Hitting The Century (XI – Distressed)

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alternative assets, Argo Group, asset managers, bankruptcy, BDCs, business development companies, Colony Financial, de-leveraging, distressed assets, distressed consumers, distressed investing, Fortress Investment Group, income/dividend bubble, JZ Capital Partners, litigation funding, private equity funds

In my last post, I briefly highlighted some difficulties a private investor might face with classic distressed debt investing. Recognizing these limitations, I usually prefer to stick with distressed debt asset managers & investment vehicles. However, there’s many other firms in orbit around this opportunity. Even better, my definition of distressed investing stretches to include what I call the distressed consumer. Consider it exploitation of the poor, if you wish – but the real bonanza is actually much more equal opportunity. To be blunt, it’s really about the exploitation of the (financially) stupid… And stupidity’s an enduring human frailty to bet on, despite the frequent & pointless efforts of politicians to legislate it away.

Let’s begin with the business end of things:

Picture you’re an ailing company whose business & finances are beginning to seize up. You’ve executed on most of the usual cost-control & cashflow measures already, but you still need more juice… Your book of receivables might yield some quick cash – Intrum Justitia (IJ:SS) can help. PRGX Global (PRGX:US) may unearth new and unexpected savings, waste & fraud for you. [PRGX is now expanding into US healthcare. Considering the unconscionable levels of fraud, waste & over-billing in that industry, this could offer them a huge new growth opportunity]. You might have been pinning your hopes on launching/winning a crucial lawsuit, but now you can’t afford the legal expense & uncertainty – Burford Capital (BUR:LN), Juridica Investments (JIL:LN) & IMF Australia (IMF:AU) can lower your risk & provide the necessary funding. Maybe you should also start selling anything that isn’t nailed down – call Ritchie Bros Auctioneers (RBA:CN).

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Hitting The Century (X – Distressed)

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asset allocation, Asta Funding, ATM fees, Colony Financial, corporate-media-retail complex, correlation, credit card debt, debt collectors, distressed assets, distressed consumers, distressed investing, Fortress Investment Group, hire purchase, pawn stores, payday loans, pre-paid debit cards, Rent-A-Center, rent-to-own, Sex and the City, student loans, stupidity, Tetragon Financial Group, unbanked, vice stocks

Continued from here.

Remember this series? Yep, I’m spending an unconscionable amount of time getting through it. FFS, I started last June, promising a closer look at my portfolio construction, allocation & metrics. [‘Hitting The Century‘ as it was my 100th post. And ‘Pretty Panties‘ because I was so bemused by the prior response to the phrase]. Instead, you get a bloody epic – like The Hobbit. Oh well, blog rules…how ’bout I try finish by next June?! 🙂

Honestly, I expected it to turn out like this. But I’m delighted at the great reader response – I guess I’ve been trying (ad nauseam) to pound the message home that portfolio construction/asset allocation is just as important as stock-picking. [Studies suggesting asset allocation accounts for 90% of returns have been debunked, but more recent studies certainly confirm an average/minimum 50% of returns are derived from this source]. Unfortunately, this is forgotten/ignored by a lot of investors, even great stock-pickers… Admittedly, they may (occasionally) practice some kind of ex-post allocation – better than nothing, but an ex-ante approach is vital if you really want to end up with a safer, more diversified & higher return portfolio.

OK, let’s trot on – here’s a familiar pie-chart as a quick reminder (sure, it’s a little out of date – but have you noticed my portfolio turnover?!):

Where’s The Credit Opportunity In 2013?

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CDOs, CLOs, Collateralized Loan Obligations, Colony Financial, Fed, income/dividend bubble, junk bonds, leveraged loans, mortgage hedge funds

Owning Colony Financial (CLNY:US) was v rewarding. I bought it as a cheap distressed assets play, but I suspect my gains actually came from income investors, who are now rushing into the stock. That got me thinking… And it hammered home a couple of lessons: a) Never under-estimate the desperation of income investors, and (more seriously) b) Don’t fight the Fed! Now, that may sound like a contrarian challenge to some – sure, sometimes it can prove v profitable to fight a rising tide.

Except surfing the big waves is simply far more rewarding most of the time. Do you really want to be the investor who faces down the Fed’s steamrolling printing press? Especially with a ravenous horde of zombie income investors chasing after it?!

