Friday, February 15, 2013

What We're Reading ~ Hedge Fund Links 2/15/13

Jim Rogers' new book Street Smarts [Jim Rogers]

Bridgewater bets on stock as cash moves into market [Bloomberg]

Is Renaissance Technologies falling off the mark? [II Alpha]

David Tepper unfazed by looming budget cuts [II Alpha]

New fund launches hit pre-crisis high [HFIntelligence]

Hedge funds score big by betting against Yen [WSJ]

JANA-Agrium stage set for proxy fight [Hedgeworld]

Citadel big winner at 2012 Absolute Return awards [HFIntelligence]

Average hedge fund fee significantly lower than reported [HedgeCo]

Billionaire Hughes chasing Blackstone as US rental king [Bloomberg]

Hedge funds lose $14 billion in assets in 2012 [Hedgeweek]

Penny Aitken talks manager selection [FINalternatives]

As gasoline prices soar, hedge fund oil bets near record [Hedgeworld]

Family offices and high net worth investors trickling back into funds [COOConnect]

SAC Capital probe hampered by auto-deleted emails [Bloomberg]

How Connecticut lost a $10 billion hedge fund manager [HedgeCo]

Thursday, February 14, 2013

Warren Buffett's Berkshire Hathaway & 3G Capital Buy Heinz

Warren Buffett's Berkshire Hathaway and 3G Capital Management are paying $72.50 a share to buy Heinz (HNZ).  The deal is around a 19% premium to the stocks' all-time high.  Here's the breakdown of the deal:

- Berkshire puts $4.4 billion in equity
- 3G puts $4.4 billion in equity
- Berkshire buys $8 billion of preferred stock
- JPMorgan Chase & Wells Fargo with debt financing

Berkshire Won't Have Operating Role

3G will own half of the equity and will operate the company (Berkshire won't have an operating role).  While the headlines will focus on Berkshire 'buying' Heinz, there should be an asterisk by that because 3G will run the company. 

When Buffett typically buys a company, you have to think along the lines of Burlington Northern Santa Fe Railroad where he buys it all and it gets integrated into Berkshire.  This isn't one of those deals.

The takeaway here is that Buffett is just putting cash to work at very good terms for him.  After all, the preferred shares will yield 9%.  And even after this deal, he still has plenty of cash to do another deal in the future.

Buffett was approached about the deal in December.  Of it, Buffett said, "This is my kind of deal and my kind of partner.  Heinz is our kind of company with fantastic brands.  I have a file on Heinz that goes back to 1980."  That just goes to show how Buffett is always researching and keeping tabs on companies he's potentially interested in.

For more on this investor, head to Charlie Munger and Warren Buffett's secrets to investing success.

Rare Video of Benjamin Graham & His Legacy

Today we wanted to highlight extremely rare video footage of value investor Benjamin Graham.  This video was shown at the Columbia Investment Management Conference (notes from the event here).  In addition to the footage of Graham, the video also features interviews with his protege Warren Buffett, Irving Kahn, Charles Brandes and many others.

Here's one of the Ben Graham quotes from the video:

"The explanation cannot be found in any mathematics, but it has to be found in investor psychology.  You can have an extraordinary difference in the price level merely because not only speculators but investors themselves are looking at the situation through rose colored glasses rather than dark blue glasses."   

Marshall Weinberg, a student of Graham's on the teacher: "Ben Graham opened the course by saying, 'if you want to make money on Wall Street, you must have the proper psychological attitude.' "

Warren Buffett on Graham: "Making money did not motivate him."

Embedded below is the video on Ben Graham's legacy:

Of course if you haven't already, stop what you're doing and read Graham's two books: The Intelligent Investor and Security Analysis.

Hat tip to Santangels Review for finding the video.

Fairholme's Bruce Berkowitz On Closing His Fund To New Investors & Talking Potential Future Vehicles

Fairholme Capital's Bruce Berkowitz recently sat down with Bloomberg and talked about his concentrated approach and how a mutual fund might not be the ideal vehicle for his strategy.

He mentioned he would be closing his fund to new investors, saying:

"Less is more.  If more money came in (to Fairholme), I can't buy more AIG because we're so concentrated ... so I do not want a lot of cash coming in that would potentially dilute those positions for existing shareholders."

