Monthly Archives: August 2009

Third Avenue Sees Value in Debt

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By Daisy Maxey (WSJ)

Deep-value manager Third Avenue Management Inc. is launching its first debt fund, which will invest in a concentrated portfolio across the credit spectrum.

Third Avenue Focused Credit Fund, available to investors Monday, will invest in debt with any credit rating or without a credit rating, and may invest without limitation in distressed securities or other debt that is in default or the issuers of which are in bankruptcy. It may also hold significant positions in equity or other assets it receives as part of a reorganization process.

The fund will invest in below-investment-grade credits the manager believes to be undervalued, including junk bonds, bank loans and convertible bonds or preferred stock. It may also invest in debtor-in-possession financing.

Third Avenue Focused Credit Fund will be available through major nontransaction-fee programs.

The new fund, the New York asset manager’s first in eight years, will be managed by Jeffrey Gary, who joined Third Avenue from BlackRock Financial in June. Mr. Gary had headed BlackRock Financial’s high-yield/distressed investment team, which managed about $17 billion, since 2003. Previously, he was a senior high-yield and distressed portfolio manager at AIG/American General and Koch Industries, and a distressed analyst at Cargill Financial before that.

The fund is an extension of all the credit and distressed investing Third Avenue has done over its 23 years and is being launched in response to demand from its clients, Mr. Gary said. The firm currently manages about $1 billion in credit and distressed securities through its various equity portfolios and a dedicated hedge fund, which has been available to institutional investors since 2003, he said.

Third Avenue Focused Credit will employ Third Avenue’s tested deep-value approach based on independent, thorough fund research and will focus first on downside protection, Mr. Gary said. It will be supported by a team of six dedicated investment professionals, he said, with an average of 13 years of investment experience in distressed and high-yield credit investing as well as financial restructuring.

The fund’s ability to invest in all areas of the credit market gives it an advantage over many of its competitors, which are limited to a narrower range, Mr. Gary said. It will focus on investing in its “higher conviction” ideas, he said, limiting its investments to a concentrated portfolio of 50 to 60 companies. Third Avenue’s research on the top 25 high-yield funds shows that they hold 350 companies on average, he said.

“We view this market as very good for credit-pickers like Third Avenue to be able to outperform,” he said.

Famed value investor Martin Whitman, founder and co-chief investment officer of Third Avenue, is known for buying distressed companies for his Third Avenue Value Fund (TAVFX) and co-wrote the book “Distress Investing: Principles and Technique,” published in April.

The new fund’s investor class requires a minimum initial investment of $2,500, while its institutional class requires a minimum initial investment of $100,000.

Its investor class shares (TFCVX) charge annual operating expenses of 1.71%, including a management fee of 0.75% of assets, though a fee waiver and/or expense reimbursements in place for one year reduce that to 1.4%, according to its prospectus. Institutional class shares (TFCIX) charge annual operating expenses of 1.27%, including a 0.75% management fee, though a fee waiver and/or expense reimbursements in place for one year reduce that to 0.95%, according to the prospectus.

Spencer Capital leads charge against VXGN board (via

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Spencer Capital has filed preliminary proxy documents to remove the board of VaxGen Inc (OTC:VXGN). In the documents, Spencer Capital, which leads a group of investors calling themselves “Value Investors for Change,” call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:

VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.

We’ve been following VXGN because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.

VXGN has now also attracted the attention of BA Value Investors, which has disclosed an activist holding and called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”

VXGN is up 25.0% since we initiated the position. At its $0.60 close yesterday, it has a market capitalization of $19.9M. We last estimated the company’s liquidation value to be around $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. The authors of a letter sent to the board on July 14 of this year ajudge VXGN’s liquidation value to be significantly higher at $2.12 per share:

Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.

Spencer Capital’s proxy solicitation is a welcome relief, and, with any luck, we will see a liquidation of VXGN soon, either at the hands of the present board, or by Value Investors for Change.

The preliminary proxy statement sets out the Value Investors for Change group’s “Reasons for the solicition” thus:

Even though VaxGen does not have substantial operations, Value Investors for Change believes that the Company has valuable assets, consisting of cash and net operating loss carryforwards (“NOLs”). We believe these assets should be unlocked for the benefit of shareholders, rather than consumed over time by the current Board.

We do not believe the members of the current Board are acting in the best interests of stockholders. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. Instead, the Board has overseen the consumption of a large portion of the Company’s assets while paying itself exorbitant compensation. In addition, the Board’s interests are not aligned with the stockholders, as displayed by their miniscule equity stake in the Company.

