ABC Arbitrage, activist investors, Biglari, Bourbaki, Carl Icahn, Christopher Mills, Crystal Amber, Damille, GPG, Harbinger, Laxey, Risk Arbitrage, Ron Brierley, Sherborne Investors, Terra Catalyst
Continued from here:
I’m not suggesting you swap your whole portfolio into an activist tracker portfolio! There are some websites/blogs out there suggesting this approach, but I’m not convinced. This probably just reflects my (mild) aversion to ‘mechanical’ investing approaches. I also think if you actually tackled this kind of project in the manner it deserves, you’re probably a pretty experienced and disciplined investor already!
The other problem is that many activists, by definition, are often taking on poorly performing companies, possibly with equally poorly performing management. (Another reason activist hedge funds always have their eye on the clock!). Or they invest in a situation where, for the life of me, I can’t see any apparent value. Do you really want to coat-tail on an investment like that?
Even if you get up and running with this type of portfolio, you’re looking at a v incomplete picture. You don’t see an activist’s entry or exit prices (and disclosure can sometimes be significantly delayed), or see what hedges, shorts or other offsets they might have elsewhere in their portfolio. A private investor long a stock (say, an investment trust trading on a large discount) can have a v different risk profile than that of an activist. The hedge fund may well be short the underlying benchmark index, and just looking to extract alpha (from a reduction/elimination of the discount).
All in all, I think it’s better to stick with activists as a catalyst. Use them wisely (and profitably) to cherry pick and/or endorse your conviction stocks. That’s not to say you can’t let activists do some heavy lifting for you in your portfolio. There are quite a few activist vehicles available now to invest in:
Damille Investments (DIL:LN) & Damille Investments II (DIL2:LN): Note both of these are currently trading at a premium.
Sherborne Investors (SIAG:LN): Sherborne is currently solely focused on its investment in F&C Asset Management (FCAM:LN). If that’s attractive, Sherborne offers an attractive entry to F&C (at a 27% discount).
Terra Catalyst (TCF:LN): This is a Laxey Partners property focused vehicle. It trades on a 30% discount to NAV, but what’s really fascinating is that TCF periodically provides a ‘look through’ NAV. This reflects the underlying NAV of its individual holdings, rather than their share price or carrying value. TCF trades on a 71% discount to this ‘look through’ NAV.
DouglasBay Capital (DBAY:LN): Another Laxey vehicle, it recently had a very successful exit (and returned most of the cash to its shareholders!) from TDG, one of Europe’s major logistics services providers. It now trades at a slight premium, but probably has some latent value in its remaining non-cash holdings.
Crystal Amber Fund (CRS:LN): Currently at an 8% discount to NAV, this targets operational (and corporate finance) improvements in generally smaller UK companies.
North Atlantic Smaller Cos (NAS:LN) & Oryx Intl. (OIG:LN): Both funds are managed by Christopher Mills (North Atlantic Value/Harwood Capital), trade around a 26% discount to NAV, and have a focus on activist/private equity investing in US and UK smaller companies.
Guinness Peat Group (GPG:LN): GPG’s currently trading on a 48% discount, and as I’ve mentioned previously, is now actually in wind-down mode. I mostly mention it here as Ron Brierley, its founder, probably has had one of the longest careers globally as an activist investor. In fact, his previous ventures, Industrial Equity Ltd. and Brierley International (which still exists as GuocoLeisure (GLL:NZ), and presents an interesting asset based company trading on a 37% discount). And it looks like the old boy may not be finished yet – he’s just taken a controlling stake in Mercantile Investment Co (MVT:AU) (formerly India Equities Fund)!
Biglari Holdings (BH:US): Sardar Biglari is an acolyte of Warren Buffett, albeit with a more visible ego. He sees Biglari Holdings as a mini-Berkshire Hathaway (BRK/A:US), but with an activist twist. To date, the track record’s been reasonably successful (mostly focused on restaurants) – unlike that other failed great experiment, Sears Holdings (SHLD:US) – and his letters are well worth checking out. It trades at a significant premium to book, but like Berkshire much of its value comes from a revaluation of its operating earnings. With the restaurants now bedded down (look back a few years to see the condition there were in…), we may see some new action here soon.
Harbinger Group (HRG:US): Yes, this is a Philip Falcone vehicle. He’s had his knocks recently – it will be v interesting to see the end-game for Lightsquared. Read this article for another take – Falcone could well be a pretty visionary value investor! I wouldn’t count him out (he still has his believers), but unfortunately he may not have the time and capital here to fight the forces arrayed against him. Harbinger Group, on the other hand, is a lot cleaner! It probably won’t be going activist for quite some time, as it’s still absorbing insurance and consumer brand acquisitions. Its major stake in Spectrum Brands (SPB:US) is easily valued, as it’s listed, and Spectrum’s pretty cheap also on an enterprise basis.
Icahn Enterprises LP (IEP:US): A lot of people don’t realize you can have Carl Icahn invest your money..!?! IEP was formerly American Real Estate Partners (a company Icahn took over years back), and Carl owns virtually all the stock, so if you invest be aware you’re simply along for the ride. Rather surprisingly, the entry price is rather cheap, the stock trades at a mere 3% premium to book value. However, we see the same premium compression happening with Berkshire, so the advancing age of Buffett (81) and Icahn (75) (though they both seem to be enjoying life more than ever!) is clearly a concern.
ABC Arbitrage (ABCA:FP): ABC’s not an activist, but it’s a rather fascinating and unique company, probably the only one of its kind! Their business is Arbitrage, including classic Risk Arbitrage. They fly completely below the radar, but have the most consistent/best returns and risk management around – far exceeding even that of Goldman Sachs (GS:US). Don’t believe me? How about 16 consecutive profitable years, with an average RoE of 35% in the past 6 years (including a 52% RoE in 2008)?! These guys are the real Bourbaki! Which might account for the disappointing growth in their Third Party Asset Management. They’re not the best salesmen..! This could be a billion EUR opportunity, but so far they’ve only raised about EUR 160 million, though the pace of fund-raising is accelerating. Otherwise, what’s the catch? None really, except ABC has always traded at a multiple of book value, obviously due to their high/consistent RoE.
IQ Merger Arbitrage ETF (MNA:US): Then we have this Merger Arbitrage ETF – another half-assed ETF launch. It invests in announced risk arbitrage deals and claims to have a global focus. However, over 90% of NAV is currently invested in US deals. This could have been a decent ETF, except for a particularly dumb-ass feature: When they acquire a stock subject to a share offer they hedge themselves. No, not by shorting the acquirer’s stock, that would make perfect sense – they actually short the relevant stock (e.g. the S&P) index instead! For such an event driven investment, this type of hedge is next to useless, an unnecessary cost, and may in fact lose money (with no corresponding offset). Not exactly the definition of a hedge! Avoid.
This is certainly proving to be the longest catalyst I’ll cover!? OK, next post, I’ll finish up activists as a catalyst by highlighting some individual company examples, and then continue on with this series to cover my last two catalysts.
Pingback: How About Another Catalyst? (Part VII) « Wexboy
Got a good mention here in Gurufocus:
And I’m rather amused to see Hot Tuna mentioned as a value trap – coincidentally, a stock so pathetic it inspired me to write about it a couple of times..!
have you read abc arbitrage’s 2010 annual report? this is by far the weirdest ar i have ever seen!!!
interesting their financials are signed off by both ernst & young and deloitte….
You mean the culinary one?! Yes, well that’s the French for you – I bet they have a nice cafeteria…sorry, dining room! I haven’t finished reading it yet – I was too hungry… 😉