NEW YORK (TheStreet) - When bond giant PIMCO recently started its first stock fund -- PIMCO Equity Series Pathfinder Fund (PTHDX) -- the company hired portfolio managers who had run Mutual Series funds, Anne Gudefin and Charles Lahr. Recruiting the veteran managers seemed like a logical move.

Mutual Series has long ranked as a top performer, and several of its veterans have gone on to manage funds at other companies. Mutual Series alumni include David Winters, now portfolio manager of Wintergreen ( WGRNX), and David Marcus and Jae Chung of Evermore Global Value ( EVGBX). Can the alumni match the record of their former employer? Perhaps. All the managers practice a similar brand of deep-value investing, and they all hold some of the same stocks.

The strategy was developed by Max Heine who started Mutual Shares ( TESIX - Get Report) in 1949. Heine made his first big scores by buying distressed railroads. The stocks intrigued him because he figured that the land and equipment were worth more than the value of the depressed shares. In 1988, Heine died and passed control to his protégé Michael Price.

Price refined the company's approach, seeking to build broadly diversified portfolios that could protect shareholders in downturns. To accomplish the goal, Mutual Series included elements few mutual funds had ever tried. Besides buying undervalued stocks, Price bought distressed debt, bonds that were close to collapse. He also invested in merger arbitrage, buying stocks of companies that were about to be taken over. When the fund manager couldn't find undervalued investments, he held cash and waited for better times.

Several of Price's strategies had an important characteristic in common: They did not necessarily track each other or the stock market. Consider the investments in distressed companies. If a troubled company emerged from bankruptcy, the prices of its stocks and bonds could skyrocket, even when the S&P 500 was falling. By holding such uncorrelated investments, Mutual Series hoped to build portfolios that could be resilient.

In 1996, Price sold Mutual Series to Franklin Templeton, and he later left the business. But disciples of Price and Heine continue to the run the funds, and they follow the same strategy. Most often the approach has worked.

All five of the Mutual Series funds with 10-year records have outperformed their benchmarks during that period, according to Morningstar. Among the stars is Mutual Quest ( TEQIX - Get Report), which has returned 7.2% annually during the past 10 years, outdoing 88% of its world stock competitors.

The fund has done particularly well in downturns. During the turmoil of 2008, Mutual Quest outdid its benchmark by 17 percentage points and surpassed 99% of competitors. Another strong performer is Mutual European ( TEMIX), which returned 8.4% annually during the past 10 years, outdoing 78% of competitors. In 2008, the fund topped 98% of competitors.

Mutual Series managers look for different kinds of undervalued stocks. Besides buying troubled companies with valuable assets, the managers sometimes take steady companies that have fallen out of favor and sell for 30% or more below their fair prices. These days many holdings are solid businesses.

The managers say that in recent years, investors have been flocking to low-quality small stocks. That has left many well-known blue chips trading at bargain levels. Mutual Shares and PIMCO Equity Series both own Microsoft ( MSFT) and Royal Dutch Shell ( RDS.A), rich giants with steady cash flows and low price-earnings ratios.

All the funds run by present and former Mutual Series managers have big stakes in tobacco companies. Because of the legal problems, the stocks sell for low prices. But the businesses have rich cash flows and growing dividends. Many of the companies have been able to push through big price increases in recent years. Mutual Quest and Wintergreen both hold British American Tobacco ( BTI) and Philip Morris International ( PM).

A standout fund with a big tobacco stake is Mutual Global Discovery ( TEDIX - Get Report), which was run by the new PIMCO managers Gudefin and Lahr. The fund is now overseen by Peter Langerman, who also manages Mutual Shares. Global Discovery has returned 8.4% annually during the past 10 years, outdoing 94% of competitors. The fund topped 98% of peers in 2008.

If you are looking for a world stock fund, should you buy Mutual Global Discovery or PIMCO Equity Series? That is a tough question. Both funds are run by veteran managers and hold similar stocks, including Imperial Tobacco ( ITYBY) and pharmacy company CVS Caremark ( CVS). Chances are both funds will continue in the tradition of Mutual Series, delivering solid returns while protecting assets in downturns.


Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.