Though his fund does not invest according to any religious principles, Mulholland, a Catholic, was struck by what realizing one's talent in the investment business could entail. "I struggled with wealth accumulation, but I realized that if I do this job well, I may need to deal with wealth," he says.
Mulholland has certainly used his talents well and bolstered the wealth of some investors (including his family - he and his wife are the fund's biggest shareholders). In the last three years, Matthew 25, based in Jenkintown, Pa., has returned an annualized average of 24.4% a year through Jan. 10, placing it among the top 1% of large-cap growth funds, according to Morningstar. In the 10 years that ended on Jan. 10, the fund, which has $362 million in assets, was up an average of 8.9% a year, placing it in the category's best 13%.
A key to the fund's good showing seems to be Mulholland's free-roaming mandate, which allows him to find well-priced growth names in any industry he likes. Though the fund is categorized as a large-cap offering, he insists that's a misnomer. A few mega-cap names in the portfolio skew the average market weighting into large-cap territory.
Mulholland says he's been able to avoid blowups by practicing a simple valuation discipline: He rides stocks' growth swings for what he believes is three-quarters of the way out of a bear market before making his exit as prices move toward his calculation of fair value. When valuations get stretched, as they did in late 1999 and early 2000, Mulholland becomes defensive and may miss out on exuberant upswings.
BLINDSIDED IN 2008
The strategy misfired in 2008, however. The stock market plunge caught Mulholland off guard, and Matthew 25 declined 40.4%, its worst-ever one-year performance. Mulholland didn't fully appreciate how pervasive real estate and financial services had become in the economy because he didn't believe that stocks were overvalued at the time. "I got blindsided," he acknowledges.
He even says he's unsure he can prevent his fund from suffering a similar setback again. He did use the slump to stock up on bargains, however, which he is still riding to profits.
Mulholland believes the equity markets offer plenty of upside for quite some time. "We've had a stealth bull market, and the average person is not participating," he says, pointing to the fact that, for the fourth year in a row, asset flows into equities have dropped, according to research from the Investment Company Institute.
But Mulholland thinks there is room to run in the current bull market - arguing that the S&P 500's forward price-to-earnings ratio of 13.4, based on estimates from Birinyi Associates, is undervalued historically.
Mulholland spends a lot of time making sure he doesn't overpay for the holdings in his portfolio, which currently has just 21 names. When he believes the market is deeply undervalued or fairly valued - as he says it is now - he tends to have more names in his concentrated fund. When prices rise, he hunkers down and contracts into the high teens.
To understand if he's paying a fair price, Mulholland divides enterprise value (market value plus net debt) by EBITDA. He is on the hunt for companies whose multiple is less than 10. Mulholland likes the enterprise value-to-EBITDA measure because it can be used to compare companies across industries. P/Es can be distorted by a company's leverage and make debt-laden firms seem cheap.
Though his fund is concentrated in the number of names it holds, it still maintains diversification across sectors.
ENAMORED OF APPLE
Matthew 25's largest holding is Apple (AAPL). Mulholland loaded up on the stock in the market slump of 2008 and 2009, when the shares dipped as low as $78. Even after a recent tumble, Apple shares were selling recently for six times more than that. Apple's superior products - Mulholland's family alone has five devices - have helped define the current technological boom in mobile devices, he believes.
"You have all this potential right in the middle of a major technology change," he says, noting that he's only paying six times enterprise to EBITDA.
Apple has had its share of problems. The company reportedly cut orders for components in December, with the market speculating that demand for the iPhone 5 softer than expected.