He's focused on having shareholders who are truly long-term investors.  After all, every fund manager desires 'permanent capital' or as close to it as they can get. 

On that front, Berkowitz was asked about the Fairholme Partnership perhaps transitioning to a vehicle that has a 5-year lockup where fickle investors can't pull capital on a whim.  So what's he have up his sleeve?  When pressed on the issue, Berkowitz said to "stay tuned."

Mutual fund rules have essentially prevented Berkowitz from buying more Bank of America (BAC).  When asked if he'd like to buy more, he had only one word: "yes."

Embedded below is Bruce Berkowitz's interview with Bloomberg:

For more on this investor, definitely be sure to check out notes from Bruce Berkowitz's CSIMA presentation.

Bill Ackman's Questions For Herbalife (HLF)

If you've followed the Herbalife (HLF) saga, you know there are some big name hedge fund managers involved on both sides of the trade.  Here's the breakdown:

- Bill Ackman makes short presentation against HLF
- Third Point's Dan Loeb goes long and explains why
- David Einhorn's Greenlight Capital used to be short HLF
- Carl Icahn seems to have been potentially long HLF at some point.  *Update: Icahn has just disclosed he owns around 12% of the company (with a large options position).

Now that you're all caught up, let's step into the next round of battle jabs.  Bill Ackman last week released a document/presentation entitled 'Questions for Herbalife' and we've embedded it below:

Ackman was also at the Harbor Investment Conference yesterday where he talked about HLF again.  He claimed that Dan Loeb's point that the majority of Herbalife's sales are abroad (providing protection against potential US regulatory implications) is a false premise because other countries wouldn't want a ponzi scheme either.

The battle wages on.

Wednesday, February 13, 2013

What We're Reading ~ Analytical Links 2/13/13

On knowing a company's relevant metrics and the investment thesis [MicroFundy]

The great equity rotation myth [CapitalObserver]

Thorp and Buffett on beating the market [Abnormal Returns]

Secular bear market 'hibernation' [The Big Picture]

Bond convexity and price risk [Business Insider]

Where are we in 2013? [Joe Kusnan]

The biggest housing bubble in the world is in Canada? [The Atlantic]

Should you gamble on Tropicana Entertainment? TPCA [Seeking Alpha]

Valero (VLO) updates its CST Brands spinoff [StockSpinoffs]

Hewlett Packard (HPQ) board studying break up [Quartz]

Bullish pitch on Merck (MRK) [Barrons]

Beating the market by buying back stock [Fortune]

A third of student loan debt belongs to subprime borrowers [WSJ]

Industrial revolution: The insourcing boom [The Atlantic]

Insider selling picks up [Marketwatch]

Create your own Apple (AAPL) stub [Brooklyn Investor]

Mexican banks: from tequila crisis to sunrise [Economist]

Corsair Capital's Thesis on Acacia Research (ACTG): Q4 Letter

Jay Petschek and Steve Major's hedge fund Corsair Capital is out with its Q4 2012 letter to investors.  In it, they provide an investment thesis write-up on one of their core picks: Acacia Research (ACTG).

Updates on Portfolio Holdings

They also provide brief updates on some of their other positions such as DigitalGlobe (DGI), which received approval for its acquisition of GeoEye.  They feel the combined entity will "yield significant revenue, expense, and capital synergies and should outperform for many years, as demand for its mapping products and services grows."  You can view Corsair's analysis of DigitalGlobe which was penned before the GEOY takeover.

Additionally, Corsair continues to like Chicago Bridge & Iron (CBI).  The hedge fund originally invested in Shaw Group, which CBI bought out.  They see CBI earning around $5.50 per share in cash earnings by 2014.

Acacia Research Thesis

This company essentially helps monetize underutilized patents and Corsair feels they fill a big gap as the majority of patents are held by small businesses or individual inventors who lack the wherewithal to protect/enforce these patents.  Corsair bought in November and think shares could trade over $40 per share, deserving a 15x multiple.

Embedded below is part of Corsair Capital's Q4 letter with their investment thesis on Acacia Research Corp:

For more hedge fund letters, we also posted up excerpts from Children's Investment Fund Q4 letter.

Tuesday, February 12, 2013

Key Takeaways From the 2013 Hedge Fund Compensation Report

The 2013 Hedge Fund Compensation Report has been released we wanted to highlight some of the key observations, including: a double-digit increase in total cash pay in 2012, up from 2011.  You can click here to see the report.

