Franklin Mutual Advisers is close to starting a closed-end mutual fund for individual investors that will invest in special situations, including distressed bank debt and bonds. The Franklin Mutual Recovery Fund will join a handful of other funds that invest in distressed securities open to retail investors, such as Martin Whitman's Third Avenue Value fund and Legg Mason's Opportunity Trust. "Franklin has been investing in distressed securities since the 1950's and we have a great deal of institutional knowledge relating to distressed investing," stated Michael Embler, v.p. in charge of the distressed investing effort. Embler will be co-portfolio manager with David Winters, who is the president and CIO of Franklin Mutual Advisers. One of the trustees for the fund will be distressed debt guru Edward Altman, the Max L. Heine Professor of Finance at New York University. Winters was traveling and could not be reached for comment.
The distressed, risk arbitrage and special situation strategies that Franklin already pursues in the broader funds and which will be the focus of this fund are subsets of the value investing strategy, Embler noted. But, this will be the first time Franklin has offered a concentrated distressed and special situations fund that will be offered to retail investors. "It's an attractive vehicle for folks who are relatively sophisticated, but is not a hedge-fund structure," said Embler. The fund will offer returns with a low correlation to the U.S. equity markets and will seek investments in bankrupt and distressed companies and risk arbitrage--the securities of companies in announced mergers, acquisitions or restructurings and undervalued stocks--according to a Securities and Exchange Commission filing.
Responding to a question on the timing of the fund, Embler said most [distressed] funds that started a year ago had a very tough time given results in the second half of 2002. "While ideally we would have liked to have opened the fund at the end of the year, it takes a long time to shepherd this process and we think there will continue to be opportunities both in distressed and potentially in some of the other areas, which the fund is pursuing." Assets have not yet been bought for the fund, since approval is required from the SEC.