Consumption of Assets

Since discontinuing its operations, the Company has consumed a significant amount of assets. According to its most recent quarterly report on Form 10-Q, since June 30, 2008, the Company’s assets have decreased by $31.7 million, or 45%. Since December 31, 2008, the Company’s assets have decreased by over $3.5 million, or 8.4%.

In addition, the Company recorded $3.6 million in general and administrative expenses during the six month period ended June 30, 2009. Much of this expense consisted of cash compensation to the Board.

Exorbitant Board Compensation

Despite the relatively simple task of overseeing a shell company and conducting an ordinary sale process, the Board has paid itself inordinately high compensation. While it is difficult to envision the rationale for the high cash compensation awarded to the Chairman Kevin Reilly and Franklin Berger, the most excessive portion of the director compensation consisted of the payments to the non-employee members of the Strategic Transactions Committee. Beginning in May 2008, Board members Lori F. Rafield and Paul DeStefano received $20,000 per month and $15,000 per month, respectively, for service on the Strategic Transactions Committee, which was formed to identify, review and evaluate potential strategic transactions and alternatives. Within a few months, these directors increased their compensation to $32,000 and $27,000 per month, respectively. This compensation is extraordinarily excessive.

Insignificant Board Equity Ownership

The members of the Board hold very few shares of the Company’s common stock. Most of the Board’s beneficial ownership holdings consist of underwater stock options. The following table describes the stockholdings of the Board, as set forth in the 2008 annual report, excluding options.

This Board has failed to take the steps we believe are necessary to preserve and enhance stockholder value. We believe the actions taken by the Board indicate that they are more interested in acting in their own self-interest rather than in the best interests of stockholders.

Value Investors for Change urges you to vote FOR the Fund’s proposal to elect the Nominees on the enclosed WHITE proxy card, thereby ending this disregard for stockholder interests. Vote to elect a new slate of directors who are willing to stand up for the interests of all stockholders and work to maximize stockholder value.

The members of the Board hold very few shares of the Company’s common stock. Most of the Board’s beneficial ownership holdings consist of underwater stock options. The following table describes the stockholdings of the Board, as set forth in the 2008 annual report, excluding options.

Grant’s Interest Rate Observer – Free Issue

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A free issue of Grant’s Interestrate Observer, one of the best investment newsletters around, is available here.

The Greenback Effect – A NYT Op-Ed by Warren Buffett

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By Warren E. Buffett

In nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.

But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.

Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Private Equity Holds Its Cash

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By Oliver Smiddy (WSJ)

Private-equity firms last year attracted new funds at more than twice the rate they made investments, according to new research.

Although fund raising by the private-equity industry globally fell 8% last year compared to 2007, the fall was far less than the 40% decline in capital invested by the industry, according to an August report by research group International Financial Services London.

The accumulation of cash could signal that private-equity firms expect the pace of deals to pick up soon or, at the very least, that they want to avoid a scenario in which they don’t have the funds to exploit an economic recovery while rivals ride bargain prices to stellar returns.

IFSL’s research showed the private-equity industry manages $2.5 trillion in funds, a 15% increase from the 2007 figure, which IFSL said was because of strong fund raising in the first half of last year. Funds available for investment totaled $1 trillion, about 40% of total assets under management.

If they don’t invest those funds soon, private-equity firms will have some explaining to do. They charge investors about 2% of the funds they raise each year.

There have been worries that private equity’s traditional investors have too much of their wealth tied up in investments that are hard to convert into cash. But the industry was still able to raise $450 billion in capital last year. The industry invested $189 billion over the same period.

One reason for private equity’s continued ability to attract investment may be that it has convinced investors that the industry reacted quickly to the downturn and reined in costs at the companies they own.

Almost 90% of U.S. private-equity firms have cut jobs at their portfolio companies, according to a March poll of 100 private-equity executives and professionals by advisory firms RSM Bentley Jennison and RSM McGladrey. More than 80% said they had improved their working-capital management, the next most prevalent cost-cutting step. About three-quarters froze salaries at their portfolio companies.

Fund raising globally has still fallen this year, with less than $100 billion raised in the first half — equivalent to a 66% drop on the figure for the six months of 2008, IFSL said.

“The slowdown in private-equity investments and funds raised in the first half of 2009 is likely to persist for the rest of the year,” said Marko Maslakovic, IFSL senior economist.

