MUTUAL SOUTHERN BANC CORP.

Consistent Capital Appreciation

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SERVICES

By artfully identifying opportunity, capably monitoring progress and carefully balancing risk, Mutual Southern Banc Corp. has created an investment strategy that affords our clients the opportunity for significant wealth enhancement.


The aspect of our communications that our clients appreciate most is the personal touch.

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CLIENT COMMUNICATIONS

Mutual Southern Banc Corp.'s clients include high net worth individuals and leading institutions including universities, foundations and retirement plans.


We communicate with our clients frequently and openly. Quarterly written reports summarize a client's entire portfolio, including assets, income, expenses, transactions and overall performance. Periodic market letters assess the state of the economy, review our investment strategy and discuss the outlook for our clients' portfolios.

However, the aspect of our communications that our clients appreciate most is the personal touch. Clients have direct access to our Client Service Team professionals, and many are in frequent contact with us to discuss their portfolios. Many of our investors are knowledgeable about the companies in their portfolios and achieve great satisfaction from closely following their performance.


Each client is paired with members of our Client Service Team as their personal Mutual Southern Banc Corp. investment partners.

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INVESTMENT APPROACH: 
Mutual Southern Banc Corp.'s Investment Approach is a Four Step Process 

Step 1: 

Screening thousands of publicly traded companies each year to identify the potential for significant value that is currently unrecognized by the stock market.

Why does undervaluation exist?

  • Fundamental change. Significant changes (new management, new product, improved market conditions, etc.) can go unnoticed or be misunderstood,
  • Negative perception of the company. Companies can fall out of favor with investors due to short-term earnings disappointments or other corporate events.

Our research to identify companies with undiscovered value takes several forms:

  • Conducting extensive financial screening using our proprietary analytical capabilities,
  • Gaining referrals from our broad contacts across the business spectrum, including recommendations from current portfolio companies and investors, and
  • Using our own in-depth knowledge of many industries. In identifying opportunities, our senior investment professionals draw upon operating experience or domain expertise in diverse fields such as financial services, media, real estate, technology, communications, computer software and healthcare.

 

Step 2: 

Confirming undiscovered value through rigorous financial analysis, focusing on "discretionary cash flow."

Once potential investments have been identified, the real work is only beginning:

  • Companies are subjected to exhaustive financial analysis to assess the nature and extent of the business's true, intrinsic economic value and its ability to sustain growth into the future, and
  • Mutual Southern Bank Corp.'s research focuses heavily on quantifying a company's discretionary cash flow - the cash generated from operations less the capital expenditures and other investments that are necessary to sustain and grow the business.

Why do we focus on discretionary cash flow?

  • It is a superior measure to earnings per share, the indicator typically used by many analysts, and
  • Reported earnings per share can be artificially inflated; discretionary cash flow as we calculate it is more certain.

Most importantly, companies use discretionary or free cash flow to accomplish a number of goals, all of which may increase shareholder value. Companies may:

  • Buy back stock,
  • Pay down debt,
  • Pay dividends to shareholders, and
  • Buy new businesses that enhance the overall value and strategic strength of the company.

Rather than buying "stock," we approach the investment process as though our intent is to acquire the entire company. This commitment to "acquisition due diligence" takes us through the target company's business fundamentals, necessitates detailed scrutiny of the reported financial statements, requires us to understand the quality of management and the nature of corporate governance, and ultimately involves the determination of a specific value for the entire business.

Our research-driven, value-oriented approach is driven by straightforward concepts:

  • Financial accounting practices allow for substantial fungibility of reported earnings, whereas cash earnings and free cash flow can be quantified absolutely.
  • The function of a business enterprise is to generate free cash flow for its owners.
  • A business is worth the net present value of future free cash flows with a discount factor adjusted for the risks inherent in the business.
  • Management's competence, agenda and incentives will materially impact the outcome.

Step 3: 

Learning all we can first-hand about the quality of management.

Once we are satisfied with a company's financials, our next step is to learn all we can about its management and other qualitative factors by:

  • Contacting members of senior and middle management, to gain an initial impression of management's quality and operating philosophy,
  • Assessing their competence and commitment to creating shareholder value, and
  • Interviewing key customers, competitors and suppliers to gain their perspectives on market and competitive factors affecting the outlook for the business.

Most importantly, we generally hold in-depth conversations with company management to gain first-hand insights into intellect, motivation, operating philosophy and style. We learn about business priorities, spending practices and compensation policies.

These contacts are invaluable in confirming the potential we have identified through our financial analysis and in allowing us to evaluate the CEO, CFO and the senior management team. We immerse ourselves in the company. We pick up signals and pursue issues that would be difficult, if not impossible, to identify through Wall Street research or financial analysis alone.

Step 4: 

Capturing the undiscovered value for our investors.


Once we are satisfied that the level of discretionary cash flow and the overall quality of management meet our criteria, we are ready to capture the undiscovered value for our clients. We typically do this by taking significant positions and we often rank among the largest shareholders of the company.


Due to our significant stake, we frequently cooperate as if we are partners with management, supporting them in a collaborative, active way as they pursue their strategies to create and realize shareholder value.


We typically hold our positions for years to capture the full benefit of the value identified through our proprietary research. We track our positions continuously and sell when, in our estimation, warranted by a change in a fundamental aspect of the company or full value is close to being achieved in the stock price.


Another advantage of our buy-and-hold strategy is low portfolio turnover. This reduces trading expenses, increases unrealized gains versus realized gains, and favors long-term capital gains over short-term capital gains. Therefore, our portfolio management tends to be relatively tax efficient.