Christian Correa

Value investor looks for opportunities where market is "overly pessimistic or simply wrong."

Michael Ryval 2 March, 2012 | 7:00PM

A bottom-up value investor, Christian Correa is mindful of global trends because of their impact on large-capitalization companies that have multinational operations. He is also aware that markets are too hasty in their reactions and often misprice companies.

Consequently, "we look for opportunities where we can see real value that the market is overly pessimistic or simply wrong about," says Correa, a portfolio manager with Short Hills, N.J.-based Franklin Mutual Advisors LLC, who oversees the $253-million Mutual Beacon.

In seeking companies that are trading at sizeable discounts to their intrinsic worth, Correa studies their cash flows and balance sheets. There are about 100 names in the portfolio, which is benchmarked against the S&P 500 Index, although about 25% of the assets are held outside the United States.

Surprisingly enough, one top holding is Microsoft Corp. MSFT, the information-technology colossus. "There are a lot of ways in which it exemplifies value today," says Correa. For one, Microsoft stock trades at nine to 10 times current earnings, a discount to the U.S. market.

"That translates into a 10% earnings yield, which is a high return historically. It looks pretty cheap," says Correa, adding that Microsoft has US$40 billion net cash on its balance sheet and a track record of returning cash to shareholders in the form of rising dividends or share buybacks.

It's the latter that holds his attention as well as the anticipated introduction of Windows 8 later this year, which will run on tablets and compete with the iPad. "We could see a whole range of new products. That would be the near-term catalyst," says Correa, who shares duties with Mandana Hormozi. "But the company is very undervalued based on its current earnings, and not taking into account new earnings from making a big splash in the tablet market."

A native of Littleton, Colorado, Correa is an 11-year industry veteran with a varied background in economics and law. He attended Claremont McKenna College in California, where he earned a BA in philosophy, politics and economics in 1994. He spent a year studying for an MA in economics at Northwestern University and completed the program in 1996 while working for a small Chicago software firm.

 
Christian Correa

Correa turned his attention to the study of law at Harvard University, although his interest was in the world of finance. "I thought the legal training would give me a more unusual set of skills than the average person in the financial world," he says, adding that the law school provided access to many courses at the Harvard Business School.

On graduation in 2001, Correa joined Lehman Brothers, where he handled merger-arbitrage research. But in June 2003, he decided to switch to the buy side and moved to Franklin Mutual.

Correa began as a research analyst and was soon promoted to co-manager alongside Michael Embler, the lead manager of Mutual Beacon. However Embler left the firm in May 2009, just as the fund was recovering from a disastrous 2008 that resulted in a 44.8% loss, worse than the negative 37% return for the S&P 500 Index.

"At the beginning of the decade there were three years in a row when the market was down, and each year the fund outperformed the market," says Correa. "If you look at 2008, the crisis really hit the financial sector and companies that had leverage. We've long been involved in financials where we have made very good returns. We were probably guilty of not understanding how bad it was going to get, although we were not unique in that."

The performance of the 2-star rated fund has improved over the past few years. Though it lost 1.5% for the 12 months ended Jan. 31, it outperformed the median loss of 5.1% in the Global Equity category. And on a two- and three-year basis, it returned an annualized 4.6% and 12.1%, respectively, compared with 3.3% and 8.9% for the median.

Looking back, Correa observes that it's easy to underestimate how volatile the market can be, and how valuations can be damaged by market perception. "Understanding how that cycle works was burned into me in 2008."

Still, he is taking a longer-term perspective and focuses on companies such as Vodafone Group PLC VOD, a global wireless firm that has a minority stake in U.S.-based Verizon Wireless. One of the main attractions is that Verizon's parent company, Verizon Communications Inc. VZ, wants to get its cash out of the subsidiary and to do so must share it with Vodafone.

"We expect that cash will come out of Verizon Wireless," says Correa, adding that the two partners could reach an agreement to resolve the ownership of Verizon Wireless. "Our belief is that there is potential for significant realization of value that the market has not given Vodafone credit for."

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Michael Ryval

Michael Ryval