Argo Group – 2013 Interim Results

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% of AUM, Andreas Rialas, AREO, ARGO, Argo Group, Argo Real Estate Opportunities Fund, Globalworth Real Estate Investments, intrinsic value, Kyriakos Rialas, Price/Cash, The Argo Fund, TPPI

You may want to first read my preview of Argo Group’s (ARGO:LN) interim results here.

My estimate for end-Jun Assets under Management (AUM) was $333.8 mio. Actual AUM was reported at $308.0 m – down (5.6)% from end-Dec, but up 1.9% y-o-y. The H1 return estimates I noted for The Argo Fund (TAF), the Argo Distressed Credit Fund (ADCF) & the Argo Local Markets Fund (ALMF) were all spot-on. [And my Argo Real Estate Opportunities Fund (AREO:LN) estimate was derived directly from their published results]. What tripped me up was the Argo Special Situations Fund (SSF) – its (20.6)% H1 NAV decline was rather unexpected… That’s a loss of nearly $23 m, which accounts for the vast majority of my AUM over-statement (net redemptions presumably explain the rest).

Even with more info to hand, I’m not sure I would have anticipated this kind of result anyway. Here’s management’s explanation: ‘The main contributors to this position were the decline in share price of AREOF; a write down in the value of an investment in the Greek telecommunications company, On Telecoms; a higher valuation ascribed to the investment in TPPI.’ Now, let’s consider each of those components:

– The PT Trans-Pacific Petrochemical Industries (TPPI) gain is no great surprise – TPPI was also the main performance contributor for TAF & ADCF this year.

– While AREO’s price decline (from EUR 0.0522 to EUR 0.02) may seem fairly irrelevant at this point, the company’s share count is high & Argo (Group & funds) own a 73.9% stake. [NB: Argo Group itself only owns a 1.8% AREO stake]. That still translates into a meaningful write-down. If I assume SSF’s the only Argo fund invested in AREO – and I’m not at all sure that’s a correct assumption – by my calculation, its loss could total up to $18.8 m.

– As regards On Telecoms, the Greek telecommunications company, it was my understanding that SSF’s predecessor funds (ACPF & AHL) had already recorded a complete write-down on their investment in the company.

Considering the points above, I’m puzzled how SSF lost almost $23 m..?

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Cyprus & Argo Group

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Andreas Rialas, Argo Group, Argo Real Estate Opportunities Fund, Cyprus bail-out, EU economy, European sovereign debt crisis, Eurozone, fiat money, Greenspan/Bernanke put, intrinsic value, Kyriakos Rialas, Lehman Brothers, Price/Cash, The Argo Fund

Obviously, I’ll be returning to Argo Group (ARGO:LN) in greater detail another day, but news of a Cyprus bailout deal has prompted scads of emails & questions to me about Argo. A post is certainly justified…

OK, Cyprus – what a God-awful mess… At this point, years into the European debt crisis, it’s hard to believe EU politicians can attain new heights of stupidity. Whenever politicians: i) do something on the cheap, ii) kick the can down the road, or iii) (perhaps the worst) enforce some obscure point of principle, haven’t we learned it comes back to bite you far more savagely & expensively?

I have to concede the US is pulling ahead of Europe – they’re much quicker to recognize failure & to learn from mistakes. The collapse of Lehman can be ascribed pretty much to one man (Paulson) & his pig-headed intention to prove a point. Oh boy, and what an expensive point it was… Of course, everybody ignored it, lessons were learned & the Greenspan/Bernanke put was accordingly (and infinitely?!) strengthened.

Argo Group – Awaiting Results

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% of AUM, alternative assets, Andreas Rialas, AREO, ARGO, Argo Group, Argo Real Estate Opportunities Fund, asset managers, distressed assets, distressed investing, emerging markets, European sovereign debt crisis, Expected Value, intrinsic value, Kyriakos Rialas, Price/Cash, share buyback, shareholder activism, tender offer, The Argo Fund

Argo Group’s (ARGO:LN) Final Results should be released shortly (I’ll try confirm the exact date). In my most recent Argo posts, I published two letters I’ve sent to Kyriakos & Andreas Rialas (CEO & CIO, respectively). I encourage you to review both letters before continuing:

Here’s the first letter (from Nov-2012)

Argo’s share price rallied +6.2% in the following week.