But it’s becoming increasingly difficult to exploit those lessons. Look around, most yields are too low, most prices too high… Look at property REITs, mortgage REITs, MLPs, closed-end funds (esp. Pimco!), and other assorted dividend story stocks. Most are now sporting fairly nauseating valuations & leverage – while the dregs are simply Ponzi schemes, relentlessly issuing stock & debt to fund excessive dividends. But what’s the alternative – Treasuries?! Oh please, just stab me with a rusty fork.

Xmas Trimmings, etc.

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ASFI, Asta Funding, BIW, CLNY, Colony Financial, Conwert, correlation, CWI, distressed assets, FIG, financial crisis, Fortress Investment Group, intrinsic value, Karl Ehlerding, KWG Kommunale Wohnen, Leverage, majority control, Merry Xmas, Price/Book, Stavros Efremidis, TRIB, Trinity Biotech

Asta Funding (ASFI:US) $9.37:   I’ve marginally trimmed my stake from 3.8% to 3.6% – consider this to be purely risk ‘house-keeping‘. This realizes a +22% gain vs. my write-up price on this small slice, and a +31% gain vs. my actual net entry price (which inc. the impact of dividends). I never got around to an Asta follow-up, as the share price (& NAV) just steadily chugged higher. Despite the rising share price, I’ve been bemused (even encouraged) by the general air of neglect still attached to this stock. Even ASFI shareholders have expressed a distinct lack of enthusiasm for the company’s progress in the past year! This is particularly in reaction to the company’s diversification into personal injury & divorce financing. Which puzzles me…

I’d counter this distaste in a number of ways: i) This new direction was prompted by Asta’s reluctance to pay up to acquire new distressed consumer receivable portfolios*. Personally, I’m delighted – how often do you see management take an absolute, rather than a relative, approach to value? [Picking up distressed debt at 9 cts on the dollar, while everybody else pays 10 cts, doesn’t mean you’ve bagged an actual bargain!] And to resist pissing away idle cash burning a hole in their pockets is quite admirable too. Of course, returning capital (via share buybacks) is a great alternative – Asta’s pursued this to a limited degree during the year. However, considering current metrics, I consider the short term return/attraction of a buyback is fairly even balanced against the potentially higher returns on offer from a (gradual) investment of their cash into distressed assets.

Argo – Escape from an Evil State!

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% of AUM, activist investors, alternative assets, AREO, ARGO, Argo Group, Argo Real Estate Opportunities Fund, Colony Financial, distressed assets, emerging markets, European sovereign debt crisis, Fortress Investment Group, intrinsic value, Investor Relations, Kyriakos Rialas, Livermore Investments, Mello Central, Price/Cash, Rialas brothers, share buyback, special situations, sub-advisory, The Argo Fund, Universe Group

OK, sorry to disappoint… This definitely isn’t a review of Ben Affleck’s new movie ‘Argo’! [I haven’t seen it yet, but it’s on my list – the reviews are uniformly good, and Affleck displayed a sure hand with ‘The Town’.]

No, this post is about Argo Group Ltd. (ARGO:LN), whose share price is also trapped in a rather evil state… Specifically, the price has steadily declined 35% in recent months to GBP 10.125p – when the company is profitable & has net cash/investments on hand of GBP 20.9p per share! Operational execution & performance ultimately offer the best escape route for Argo. [I’m delighted to see Argo has now launched a new liquid emerging market debt fund. This offers attractive exposure, I’m sure it will clock up a good performance, but real success will come down to the level of fund-raising that’s achieved.] But there a number of additional actions & strategies that may offer considerable assistance in making this escape. Here’s a copy of a recent letter I sent to Kyriakos Rialas, CEO of Argo:

‘November 07, 2012

FAO:    Kyriakos Rialas, CEO

Cc:       Andreas Rialas, CIO

Cc:       Michael Kloter, Chairman

Argo Group Limited

33-37 Athol Street

Douglas

Isle of Man

IM1 1LB

Correlation…Schmorrelation!

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activist investors, agri-business, Asta Funding, beta, catalyst, Colony Financial, correlation, distressed assets, Europe, Event Driven, favourite stock, Fortress Investment Group, litigation funding, Margin of Safety, reading, Risk Arbitrage, risk management, stock ideas, umbrellas & ice cream, value investing, wind-down

Monday, I re-posted my appeal for your fave stock ideas, which was originally prompted by the dog days of summer. Those months when trading volume & news slows down, and you’re off for a relaxing holiday, are a perfect time to open your mind & embrace new ideas. Take along some good books for their historical perspective, magazines to dip into the current market/economy buzz, and (most importantly) stacks & stacks of annual reports. And just read, read, read..!

