In the 1990s, Muhlenkamp Fund’s clever value investing formula made it a star among no load mutual funds. Then the long tech bull market left it in the dust. A new generation is making a comeback.
Twenty years ago Wexford, PA-based Muhlenkamp Fund was a perennial star on Forbes annual mutual fund Honor Roll list. Year-after-year it bested the S&P 500 using a low risk investment formula seeking large and small cap companies whose return on equity surpassed their price-earnings ratios and whose revenue growth was at least 10% a year.
It owned stocks like Ford, Alaska Airlines and Lockheed Martin. But in early 2000’s founder Ron Muhlenkamp began loading up on stocks of homebuilders like NVR and Beazer Homes, which appeared to be great bargains on paper, just as the housing bubble was filling up with irrational exuberance. Fund assets swelled from around $200 million in the late 1990s to more than $3 billion just prior to the Financial Crisis.
That’s when Muhlenkamp and other value stock managers hit a wall. The fund’s assets plummeted to $1 billion by the end of 2009. Over the next 15 years, an investment in Muhlenkamp Fund would have produced less than 9% per year while merely owning the increasingly tech-heavy S&P 500 would have produced a 12% annual return. The family fund continued to lose customers and by 2023 assets were $350 million.
Enter Ron’s son Jeffrey Muhlenkamp, who had spent 20 years in the army and retired as a Lieutenant Colonel in 2008 before joining his father in the business as an analyst.
“Ron’s performance was extraordinary, but he ended up staying in those stocks too long and the financial crisis hit,” recalls Jeff, 59, who assumed control of his family’s namesake fund in 2020.
Under Jeff’s skillful management, Muhlenkamp has emerged as one of the few actively managed mutual funds to beat the S&P 500 over the past five years, with an average annual return of 17.56% versus the S&P’s 16.47%. Year-to-date the fund is up 14.3%, outpacing the broader index’s 12.6%.
And while Jeff insists his investment philosophy is following in his now 81-year old father’s footsteps, dishing out quotes like “A good company at a high price is a bad investment”, his stock selection reflects a more pragmatic approach in terms of buying stocks that have the market winds at their back.
Currently his mutual fund has 19% of its $400 million in assets in gold stocks as fears of inflation and geopolitical instability have caused the price of gold to more than double in the last five years. For Muhlenkamp Fund, it began as a small position in the SPDR Gold Shares ETF (GLD) which has since evolved into a large allocation to miners such as Newmont, Agnico Eagle and Royal Gold.
Gold, Muhlenkamp argues, has been the better portfolio hedge than Treasurys since Covid. Central banks, he notes, are buying roughly a thousand metric tons of gold a year, nearly a third of global production, while federal deficits keep widening. “Countries solve debt by devaluing currency,” he says. “If you want to hide from that, you own gold.”
With gold up more than 40% this year, does Muhlenkamp worry about a gold bubble? Quite the opposite. Muhlenkamp thinks gold’s run could continue for years as debt and deficits weigh on the dollar.
“Nobody’s buying more [gold] mines because too many investors got burned by miners last time when prices fell,” he says, noting that miners tend to trade more volatility than the price of gold. He laughs recalling Costco’s recent foray into selling gold bars online, under its Kirkland label, which only reinforced his bullish conviction: “They sold like hot cakes.”
Other big momentum-friendly Muhlenkamp holdings include Microsoft, Berkshire Hathaway and Apple. Muhlenkamp says he has adapted his father’s value approach, and sees his firm firmly in the camp of converted value investors who buy growth stocks—when the math works. Muhlenkamp starts with screening for above-average return on shareholder equity and keeping an eye on inflation. “As inflation goes up, people pay for return on equity,” says Jeff Muhlenkamp. “This [ROE] strategy was a big leg up in the 1970s… Now it’s relevant again.”
Very important to Muhlenkamp version 2.0 is how management incentives are structured, and how buybacks are handled. Muhlenkamp is skeptical of executives who treat repurchases as routine. “If a CEO says, ‘we are just returning cash to shareholders,’ I’m usually less interested,” says Muhlenkamp. “You bust your tail to make this cash and then you don’t care how you invest it?”
He says the fund’s holdings of Microsoft and Apple, for example, were bought a decade ago not as tech darlings but as steady cash cows. “Microsoft was 10–12x earnings with a 4% yield… that was better than cash,” says Muhlenkamp. “Then cloud showed up and it became a growth stock again—we’ve made 10x.” Apple, meanwhile, was partly trimmed ahead of its 2022 slide; Muhlenkamp calls it “a cash cow that still needs a new product cycle to grow again.”
The fund’s longest holding and one of its biggest winners is Rush Enterprises, an $8 billion (revenues) Texas-based truck dealership they first bought in 2001. “We have made something like 45 times our money,” Jeff says. The appeal: a consolidation story with a high-margin service engine attached. “They’re only about 5% of new truck sales—still a lot of runway,” he says. “I’ll only sell if they quit doing what they’ve been doing.”
EQT, the Marcellus gas producer, is another of the fund’s conviction bets. Muhlenkamp likes the company because they are low cost producers, have disciplined management and will benefit from rising demand for cleaner energy. “The Rice brothers remade the company,” he says. “When we ran the numbers, even if their free-cash projections were half right, it was a 15% yield… that looked very attractive.”
What the fund doesn’t own—or is selling—matters just as much. “I think AI is somewhere between a boom or a bubble, and the difference is immaterial,” insists Muhlenkamp leaning into his value investor pedigree. “It will be very difficult for future reality to match current expectations so I am very leery of stocks which have been driven by their AI exposure.”
In January fund exited Broadcom, an AI infrastructure company that recently struck a partnership with OpenAI, after a five-year run. “It was at 25x sales. Has it doubled since we sold? Yes. Do I regret selling it? No,” insists Muhlenkamp. His only remaining AI-linked holding, MasTec, a $16 billion market-cap construction firm that builds data centers, is “on the worry list,” because capital-spending pledges from hyperscalers might not fully materialize. The rest of his portfolio has rotated toward manufacturing and healthcare—sectors still out of favor after a two-year industrial downturn.
To Muhlehkamp, AI’s parallels to past investment crazes are obvious. “Capital-spending booms always end in a bust,” he says, citing shale energy and housing as examples. “If we get a bust, that’s when the bargains will appear.”