And the second letter (from Dec-2012)

This was sent on behalf of myself, Guy Thomas & some other (smaller) shareholders, representing an aggregate 5% shareholding in Argo. The letter focused on a single specific shareholder distribution proposal. ARGO subsequently rallied +6.5% (in the following week). [In fact, the share price is now up an impressive +36% since my November letter. Despite the rally, I believe Argo remains just as compelling an investment proposition – I currently have a 5.4% portfolio stake].

My recommendations & proposal require little (further) explanation, and I expect shareholders will enthusiastically support all efforts to realize & enhance Argo’s intrinsic value. But I will revisit them in the context of an upcoming results preview – plenty of current & prospective shareholders have emailed me about Argo, so I hope you’ll find this useful. Let’s first consider Argo’s existing funds:

Another Assault on Fortress

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% of AUM, alternative assets, asset managers, dry powder, Ex-Cash Ratios, FIG, Fortress Investment Group, high dividend yield, incentive fees, Logan Circle Partners, Price/Cash, RailAmerica, share buyback

In May, I published a series on alternative asset managers, which culminated in a write-up of my latest purchase (at the time), Fortress Investment Group (FIG:US). Based on its net cash/investments per share, plus a fund management valuation of 6.3% * $46.4 bio of Assets under Management (AUM), I pegged FIG at a Fair Value of $7.80 per share. Based on FIG’s $3.11 share price at that point, this offered substantial Upside Potential of 151%. This turned out to be v fortunate timing, as I caught the 2012 bottom (in fact, pretty much the 3 yr low) for FIG:

Argo Group – A Shareholder Proposal

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% of AUM, Andreas Rialas, ARGO, Argo Group, asset managers, catalyst, distressed assets, intrinsic value, Kyriakos Rialas, Price/Cash, share buyback, shareholder activism, tender offer, The Argo Fund

Argo Group Ltd. (ARGO:LN) has been a consistent Top 7 holding for me since launching the blog last year. It currently represents 4.9% of my portfolio.

It was among the first handful of stocks I wrote up late last year (here & here). I also included it in my Baker’s Dozen for 2012. I followed up with another detailed write-up in May-12. [btw An asset manager series later that month may add useful context: Parts I, II, III, culminating in a Fortress Investment Group (FIG:US) write-up]. I then briefly revisited Argo in Oct-12 as part of my catalyst series.

I was pleased to note recently my Argo write-ups have actually proved the most popular with readers. Which certainly isn’t reflected in the performance of the share price: ARGO is actually down 20% YTD! Considering the UK market’s progress this year, and based on reader/investor feedback, it’s reasonable to suggest some/all of this price decline might have been avoided…

This compelled me to write to Argo’s management a month ago with a number of recommendations to enhance shareholder value, improve investor relations & disclosure, and to increase Assets under Management. I’m pleased to see the letter would appear to have reminded new/existing investors of Argo’s far higher intrinsic value, and its potential – the share price has subsequently rallied +15%. It also garnered some v useful shareholder feedback & support, which prompted me to send this follow-up letter to Argo last week:

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

Asset Managers – Cash Hogs & What’s Hot, What’s Not

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% of AUM, 3i Group, Affiliated Managers, AHL, alternative assets, Altira, Argo Group, Artio Global, Ashmore Group, asset managers, carry trade, Charlemagne Capital, CIFC, Cowen Group, David Harding, FRM Holdings, GLG Partners, IFMI, Integrated Asset Management, Janus Capital, Man Group, MPC Capital, Polar Capital, Price/Cash, Ramius, Record plc, Volcker rule, Winton Capital