Personally, my focus over the summer’s been on correlation. Some investors are great at stock-picking, risk management & portfolio construction, while others are abysmal..! But, all too often, there’s precious little difference in respective performance. Because we’re all terribly correlated with the market, and with the economy – yep, we’re all making pretty much the same big bet! A preference for discounted assets, special situations & stocks with specific catalysts is my attempt to escape this correlation risk. Medium-longer term, I think this approach offers a genuine ‘edge‘ via lower beta stocks. Trouble is, shorter term, market correlation (especially in market setbacks) can simply trounce all other factors…

Asset Managers – OK, Time to Storm the Castle!

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% of AUM, absolute return, Ally Financial, asset managers, carried interest, catalyst, Colony Financial, de-leveraging, distressed assets, Fortress Investment Group, KKR, mortgage servicing rights, MSRs, Nationstar, Newcastle, Nomura, Oaktree Capital, Och-Ziff, Ocwen Financial, pension funds, PHH Corp, Price/Sales, private equity funds, special situations

Continued from here. As I’ve highlighted, (alternative) asset managers have an attractive business model, strong balance sheets, and are generally undervalued. On the other hand, they’re a geared market play. I see 2 ways to alleviate this risk:

i) Ration asset manager allocation in your portfolio. As I’ve discussed,  analyzing, ranking & selecting from the broadest universe of listed managers is the best way to achieve this.

ii) Look for a great story, a great stock, AND a great price. This can significantly transform your risk/reward. Make a poor decision on one attribute, and hopefully the others bail you out. Get them all right, and accelerate & increase your returns…

Happy New Year! – A (Baker’s) Dozen for 2012

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Argo Group, Asta Funding, Avangardco, Colony Financial, Cresud, Dhir India, EIIB, FBD Holdings, Livermore Investments, pdosullivan, Petroneft Resources, Sirius Real Estate, Total Produce, Trinity Biotech, Vietnam Opportunity Fund

Philip O’Sullivan kicked us all off here with his list of picks for 2012, and so far I’ve seen John Kingham and Mark Carter join in with their contributions here. Note John can only win half of the (non-existent!) prize since he came up with 2 lists…

I struggled with the idea a little myself – I’d far prefer to write 1,200 words about 1 stock than to write 1 list, haha! I also dread seeing shoot-for-the-moon lists (congrats so far, chaps) stuffed full of triple leverage ETFs and penny dreadfuls – not much use to any of us in the real world.

2011 Stock Recommendations & Performance

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Argo Group, Asta Funding, Colony Financial, Cresud, Dhir India, EIIB, Fair Value, portfolio performance, purchasing power, Sirius Real Estate, Total Produce, Trinity Biotech

I’m sure you’ve noticed I’m not shy about setting Fair Value Price Targets for recommended stocks. I don’t see a lot of people out there doing this – pretty obvious why…I’m sure someone will be sure to point out how precisely wrong I’ve been when I come up with a few duds! Ouch!

But, in an ideal world, the best way I’d evaluate any recommendation from a website or blog is to know the writer’s price target and portfolio stake. Ownership demonstrates their conviction, the size of their stake confirms the strength of this conviction, and their price target allows the reader to perform their own risk/reward evaluation. What are your own thoughts? Do you agree whole-heartedly, partially, or do you think this approach is a danger or a hindrance in some way?

Argo – Time to Claim the Golden Fleece

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% of AUM, ACMH, Argo Group, Ashmore Group, Colony Financial, emerging markets, Florian Homm, PSource, Rent-A-Center, Sean Ewing

Argo Group Ltd. (ARGO:LN)

• Mkt Price:  GBP 14.5p
• Mkt Cap:  GBP 9.78 mio
• % of AUM:  4.0%
• P/S:  1.3
• Div Yield:  8.3%      

Argo is an AIM quoted alternative investment manager focused on global emerging markets. Argo’s funds are designed to deliver low volatility absolute returns with lower correlation to wider global markets. It invests primarily in special situations, real estate, high yield corporate credit and distressed debt. The company has a performance track record dating back to 2000, and has won several awards for best Risk Adjusted/Sharpe Ratio performance. Andreas Rialas, the CIO, is Argo’s founder while his brother Kyriakos has been CEO since 2003. Unfortunately, to reach its current listed status, the company has really been through the Symplegades…