Value Investing Congress Notes: Jeffrey Ubben, Claude Leveille, Michael Kao ~ market folly

Thursday, May 5, 2011

Value Investing Congress Notes: Jeffrey Ubben, Claude Leveille, Michael Kao

Yesterday we posted up a summary of the Value Investing Congress' first day featuring speeches by Howard Marks, Steve Romick, Whitney Tilson and more. Here are some notes from day two of the event:

Jeffrey Ubben (ValueAct Capital): This activist investor only makes 3 or 4 new investments each year and their average holding time is 3 years. ValueAct says that their biggest advantage in the markets is their ability to truly focus on the long-term.

Ideally, they look for companies with solid cashflow during both economic prosperity and troubled times. Their activist strategy really places focus on management teams and they've been involved in numerous CEO changes. Interestingly enough, ValueAct doesn't do any shorting.

Ubben's newest position is in Motorola Solutions (MSI). Investors will recall that the former Motorola was split into two: MSI and then Motorola Mobility (MMI). ValueAct likes MSI due to its improving margins and the fact that it is still growing through a down cycle. Also, the company's cash currently represents 40% of market cap. For more on this manager, head to our post on ValueAct's activist strategy as well as some of their recent portfolio activity.

Claude Leveille (Courant Investment Management): Leveille seems to be a contrarian as he focuses on avoiding the 'herd'. We've of course talked about the hedge fund herd mentality numerous times before. Some years Leveille does as few as 3 or 4 trades, noting that he is extremely patient to wait for the fat pitches. Courant uses no leverage and only holds long positions.

One fat pitch that Courant swung at was the 10% position he took in BP (BP) after the Gulf oil spill with an average price of $31. He believed that the market overreacted to the news and has been correct as shares currently trade around ~$44 per share. We also documented how Whitney Tilson's T2 Partners also bought BP during the spill, taking advantage of the carnage (you can see their presentation on BP here). And then this year, well after the oil spill, David Einhorn still saw value as his Greenlight Capital also bought BP.

Courant aligns its interests with investors by employing a modified fee structure. Leveille says that the typical hedge fund fee structure of a 2% management fee and 20% performance fee "grossly misaligns interests." As such, he has implemented a 0.75% management fee and then a 15% performance fee over a 5% hurdle. Also, the performance fees are not extracted, but rather remain in the fund itself.

Leveille says that the best investments are the ones that are simplest to understand. This is reminiscent of Warren Buffett's approach of only buying things in your "circle of competence." Leveille listed some of his mistakes as investor such as: not concentrating positions enough, going outside of his circle of competence, selling too early, and holding too much cash.

And speaking of cash, Courant currently has around 25% of assets parked there. Leveille has been buying South Korean equities and also US large caps in the healthcare sector. He also mentioned that he currently does not have any investments in gold, bonds, or the euro. As far as inflation hedges go, he thinks that buying companies with high return on equity (ROE) can help battle the printing presses.

Michael Kao (Akanthos Capital Management): Sticking briefly with the theme of protecting from inflation, Kao recommended going long the Hong Kong dollar as a form of protection. In terms of general investment opportunity, Kao sees perpetuity options as an attractive bet, pointing to GSE preferreds as an example. He also mentioned that he learned an early lesson to be 'long optionality' as a portfolio lined with asymmetric payoffs is a solid strategy.

Akanthos Capital focuses on convertible, capital structure, and event-driven arbitrage. Prior to founding Akanthos, Kao co-founded the arbitrage strategies group at Canyon Capital Advisors. He holds a B.S. in electrical engineering and computer science from the University of California at Berkeley and an MBA from the Wharton School at the University of Pennsylvania.

Jonathan Friedland (Porter Orlin): Friedland's presentation focused on American value investors hunting for value abroad. His first idea was Droga Raia (SAO: RAIA3), a retail drug store operator in Brazil. His second pick was Coal India (BOM: 533278), a non-coking coal and coking coal producer. Lastly, he mentioned Television Broadcasts Limited (HKG: 0511), a program production, licensing, and distribution company (it also trades as an ADR on the pink sheets as TVBCY). Friedland is the portfolio manager for Porter Orlin's Amici Global funds and previously worked at hedge fund Zweig-Dimenna.

For more coverage of this event, be sure to check out our summary of the Value Investing Congress from the first day's speakers.

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