It's based on data collected directly from hundreds of hedge fund professionals (Citadel, Silver Point, Lansdowne, Carlson, Man, Black River just to name a few).  The 53-page report highlights:

- Breakdown of earnings by title, fund size, and fund performance
- Cash compensation earned
- Bonuses
- Equity sharing levels
- Work satisfaction
- Relationship between fund performance and pay expectations

Key Takeaways From the 2013 Report

- Annual average cash compensation is $314,000, up 15% year over year

- Nearly three-quarters of participants work between 50-70 hours per week

- Mean compensation did not vary much based on fund size

- Big funds are getting bigger while small funds have trouble raising capital

- Only 4% of respondents made more than $1 million (correlated to good fund performance)

- Bonuses represented more than 70% of total earnings for the 2 highest earning groups

- 13% of respondents said they were required to invest some of bonus back into fund

As far as hedge fund hiring goes, 2012 saw an increase in those hiring operations positions.  In 2013, many funds expect to hire in their legal department.  As many funds were in the black in 2012 (and are off to a good start in 2013), it's reasonable to expect investment team hiring to pick up as well.

Overall, some very interesting data highlighted in the report.  If you're looking to get into the industry or make a move, this report could definitely provide leverage in negotiations.  And if you run a fund, these data points will shed light on if you're under/over-paying employees and what the competition is offering.  You can check out the full hedge fund compensation report here.

Monday, February 11, 2013

Children's Investment Fund on News Corp & Disney: Q4 Letter

Christopher Cooper-Hohn's Children's Investment Fund is out with its 2012  Q4 letter and we wanted to highlight some excerpts.  One of the main takeaways here is that Porsche SE is now Children's largest holding.  The fund had a great 2012 and was up 29.52% for the year.

Children's Top 5 Holdings At 2012 Year-End

1. Porsche SE: 20.6% of Fund NAV
2. Lloyds Bank Bonds: 17.6%
3. News Corp: 15.4%
4. Japan Tobacco: 14.7%
5. Aurizon (QR National): 13.7%

Porsche shares have appreciated considerably over the past few months, but Cooper-Hohn thinks there's more room to run, with an upside of 160%.  They see 4 ways they can profit from the investment: "strong underlying performance of the investment in VW, a successful and benign resolution of the legal cases, large and increasing dividends from VW flowing through to Porsche shareholders, and the longer-term potential for a merger between Porsche and VW."

News Corp: Publishing Assets Undervalued?

Cooper-Hohn has previously talked about his News Corp position, but his latest letter breaks down how the company's spin-off of the publishing assets could come as a surprise.

While Children's has a 'pessimistic' view on print, they do acknowledge that valuation could easily double to $10 billion based on the new publishing co's assets:

" •    $0.5bn of cash: This likely be higher as the group is still considering how much cash to allocate to PubCo, but any change should be a wash with the change in the market cap.
•    $3.0bn: 50% stake in Foxtel, Australia's main pay-TV provider in a third of all homes in Australia. 14x net operating profit after tax (nopat).
•    $1.5bn stake in the listed and dominant online property listings company in Australia.
•    $1.5bn: at 10x EBIT, 14x nopat the Australian Cable Network (Fox Sports Australia) assets which account for 27% of PubCo EBIT are clearly worth a higher multiple than the publishing assets.
•    $0.7bn: listed stake in Sky Network Television, a New Zealand pay-TV operator.
•    $0.5bn: Harper Collins book publishing on 8x nopat.
•    $3.2bn: Newspapers on 8x nopat: includes DowJones, New York Post, HarperCollins, News America Marketing, Australian Publishing and UK Publishing.
•    $0.5bn: The PubCo also has NOLs and capital loss carryforwards of $1.2bn. These probably need a huge discount, but should have some value.
•    $0bn: The Education business Amplify will generate $180m of losses in 2013. These losses are capitalized in many valuation approaches. First, we think this is a credible enough investment to be valued at zero rather than negative $1.2bn (10x $120m nopat losses); News Corp will clearly argue it’s worth a considerable premium to NAV, let alone zero. Second, the company guides to a sharp narrowing in these losses over the coming years which will actually contribute strongly on a starting base $535m PubCo EBIT in 2013."

