S. or non-U.S. dollar denominated short-term investments, including cash or cash equivalents.

Thus, the two possible explanations are:

1) Winters doesn’t see a lot of opportunity in today’s markets
2) Winters is worried about market volatility or a potential crash

Regarding #1, Winters regularly asserts that today’s markets are a value investor’s dream come true. Here are a few quotes from interviews he’s given in the last six months:

“… [today’s market] is heaven, it’s like gems on the beach.”
Smart Money Interview June 2, 2009

"… around the world as people become wealthier, we think there are a lot of ways to make money”
CNBC Interview May 28, 2009

“… it’s actually a great time to be a value investor… the smart investors are buying.”
Bloomberg May 9, 2009

“I’VE NEVER SEEN SO MANY TRIFECTAS IN MY LIFE — GOOD BUSINESSES WITH GOOD MGM’T AT LOW PRICES.”
Outstanding Investor Digest March 17, 2009

Obviously Winters sees opportunity in today’s market. So the idea that he’s got nearly 1/7th of his portfolio in short-term Treasuries because of “insufficient investment opportunities,” doesn’t work.

This, then, leads me to conclude that Winters is extremely worried about market volatility or a potential crash. Indeed, looking over his fund’s historic portfolio holdings, we see that Winters only began buying short-term Treasuries in May 2008, after the financial crisis had begun in earnest (Bear Stearns had already gone under).

Winters’ Treasury holdings hit a peak of 24% of assets in the wake of the financial collapse in November 2008. So it’s quite telling to me that despite a 25% rally in stocks since the November lows (42% since the March ’09 lows),

Winters continues to hold 15% of assets in short-term Treasuries. This is especially bearish when one considers that Winters is repeatedly stating that today’s market is a long-term value investor’s dream come true.

In light of this, I would argue that Winters expects greater market volatility ahead… possibly even another Crash. After all, if opportunities are so abundant, why does he have 1/7th of his portfolio in short-term Treasuries (a safe haven)?

I urge to you to be extremely cautious investing in today’s market. If investing legends like David Winters remain heavily invested in short-term Treasuries then were are DEFINITELY not out of the woods yet. I wouldn’t be surprised to see something of a repeat of last year’s September-November performance. Looking at David Winters portfolio, I’d say he’s thinking the same thing.

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Good Investing!

Graham Summers

http://gainspainscapital.com

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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