This 'Forgotten Fund' Is Exploding Thanks To Gold Stocks

Key Concepts

• Mullenamp Fund: A mutual fund founded by Ron Mullenamp, later managed by his son Jeffrey Mullenamp.
• Return on Equity (ROE): A measure of profitability that calculates how effectively a company uses shareholder equity to generate profits.
• Price Earnings Ratio (P/E Ratio): A valuation ratio of a company's share price to its earnings per share.
• Revenue Growth: The increase in a company's sales over a specific period.
• Value Investing: An investment strategy that involves buying securities that appear underpriced by the market.
• Growth Stocks: Stocks of companies that are expected to grow at an above-average rate compared to other stocks.
• Housing Bubble: A rapid increase in housing prices followed by a sharp decline.
• Financial Crisis: A severe disruption in financial markets characterized by sharp declines in asset values and failures of financial institutions.
• S&P 500: A stock market index representing 500 of the largest companies listed on stock exchanges in the United States.
• Gold Stocks: Stocks of companies involved in the mining and production of gold.
• SPDR Gold Shares ETF (GLD): An exchange-traded fund that tracks the price of gold.
• Central Banks: Institutions responsible for managing a state's currency, money supply, and interest rates.
• Inflation: A general increase in prices and fall in the purchasing value of money.
• Geopolitical Instability: Uncertainty and potential conflict arising from international relations.
• Treasuries: Debt securities issued by the U.S. Treasury Department.
• Currency Devaluation: A decrease in the value of a currency relative to other currencies.
• Gold Bubble: A period of rapid and unsustainable price increases in gold.
• Volatility: The degree of variation of a trading price series over time.
• Momentum Investing: An investment strategy that seeks to capitalize on existing trends in the market.
• Shareholder Equity: The value of a company's assets minus its liabilities.

Mullenamp Fund's Evolution and Current Strategy

Historical Performance and Challenges

The Mullenamp Fund, based in Wexford, Pennsylvania, was once a prominent performer, frequently appearing on Forbes' annual mutual fund honor roll. For two decades, it consistently outperformed the S&P 500 by employing a low-risk investment strategy. This strategy focused on identifying large and small-cap companies that met specific criteria: their return on equity (ROE) had to surpass their price earnings (P/E) ratios, and their revenue growth needed to be at least 10% annually. Notable holdings during this period included Ford, Alaska Airlines, and Lockheed Martin.

However, in the early 2000s, founder Ron Mullenamp began heavily investing in homebuilder stocks like NVR and Beazer Homes. This shift occurred during a period of significant "irrational exuberance" in the housing market, which was experiencing a bubble. This strategy led to a dramatic increase in fund assets, growing from approximately $200 million in the late 1990s to over $3 billion just before the 2008 financial crisis.

The financial crisis marked a turning point for Mullenamp and other value stock managers. The fund's assets experienced a sharp decline, falling to $1 billion by the end of 2009. Over the subsequent 15 years, an investment in the Mullenamp Fund yielded less than 9% annually, significantly underperforming the S&P 500, which delivered a 12% annual return during the same period, largely due to its increasing allocation to tech stocks. The fund continued to lose clients, and by 2023, its assets had dwindled to $350 million.

Transition to New Leadership and Renewed Success

In 2020, Jeffrey Mullenamp, Ron's son, assumed control of the fund. Jeffrey, a retired lieutenant colonel with 20 years of service in the army, joined his father's business as an analyst after retiring in 2008. He is currently 59 years old. Jeffrey acknowledges his father's past success, stating, "Ron's performance was extraordinary, but he ended up staying in those stocks too long, and the financial crisis hit."

Under Jeffrey's management, the Mullenamp Fund has experienced a resurgence, becoming one of the few actively managed mutual funds to outperform the S&P 500 over the last five years. The fund has achieved an average annual return of 17.6%, compared to the S&P 500's 16.5%. Year-to-date, the fund is up 14.6%, exceeding the broader index's gain of 13.6%.

Evolving Investment Philosophy: Value Meets Growth and Gold

While Jeffrey insists he is following his father's core philosophy, exemplified by the quote, "A good company at a high price is a bad investment," his stock selection demonstrates a more pragmatic approach, focusing on stocks with market momentum.

A significant aspect of the fund's current strategy is its substantial allocation to gold. The Mullenamp Fund currently holds 19% of its $400 million in assets in gold stocks. This move is driven by rising fears of inflation and geopolitical instability, which have caused the price of gold to more than double in the last five years.

The fund's initial foray into gold began with a small position in the SPDR Gold Shares ETF (GLD). This has since expanded to include significant investments in gold mining companies such as Pneumont, Agnico Eagle, and Royal Gold.

Jeffrey Mullenamp argues that gold serves as a superior portfolio hedge compared to treasuries. He points to the actions of central banks, which are purchasing approximately 1,000 metric tons of gold annually, representing nearly a third of global production. Simultaneously, federal deficits continue to widen. Mullenamp states, "Countries solve debt by devaluing currency. If you want to hide from that, you own gold."

Despite gold's impressive performance, with a more than 40% increase this year, Mullenamp does not believe a gold bubble is imminent. He anticipates that gold's upward trend could persist for years due to ongoing debt and deficit pressures impacting the dollar. He explains that fewer investors are entering the gold mining sector because many were "burned by miners last time when prices fell," noting that mining stocks tend to exhibit higher volatility than the price of gold itself. He cites Costco's recent success in selling gold bars online as further evidence of strong demand, remarking, "They sold like hotcakes."

Diversified Holdings and Adaptability

Beyond gold, the Mullenamp Fund also holds other "momentum friendly" stocks, including major tech companies like Microsoft, Berkshire Hathaway, and Apple.

Jeffrey Mullenamp views his firm as having adapted his father's value approach, now operating within the camp of "converted value investors who buy growth stocks." The investment process begins with screening for companies with above-average return on shareholder equity and a keen eye on inflation. Jeffrey emphasizes the renewed relevance of the ROE strategy, stating, "As inflation goes up, people pay for return on equity. This ROE strategy was a big leg up in the 1970s. Now it's relevant again."

For comprehensive details, readers are directed to Sergey Klebnikov's article on Forbes.com. This report was presented by Kieran Meadows from Forbes.