Overall though, Children's sees NWSA as a story on affiliate/re-transmission re-pricing as they focus on the Fox Entertainment Group. 

Disney: Entering a 'Multiyear Growth & Re-rating Phase'

Sticking with media, Cooper-Hohn also shared thoughts on Walt Disney (DIS).  He writes,

"We believe we are in the midst of a very long-term transfer of economics from distributors to content providers which, as we argued at our investor conference, is still in an early phase ... For the last decade, this power shift has driven consistent 8-10% pricing growth, a unique and truly giant expression of pricing power. Disney has arguably the strongest bargaining leverage of its peers and we are entering an affiliate re-pricing cycle which we think delivers some acceleration in pricing, off this extremely high base for the next 3-4 years."

He also points out how the company is finishing its massive capex at its parks and will soon begin to see margin expansion.

For more from this hedge fund, we've posted up Cooper-Hohn's presentation from the Sohn London Conference where he talked about being long News Corp and Porsche and short Fiat.  Additionally, you can view excerpts from Children's Q3 letter on Porsche and Japan Tobacco.

Jeff Saut: Don't Just Do Something, Sit There

Market strategist Jeff Saut is out with his weekly investment commentary and this week's missive is entitled "Don't Just Do Something, Sit There."  Saut appropriately titled it as such because he's received lots of advisor commentary where clients want back in the markets and there's really been no pullback to do so.  A few weeks ago, he singled out the best stock ideas for the next 3-5 years.

This highlights the seemingly omnipresent appetite for equities by retail investors... that is once markets have rallied higher and they feel 'safe' looking in the rear-view mirror and seeing gains instead of tumult. 

Saut continues to believe that we could potentially be entering a new secular bull market.  But first, he'd like to see the Dow Jones Industrial breakout to new highs.  In his piece, he draws on similarities between the present and 1982.

That said, he feels that the market will pullback soon to the tune of 5-7%.  Embedded below is Saut's latest commentary:

You can download a .pdf here.

For more from the market strategist, head to Jeff Saut's best stock ideas for the next few years.

Seth Klarman's Baupost Group Increases Idenix Pharmaceuticals Position

Seth Klarman's firm Baupost Group recently filed an amended 13G with the SEC regarding its position in Idenix Pharmaceuticals (IDIX).  Per the filing, Baupost Group now owns 18.48% of the company with 24,740,200 shares.

This marks around a 106% increase in the number of shares they own since the end of the third quarter.  The filing was made due to portfolio activity on January 31st.

Per Google Finance, Idenix Pharmaceuticals "is a biopharmaceutical company engaged in the discovery and development of drugs for the treatment of human viral diseases with operations in the United States and Europe. The Company’s research and development focus is on the treatment of hepatitis C virus (HCV)."

You can see more of Baupost Group's portfolio activity here.

Notes From Bruce Berkowitz's CSIMA Presentation

Last week we posted up notes from the Columbia Investment Management Conference.  While those notes weren't directly attributed to particular speakers, one speaker did go 'on the record' at the event.  So today we present notes from comments made by Bruce Berkowitz of Fairholme Capital at CSIMA 2013.

Notes From Bruce Berkowitz's CSIMA Talk

- On diversification: it dumbs us down because we can't focus on a few things that can make a difference.  You're most likely not the only fund your investors are in so you have to be more risk averse for your own job safety.  Most managers hold too many positions.  Less than 10 positions typically equals career risk.  The benefits of diversification fall off between 10-30 stocks in a given portfolio.  If investors put around 10% in one fund and that fund holds 10 stocks, they effectively hold 100 stocks.

- On spending time with clients: it's actually a disservice to them to spend time away from investment research.  You need to be focused on your investment process as it will benefit them more than spending time with them.

- On time management:  the best way to maximize your time is to say "no" to a lot of people.  He likes to get the most out of every minute so he's even listening to books on tapes.

- On investing: If you hustle on the investment trail and do it 24/7 you'll be a great investor 30 years from now.  Take 2 steps back to take 10 steps forward, sometimes it's necessary. He reads company reports before going to bed and is always listening to conference calls.  He also emphasized decoupling from the herd or the groupthink of Wall Street (most likely why he's in Miami instead of New York).  To do well in life, you've got to be excited. 