Private-equity firms’ struggles last year to obtain debt financing from banks have extended into this year. Deals over the first six months fell 80% to $24 billion from the year-earlier period, the lowest first-half level for 12 years, according to IFSL.

Can the Supreme Court Undress High Fund Fees?

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by Jason Zweig (WSJ)

Seldom does anything on the U.S. Supreme Court docket hit you right in the pocket.

The case of Jones v. Harris Associates, now pending before the high court, could create new standards for setting mutual-fund fees. That is critical to the future returns of the 53 million American households that own the funds.

In August 2004, three investors in the Oakmark funds sued Harris Associates, the firm that created and manages the stock funds. The investors alleged that the funds’ fees were excessive and that the board of directors, which is responsible for approving fees, wasn’t sufficiently independent. The investors also pointed out that Harris charged separately managed accounts for pension funds as little as half what it charged retail mutual funds for similar services.

Harris responded that its fees were reasonable — for the flagship Oakmark Fund, annual expenses were around 1.05% and now are 1.1% — and that its trustees did a careful and uncompromised review. Harris said that serving a few big pension clients is cheaper than handling a multitude of mutual-fund investors.

The Supreme Court is stuck with this case since nobody else has figured out how to make directors get tougher on expenses. In 1966, the Securities and Exchange Commission noted that fund fees remained stubbornly high “because of the absence of competition…and the difficulty of effective action by unaffiliated directors.”

Being a fund director carries nice benefits, like earning as much as $200,000 a year for showing up at a handful of meetings, sometimes at fancy golf resorts. But a directorship also entails dilemmas. Directors’ compensation is paid by fund shareholders but set by the fund manager. Biting the hand that feeds you isn’t easy.

The Supreme Court has no business setting fees, but people watching the case said they expect the justices to get their hands dirty, providing fund boards with guidance on how to negotiate fairer fees.

First, the Court should spotlight the shameful legal loophole that permits former executives of the investment manager to shape-shift into “independent” board members once they have been out of the firm for two fiscal years.

No former executive of the fund manager should ever be regarded as independent or allowed to vote on fees. “You can’t have people who have a conflicted interest in negotiating the best possible fees for themselves or their former colleagues,” says Max H. Bazerman, an expert on negotiation at Harvard Business School.

Many funds have “breakpoints” in their fees; when assets rise above a certain level, providing economies of scale to the manager, expenses drop.

At Pioneer Equity Income (assets: $870 million) the management fee is 0.6% on the fund’s first $10 billion in assets; it drops only to 0.575% thereafter. And the fund will need to increase more than $9 billion from the current level to earn even that small discount.

The way Pioneer’s breakpoints work is hardly unusual. Not all fund boards systematically review breakpoints — and often the fee reductions are tiny, difficult to achieve, or both. This issue has been raised in “friend-of-the-court” briefs filed in the case. Dan Calabria, a 40-year veteran of the fund business who retired in 1992 as president of Templeton Funds Management, thinks boards are perennially fooled by the way managers set breakpoints. “You sit there and you’re stunned at how inconsequential it is,” he says. “Most breakpoints are meaningless rounding errors.”

So the Supreme Court should mandate a formal, annual review of breakpoints, looking explicitly at how fairly the benefits of asset growth are accruing to the fund’s investors.

Another former fund-industry chief executive told me this harrowing story: “I sat in on a management meeting where a senior guy said, ‘This fund’s performance is so bad, all the investors must either be dead or dumb. Nobody will object if we raise the fees.’ It became: ‘Let’s raise the fees, just because we can.’ ”

The former executive adds that when the request for higher fees came before the board, “all the information came from the inside staff,” putting it in a more positive light.

The court should spell out the kind of objective data that boards must review in order to evaluate whether fees are fair, including what other clients pay for equivalent services, what investors in an index fund would pay and how much more — or less — it costs the manager to run a big fund than a small one. Fees will never fall in a world where management spins the data to its own benefit.

For Global Investors, ‘Microfinance’ Funds Pay Off — So Far

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By Rob Copeland (WSJ)

Investing in funds that make small loans to third-world borrowers has been lucrative the past 12 months. But the weak global economy has some investors worried about trouble ahead.

The $30 billion industry, partly made up by small lenders on the ground financed by bigger microfinance investment funds, has been expanding its lending at a 40% to 50% annual pace over the past five years, according to the Consultative Group to Assist the Poor, a research institute hosted at the World Bank.

Those microfinance funds have returned 4.47% for investors the past 12 months, according to a benchmark index, compared with a 22% loss by the Standard & Poor’s 500-stock index.

