Friday, April 12, 2013

Jonathan Ruffer's Latest Commentary: Reducing High-Yield Equities, Adding Interest Rate Hedges

Today we check in with UK-based manager Jonathan Ruffer via his April market commentary from Ruffer Investment Company.  In his latest missive, he talks about the continued government printing presses and how liquidity benefits asset prices.

Investors Flee Cash Seeking Yield

Ruffer points out that while many investors have gotten over their losses from the financial crisis, there still is no worthwhile yield on any 'safe' investments.

He writes,

"The  lack of yield on cash is a distortion which means that safety can no longer be found in conventionally defined ‘safe  assets’ or ‘safe havens’, and cash itself is dangerous to hold in these inherently inflationary conditions. Without a refuge,  and safety closed off to prudent investors, there seems little choice but to strive for capital gain – which has been broadly  available. Thus we are all chivvied towards reckless behaviour at a time when the macro-economic climate cries out for  carefulness in the management of assets."

His main concern has been and continues to be inflation going forward.  Previously, we'd noted how Ruffer had been seeking 'refuge' in inflation-linked bonds, gold and Japanese equities.  As of late, gold has obviously been selling off.  But as a pleasant surprise to Ruffer, his Japanese equities holdings have fared better than anticipated.

Trimming Equities, Adding to Interest Rate Hedges

But as equities have surged, Ruffer has been reducing their positions in high-yield staple equities.  Additionally, Ruffer makes the case that interest rates could rise sooner rather than later and his firm has used instruments that would take advantage of such happening in the US and Japan.  If interest rates surged higher faster than many anticipate, Ruffer sees this as bad for equities and has looked to hedge against such a scenario.

Embedded below is Jonathan Ruffer's Q1 letter:

JANA Partners Discloses Ashland (ASH) Stake

Barry Rosenstein's hedge fund firm JANA Partners has filed a 13D with the SEC regarding shares of Ashland (ASH).  Per the filing, JANA has revealed a 7.4% ownership stake in ASH with over 5.8 million shares.

This is a brand new position for the hedge fund.  However, they have owned the name in the past: back in 2010.  The latest filing was required due to portfolio activity on April 1st, though JANA was out buying ASH shares as early as February 12th and as recent as April 10th according to the filing, at prices ranging from $76.xx to $80.xx.  ASH shares currently trade around $84.

Breakdown of Options Position

In the fine print, we see that JANA's position includes 4,145 and 2,210 call options with strike prices of $65 and $70 that expire next week (April 19th).  They also own May expiration calls via 1,465 options with a strike of $60 and 1,445 options with a strike of $65.  Additionally, they've sold 2,270 April puts with a strike of $70 and they've also sold 1,445 May puts with a strike of $65.

Reason For Purchasing ASH Shares

As to why they purchased the stake, JANA reveals their intentions in the "purpose of transaction" section of the 13D filing:

"The Reporting Person acquired the Shares because it believes the Shares are undervalued and represent an attractive investment opportunity. The Reporting Person has had discussions with the Issuer’s management relating to, among other things, the Issuer’s business, corporate structure, capitalization, operations, stragetgy and future plans. The Reporting Person expects to continue to have such discussions with the Issuer’s management as well as with the Issuer’s board of directors, shareholders and other parties relating to such matters, and may take other steps seeking to bring about changes to increase shareholder value."

Per Google Finance, Ashland is "a global specialty chemical company that provides products, services and solutions throughout a variety of industries. Ashland’s business operates in four segments: Ashland Specialty Ingredients; Ashland Water Technologies; Ashland Performance Materials and Ashland Consumer Markets."

For more from this hedge fund,  be sure to check out Rosenstein's in-depth interview with Columbia Business School.

What We're Reading ~ Hedge Fund Links 4/12/13

Notes from Jeff Gundlach's DoubleLine lunch [Reformed Broker]

Diworseification: avoiding over-diversification with best idea funds [SumZero]

Lee Cooperman: stocks are the place to be [HFIntelligence]

Alternative investments are no longer all that alternative [Abnormal Returns]

Vulcan Value Partners offers top investing ideas [Barrons]

Third Point plans Greece fund [Bloomberg]

Some March hedge fund performance numbers [HFIntelligence]

Are hedge fund-backed reinsurers here to stay? [Reuters]

Ackman says mistakes were made in JC Penney (JCP) turnaround [Reuters]

Paulson said to start fund to reduce clients' tax bills [Bloomberg]

Quant funds run one-third of hedge fund assets [HedgeWorld]

Agrium (AGU) sweeps proxy vote, JANA Partners cries foul [Reuters]

Canadian Pacific (CP): Off the tracks after Ackman [Seeking Alpha]

Institutional herding in the corporate bond market [SSRN]

An old profile of Carl Icahn [LATimes]

Wednesday, April 10, 2013

Bruce Berkowitz's Fairholme Reduces MBIA Stake

Bruce Berkowitz's investment firm Fairholme Capital has just filed an amended 13G with the SEC regarding shares of MBIA (MBI).  Per the filing, Fairholme has disclosed that they've reduced their position in MBI by 11 million shares.