Continued from here. And plse ref. my (alternative) asset manager table here. Taking a look, I marvel again how conservative most managers are in terms of net cash/investments. Less than 1 in 10 has net debt, while the average manager’s on a 4.6 Price/Cash multiple – 22% of the average market cap. consists of net cash/investments! This has always puzzled me. In general, particularly now, I don’t believe shareholders are being properly rewarded for this asset/financial strength. You’d think managers would be a little savvier about shareholder value..?! And reasons for this surplus cash? I can think of three:

i) Management Nap Policy:  Ah diddums, management finds it hard to sleep, or even nap, unless they’ve a large chunk of cash lying ’round so they feel warm & cozy… Maybe they’re even hoping a lap dancer will be impressed at the size of their…balance sheet? A touch sarcastic? Don’t forget a company’s really just a collection of people – which can sometimes be wonderful…or terrible! [btw Here’s another collection of people]

Sailing on the Good Ship Argo

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% of AUM, Argo Group, Ashmore Group, distressed assets, Ex-Cash Ratios, hedge funds, Margin of Safety, Price/Cash, private equity funds, Rialas brothers, The Argo Fund

Argo Group Ltd. (ARGO:LN)

• Mkt Price:  GBP 13.375p
• Mkt Cap:  GBP 9.0 mio
• % of AUM:  4.5%  (of $325.4 mio)
• P/C:  0.6
• P/S:  1.3
• P/E:  10.0  (Pre-Amortisation/One-off Fee)
• Div Yield:  9.7%      

Please read my previous investment write-up here & here. Wow, it was December when I last wrote about Argo! But not so surprising – the pace of news from the company is astonishingly low… In fact, we’ve only had one news item since, their Final Results. Shouldn’t complain though, I guess this contributes to the market’s neglect of the stock. Anyway, it’s a pleasure to write about Argo again…and marvel at just how bloody cheap this stock is!? If you haven’t read my prior posts (which provide plenty of useful background, some of which has contributed to ARGO’s cheapness), I think you’re in for a treat!

Argo II – Time to Claim the Golden Fleece

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% of AUM, Argo Group, Ex-Cash Ratios, Margin of Safety, Mulberry, Price/Cash, special situations, Theo Fennell

Argo Group Ltd. (ARGO:LN)

• Mkt Price:  GBP 14.5p
• Mkt Cap:  GBP 9.78 mio
• % of AUM:  4.0%  (of $379.7 mio)
• P/C:  0.6
• P/S:  1.3
• P/E:  5.8  (pre-Amortisation)
• Div Yield:  8.3%      

Continued from here…     However, Argo is a relatively small fund management business, so I still worry that a loss of funds or personnel could have a disproportionate financial impact. It’s also not clear when performance fees will be a significant contributor again for Argo. This will depend on future market performance, and how its funds stand in relation to their high-water marks. On the other hand: Argo obviously has a well respected investment record and reputation. I’m actually impressed that their AUM has only declined 6% in the past year, and 20% in the past 2 years, despite the difficult market. And, of course, the litigation issue…don’t underestimate this! I’ve dealt with this type of problem personally, and it’s nearly impossible to raise funds from (institutional) investors when there is such a due diligence stumbling block. Now this is out of the way, I think Argo finally has to chance to do some significant fundraising.

Duh, Duh, Dhir…

Tags

Adjusted NAV, Aurora Russia, Dhir India, distressed assets, market-makers, message boards, Price/Book, Price/Cash, wind-down

Dhir India Investments (DHIR:LN)

• Mkt Price:  GBP 16p
• Mkt Cap:  GBP 2.67 mio
• P/C:  0.36  (adjusted)
• P/B:  0.12

Just because I’m a value investor, doesn’t mean I won’t make speculative bets, it just means I like to use value investing to determine that bet..! Here’s one I’ve finally jumped into:

Dhir India’s the only UK-listed investment vehicle offering fund managers/investors exposure to distressed assets and companies in India. The fund invests in 4 types of transactions: Turnaround of companies, re-sale of companies/assets, break-up and sale of assets and bridge financing. Charlie Hambro is the Chairman, while the Investment Manager Shiva is headed by Alok Dhir. Dhir’s been practicing insolvency law for over 20 years, and is a successful investor in Indian non-performing assets. The company was launched in mid-2007, and promptly completed 6 investment projects (1 listed) by year-end.