While the inflow of funds from the Western world has allowed lending to boom to small borrowers in poor countries — from India to Bosnia to the Ukraine — it’s also sparked worries that too much money is chasing too few loans.

“As soon as we reach a certain limit, we will see more [loan] defaults,” said Jacques Grivel of the Luxembourg-based $100 million Finethic fund, which invests in microfinance world-wide.

Already more than 100 investment funds are focused on microfinance, typically accepting money from targeted individuals or institutions, usually with a minimum of $10,000. The funds then buy the bonds or stocks of small, local banks in mostly third-world countries. These banks then lend money to tiny entrepreneurs at annual interest rates up to 50%.

Not everyone is persuaded the industry is hitting a barrier. They argue that the business is still in its infancy, and $30 billion of loans is a drop in the bucket compared with the needs.

Bob Annibale, head of a Citigroup Inc. unit that advises local microfinance lenders, said his clients are “aware of what’s happening in their markets and the challenges.” They have halved their lending pace, and are taking a harder look at potential borrowers, he said.

Meantime, fund managers, spurred by the surge in investor interest, are launching new funds. Dexia Bank’s $500 million Micro-Credit Fund has added $100 million in the past year and MicroVest Capital Management, a Bethesda, Md.-based company, is starting a new fund this fall.

Alex Hartzler, a Harrisburg, Pa., entrepreneur, put $750,000 into funds run by MicroVest. “This has outperformed everything else I’ve had,” he said.

Microvest’s first fund has averaged 8% annual returns since 2003, according to the fund manager.

Microfinance is largely unregulated, and lending standards remain relatively opaque. Since most U.S.-based funds aren’t registered investment companies, they aren’t subject to Securities and Exchange Commission oversight.

It’s tough to get solid data about loan performance at microfinance firms. According to the Consultative Group to Assist the Poor, the accepted default rate is around 2%. By comparison, a U.S. subprime-mortgage default rate is closer to 30% for loans 90 days past due or in foreclosure.

However, the International Association of Microfinance Investors, which attempted to verify the 2% default rate this month, said the rate could actually already be much higher, since bookkeeping by many local lenders is incomplete.

Gustavo Moron, business manager for Financiera Edyficar, a small Peruvian bank that specializes in lending to small-business owners, said he’s being pinched between stiff competition and the flailing economy. In cities like Cusco, at the foot of the Andes Mountains, Mr. Moron is slashing monthly interest rates to 1% from 3% to salvage repayments from taxi drivers, artisans and tour guides who aren’t making money because of weak international tourism.

As returns are shrinking, he finds himself taking chances he hasn’t before. “We’re loaning to people we wouldn’t have two years ago,” Mr. Moron said in a phone interview from Lima.

Enpointe Technologies Inc. (ENPT) Completes Merger; Position Closed

Enpointe Technologies Inc. (ENPT) has completed its merger transaction with Din Global Corp, and has been acquired for $2.50 per share. Previously, the company and third parties involved had set July 31, 2009 as the deadline for the completion of the merger. The deadline was later extended to August 14, 2009. For more, see SEC filing.

Why Warren Buffett is (Still) a Genius

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The following article shows why Warren Buffett is the world’s best investor. While the federal government received a 23 percent annualized return for its Goldman investment (the bank agreed to pay $1.1 billion to settle warrants the Treasury Department received after injecting $10 billion into the bank in November), Mr. Buffett would realize an annualized return of about 111 percent if he sold his Goldman stake today, which amounts to $9.1 billion.

Buffett Goldman Stake Pays Richly

(NYT DealBook)

Warren E. Buffett showed again why he is known as one of the world’s best investors, thanks in part to another prominent investor, Goldman Sachs.

Mr. Buffett’s stake in Goldman is now worth $9.1 billion, or about $4.1 billion more than what he paid 10 months ago, according to an analysis by Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette.

According to Mr. Wilson’s calculations, Mr. Buffett would realize an annualized return of about 111 percent if he sold his Goldman stake, which is held by his conglomerate Berkshire Hathaway.

In comparison, the federal government received a 23 percent annualized return for its Goldman investment, the bank said after it agreed on Wednesday to pay $1.1 billion to settle warrants the Treasury Department received after injecting $10 billion into the bank in November.

Mr. Wilson calculated the annualized return to be about 20 percent assuming that dividends received on the preferred stock are used to pay down the national debt.