This marks around a 26% reduction in their position size.  The filing was required due to portfolio activity on March 31st and Fairholme now owns 16.3% of the company.  We've previously posted up Berkowitz's investment thesis on MBIA for those interested.

Per Google Finance, MBIA  "operates the financial guarantee insurance businesses in the industry and is a provider of asset management advisory services. These activities are managed through three business segments: United States public finance insurance, structured finance and international insurance, and advisory services. MBIA’s United States public finance insurance business is operated through National Public Finance Guarantee Corporation and its subsidiaries, its structured finance and international insurance business is primarily operated through MBIA Insurance Corporation and its subsidiaries, and its asset management advisory services business is primarily operated through Cutwater Holdings, LLC and its subsidiaries. It also manages certain business activities through its corporate, asset/liability products, and conduit segments. The corporate segment includes revenues and expenses that arise from general corporate activities."

For more on Fairholme, head to a recent interview with Berkowitz as well as notes from his CSIMA presentation.

Tiger Global Reduces Position in UK-based Dignity Plc

Chase Coleman’s hedge fund Tiger Global Management has slightly reduced its position in London listed funeral services company, Dignity (LON: DTY).

Due to trading on April 4th, Tiger Global now hold 5.98% of the voting rights, reduced from their previous 6.69% position. Based on public filings, Tiger Global have been invested in Dignity for several years.

Per Google Finance - “Dignity plc is a United Kingdom-based holding company. The Company, along  with its subsidiaries, is engaged in the provision of funeral services, including funeral directing,  crematoria operation and the marketing and administration of pre-arranged funeral plans. Its  operations are managed across three main areas: funeral services, crematoria and pre-arranged  funeral plans. Funeral services revenues relate to the provision of funerals and ancillary items, such  as memorials and floral tributes. As of December 28, 2011, the Company operated a network of 600  funeral locations throughout the United Kingdom. During the fiscal year ended December 28, 2011,  it conducted 62,300 funerals. Crematoria revenues arise from cremation services and the sale of  memorials and burial plots at the Company's crematoria and cemeteries. It operates 35 crematoria  in England and Scotland. On January 25, 2013, the Company acquired Yew Holdings Limited.”

For more on this hedge fund, we've highlighted some of Tiger Global's other portfolio activity.

Third Point Short Japanese Yen, Long Liberty Global & International Paper: Q1 Letter 2013

Dan Loeb's hedge fund Third Point has released its Q1 2013 letter to investors.  In it, we see that Third Point finished the first quarter up 9%.  There were three main takeaways from Third Point's activity: a short position in the Japanese Yen, as well as long positions in Liberty Global (LBTYA) and International Paper (IP).

Liberty Global (LBTYA)

 Loeb's firm bought when shares swooned in Q1 after announcing a takeover of Virgin Media (VMED), a company Third Point also has a large stake in.  Third Point likes the company's impending buyback and sees "Liberty's strategic value as the primary alternative to the incumbent telecom operator's fixed infrastructure in its markets is overlooked." 

Third Point also thinks shares could compound at around 20% per year after closing of the VMED deal.  As of the end of 2012, numerous other hedgies had stakes in LBTYA including Coatue Management, Blue Ridge Capital, Eton Park Capital, and Maverick Capital.

International Paper (IP) 

They like the company's pricing power in North American Containerboard and see numerous catalysts for the company, including finding out whether the industry's price increase has been sanctioned.  We also recently highlighted that Senator Investment Group added to their IP position.

Third Point has also been short the Japanese Yen, in what has been almost a consensus hedge fund trade recently.  You can read the rationale behind their position in Third Point's Q1 2013 investor letter, embedded below:

For more from this hedge fund manager, be sure to also check out Dan Loeb's recommended reading list.

What We're Reading ~ Analytical Links 4/10/13

Choosing simplicity as a default [Abnormal Returns]

Goldman Sachs on slipping into a slowdown [Business Insider]

On sustainable competitive advantages & profitability [Deloitte]

Finding alpha in short interest data [Thomson Reuters]

Lumber prices near housing bubble high [Calculated Risk]

Do you think you might be trying too hard? [Greenbackd]

An interesting presentation on floats and moats [Fundoo Professor]

The supply and demand of alpha is not static [Abnormal Returns]

Comparing returns between property and collectibles [FT]

Shodan: the scariest search engine on the internet [CNN Money]

A low growth world can also mean high profits [NYTimes]

Single family homes built for rent market [Eye on Housing]

College, Inc. [PBS Frontline]

Daniel Kahneman on the danger in trusting your gut [Forbes]

Carrefour (EPA:CA): up the right aisle [The Economist]

Holy buybacks Batman ~ DirecTV (DTV) [Fool]

How entrepreneurs really succeed [Malcom Gladwell]

Mark Cuban on lessons learned about leadership [Forbes]

The best undergraduate business schools for finance [Business Week]