Mainstay fund offers solid safety of old values

Diversity, experience are its strong points

Dollars & Sense

January 06, 2002|By Gregg Wolper | Gregg Wolper,MORNINGSTAR.COM

After another tumultuous and disappointing year for fund investors, portfolio diversification and experienced management seem more important than ever. An overlooked mid-cap fund known as Mainstay MAP Equity can help provide you with both.

In the 1990s we named this offering a "forgotten fund" more than once because it had minuscule assets despite a fine record. At the end of 1998, for example, it had a mere $57 million despite four straight years of above-average performance in the mid-blend category. It joined the Mainstay family the next year and now has more assets - about $350 million across all its share classes - but it remains off most investors' radar screens.

It's worth taking a look at this one, because Mainstay MAP Equity offers a wealth of experience in the managerial ranks and has amassed an excellent long-term record by using uncommon but straightforward techniques. For example, co-managers Michael Mullarkey (who has been at the helm since 1981), Roger Lob (who joined in 1987) and new addition Chris Mullarkey (Michael Mullarkey's son) pay much closer attention to insider buying and share repurchases than do most portfolio managers.

Such information is available to all and does not in itself provide reliable buy or sell signals. But these managers know the companies they follow inside and out; in some cases, they've been following them since the 1960s. So they are able to incorporate elements such as insider buying into the larger picture of companies' health, relying upon indicators such as free cash flow as well as broader portents such as changes in the political or economic environment or the installation of new management.

For example, when emerging markets suffered one of their periodic crises in 1998, the elder Mullarkey bought Bankers Trust after its share price had plummeted because of its emerging-markets exposure. He believed the firm would not only weather that storm, but would also profit from falling interest rates and a rumored merger with Deutsche Bank. He was right, and the stock's price zoomed upward.

More recently, he bought shares in several stocks that he thought would benefit from increased spending by the Defense Department and other organizations newly alert to the need for data storage. Some of these stocks, such as Advanced Digital Information ADIC, were also being bought by insiders. That's typical of the combination of factors that inspire these managers.

Their approach has worked year after year. The fund's 10-year annualized return of 16.6 percent through November 2001 puts it ahead of more than four-fifths of its category peers. And its volatility level has been among the very best - meaning it has had one of the smoothest rides in its class.

The fund's costs are reasonable, too. Although the A, B and C shares - instituted after the switch to Mainstay from its previous sponsor - have expense ratios about average for the category, the fund pays attention to costs in ways that don't show up in the expense ratio. New co-manager Chris Mullarkey has had many years of experience working at an electronic trading firm, using a new type of platform that shaves the cost of trades, and under his influence, the fund has already instituted changes in its trading arrangements that will lead to substantial savings for shareholders.

There's one note to keep an eye on here. Although the managers work together closely, they manage separate portions of the portfolio. Michael Mullarkey has usually run about three-fourths of the money, but he says that could change. How so? He won't elaborate, beyond noting that son Chris, who now has just 1 percent or so of the portfolio under his control, would likely see that amount increase. Unless the elder Mullarkey steps down entirely, however, this doesn't seem a concern. All in all, the fund remains deserving of more attention.

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