Goldman turned to Mr. Buffett in September, seeking a cash injection. In return, Mr. Buffett negotiated what was considered even then to be very favorable terms.

Berkshire Hathaway received perpetual preferred shares in Goldman, which pay a 10 percent annual dividend, or $500 million a year. Berkshire Hathaway also received warrants to buy $5 billion in common stock at a strike price of $115 a share, which could be used at any time within five years of the initial investment.

Mr. Wilson , who has become a national authority on valuing warrants, ascribed a $5.5 billion valuation to Mr. Buffett’s preferred shares and $3.2 billion to the warrants. He also calculated that Berkshire’s reinvested dividends from the Goldman stake were worth about $400 million. The valuation of the warrants was based on Goldman’s closing share price of $160.46 on Wednesday and the 10-year historic volatility of the shares.

(For financial wonks, Mr. Wilson used the Black-Scholes and Merton option pricing models with the dilution adjustments of Galai and Schneller.)

While Mr. Buffett is unlikely to sell his Goldman stake right away, he is allowed to do so under the deal with the firm, provided he can find buyers who are willing to pay his price.

At the time of Mr. Buffett’s investment, critics said that Goldman’s long run of soaring profits was coming to an end. As a federally regulated bank holding company, Goldman would not be able to take the kind of risks that have yielded profits and bonuses that defined Wall Street’s latest Golden Age, they said.

But last month, Goldman reported a second-quarter profit of $3.44 billion.

Top Funds’ Traits: Strategy and Size

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By Sam Mamudi

While their names mightn’t be familiar to many investors, there were some stock funds that delivered stellar returns over the past year.

Among the seven best-performing funds in the 12 months to July 31, none is from the 25 largest mutual-fund companies and none of the funds has more than $700 million in assets, according to data from Morningstar Inc.

Despite the market downturn that saw the Standard & Poor’s 500 Index lose 22% during the 52-week period, the seven funds, all of which invest in long-only securities and are mostly invested in stocks, have seen double-digit returns.

Six of the funds use “value” strategies, while four have concentrated portfolios and held fewer than 40 stocks, according to the most recent data. The figures suggest investors should take note of smaller funds, if nothing else than for their ability to be more flexible in challenging markets.

“If you’re a $40 billion large-cap value fund, it’s very difficult — and not very wise — to make huge sector and asset shifts,” said Russ Kinnel, director of mutual-fund research at Morningstar. “In a 12-month period like the one we just had, willingness to go to cash and to hop around [buying stocks] is key.”

The biggest fund of the top performers was the $674 million Yacktman Fund (trading symbol: YACKX), a large-cap value fund that returned 12% over the past year. “When the market started to tank, we shifted into more volatile stocks,” said Don Yacktman, value manager of the fund and also of another of the top-performers, Yacktman Focused (YAFFX), which was up 18%. “It was a scary period, but that’s how we create value.”

Intrepid Small Cap Fund (ICMAX), also a value fund, was another that took advantage of the plunging market.

“We avoided the excesses of the market from 2005 to mid-2008, and had very mundane, boring companies,” said Eric Cinnamond, manager of the fund. “But we then took on more balance-sheet and cyclical risk in the decline; as the market troughed we got very aggressive”

Another top performer over the duration of the market slide, and subsequent rally, was Catalyst Value Fund (CTVAX), which was up 22%. The fund, which has just $10 million in assets, is concentrated, holding just 38 stocks. Mr. Yacktman’s Focused holds 32 stocks and Yacktman Fund has 37 stocks.

Too much “diversification is a kind of ignorance,” said Mr. Yacktman, one that betrays a manager’s lack of confidence in predicting stock performance.

The most concentrated fund among the best performers was Appleseed Fund (APPLX), a socially responsible fund which, as of June 30, held 20 stocks. The fund returned 12% in the 12 months to July 31.

“It’s a question of how close you want to hug an index,” said Josh Strauss, co-manager of the fund. “We believe the top performers are concentrated.” Roughly one-third of the fund is in health care, specifically drug companies.

The only other funds with double-digit returns for the 12 months to July 31 were Reynolds Blue Chip Growth Fund (RBCGX) and Rydex/SGI Small Cap Value Fund (SSUAX). Monteagle Informed Investor Growth Fund (MIIFX), which returned 33%, also was in Morningstar’s screen for diversified U.S. stock funds, but the fund as of June 30 held more than 50% in cash, and was invested in ProShares UltraShort S&P 500 (SDS), an inverse leveraged exchange-traded fund.