- On Sears (SHLD): He still likes the stock and the real estate is what's attractive to him.  It has more commercial square feet than Simon Property Group (SPG), but SPG is worth 10x more than Sears (using enterprise value).  Some investors argue that Eddie Lampert isn't a retailer, but look at AutoNation  (AN), which he's also been involved in.  Berkowitz feels that he has a nice margin of safety at the prices he bought at and has the potential to make a lot of money.  (We've previously posted Berkowitz's case study on Sears.)

- On Bank of America (BAC): A lot of people are fixated on the Countrywide problems, but great earnings are there and in the future that Countrywide drain won't be there so the earnings power is just starting to show.  (We've also posted Berkowitz's Bank of America case study.)

- On American International Group (AIG): The company will eventually become a profitable insurance business as they're the price leader. (You can also view Berkowitz's thesis on AIG here.)

Update: There's also some audio from Berkowitz's talk which we've embedded below via Investing In Knowledge:

For more from the Columbia Investment Management Conference, be sure to check out more notes from CSIMA 2013.

And for more from the Fairholme manager, be sure to also check out Berkowitz's interview at the University of Miami.

Marcato Capital Managment & Oskie Capital File 13D on Lear

Mick McGuire's hedge fund firm Marcato Capital Management just filed a 13D with the SEC regarding shares of Lear Corp (LEA).  Per the filing, McGuire's firm now owns 5.2% of the company with 5,034,986 shares (inclusive of common stock and options/swaps, as detailed below).

This was a joint filing along with David Markowitz's and Clive Rowe's hedge fund Oskie Capital, forming a filing 'group'.  Oskie owns 0.4% of Lear shares.

This is a brand new position for McGuire's fund, who are known for their activist investment strategy.  The filing was disclosed due to portfolio activity on February 6th.

Activist Plans

Per the fine print of the filing, the hedge funds have recently discussed the capital allocation practices of the company.  They also plan to nominate director candidates.  The company recently announced that it was accelerating its share repurchase plan and increasing its dividend.  The hedge funds still plan on nominating directors and engaging in discussions with management.

Breakdown of Position

Marcato's position is slightly more complex than just owning equity outright.  They have the right to purchase 2,383,440 shares via call options with strikes ranging from $0 to $55 and exercise dates from March 2013 to February 2015.

They also hold options to sell 1,997,180 shares with strikes ranging from $25 to $40 with exercise dates ranging from March 2013 to February 2015.  Additionally, they've entered into swaps with the number of shares specified in such swaps totaling 618,040.

Oskie also holds options to purchase 200,000 shares via call options with strike prices of $50 and expiration dates ranging from February 2013 to March 2013. You can view the specifics of all these transactions at the bottom of the filing here.

Per Google Finance, Lear is "a tier 1 supplier to the global automotive industry. The Company supplies its products to automotive manufacturers with automotive seat systems and related components, as well as electrical distribution systems and related components. The Company has two segments: seating and electrical power management systems (EPMS). The seating segment includes seat systems and related components, such as seat frames, recliner mechanisms, seat tracks, seat trim covers, headrests and seat foam."

For more on McGuire's hedge fund, we've detailed Marcato Capital Management's portfolio activity here as well as a pitch from McGuire on three of his holdings.

Southeastern Asset Management Opposes Dell Takeover, FIles 13D

Mason Hawkins' firm Southeastern Asset Management has filed a 13D with the SEC on shares of Dell (DELL), indicating that they will use 'all options' to oppose the deal to take the company private, including a proxy fight, litigation claims, Delaware courts, etc.

Founder Michael Dell and Silver Lake Partners have bid to take the company private at a level that Southeastern says is well below intrinsic value of the company.  The deal is for $13.65 per share while Hawkins values the company around $24 per share. 

Southeastern is Dell's largest institutional shareholder as they own 8.5% of the company.  They feel a recapitalization of the company is a much better option.

Other Shareholders Support Southeastern

Reuters has reported that other institutional shareholders are opposed to the deal as well, including Harris Associates LP, Yacktman Asset Management LP, and Pzena Investment Management.  Those three managers collectively own 3.3% of the company.  Pzena's chairman, Richard Pzena, feels a deal should be in the $20 per share arena. 

All told, approximately 11.8% of the company's shareholders seem to oppose the deal (at least publicly).  It will be interesting to see how this plays out.

Embedded below is Southeastern's letter to Dell's board of directors:

You can download a .pdf copy here.