Rick Reider Long Emerging Markets Debt: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago Conference 2017.  Next up is Rick Reider of Blackrock who pitched a long of emerging markets debt.


Rick Reider's Invest For Kids Chicago Presentation: Long Emerging Markets Debt

“Getting income the new-fashioned way”.  Huge, extraordinary demand for income; buy emerging markets debt – hard to find it elsewhere.  Aging populations, lower growth will drive more demand for income.  Tens of trillions of supply-demand imbalance for income.  Would growth will follow the demographics.  Rates may stay low for a long time, especially ECB and BoJ (China, India, USA are a little better).  China is the world’s demand growth driver – up to 40% of world growth is China.  26 of the world’s 27 largest economies are growing right now – rare and extraordinary.

A good capital spending cycle is underway and that bodes well for 2018.  There has been no deleveraging – private debt now on public balance sheets.  A rate increase is daunting – central banks can’t let rates rise in the next five years or else the debts become overwhelming.  Technology is deflationary, although wage pressure is slowly building in developed economies (not in EM).

Emerging market valuations are still attractive: real rates + inflation + credit (CDS) framework shows value.  Equilibrium in energy markets has led to very low volatility in inflation – that stability in emerging markets is a new paradigm.


For more from this event, check out the rest of the presentations from Invest For Kids Chicago 2017.

Third Point Q2 Letter: Re-enters Alibaba, Adds BlackRock Stake

Dan Loeb's hedge fund firm Third Point was up 4.6% for the second quarter and is up 10.7% for the year.  Third Point's second quarter letter reveals they've re-entered Alibaba (BABA).  They feel now is the time to re-enter due to the company's launch of personalized advertising, new ad tech for brand advertisers, as well as revenue potential from higher ad loads, among other reasons.

Backing out net cash and some other stakes, Loeb's firm feels Alibaba's core business alone is worth $121 per share (around 15x their 2019 EPS estimate of $8.20) with earnings growing 30% year-on-year.  They feel BABA can close the valuation gap with competitors like Tencent, which trades at 32x consensus 2018 EPS.

Third Point also reveals a stake in BlackRock (BLK) in the letter.  Rather than simply being an asset manager. they feel it's "becoming a network or index-like business, with earnings power driven by ETFs (via iShares) and data & analytic services (via Aladdin).  They point out they're basically oligopoly businesses.

Also, a few months ago we highlighted how this hedge fund has gone activist on Nestle and we posted Third Point's letter on Nestle here.

Embedded below is Third Point's Q2 2017 letter:



You can download a .pdf copy here.

For other recent hedge fund letters, you can also read Greenlight Capital's Q2 letter here.

What We're Reading ~ 4/19/17

The Attention Merchants: The Epic Scramble To Get Inside Our Heads [Tim Wu]

Why we think we're better investors than we are [NYTimes]

Inside the hotel industry's plan to combat Airbnb [NYTimes]

Two law professors mimic activist hedge fund: a corporate raiding adventure [The Atlantic]

Vanguard is growing faster than everybody else combined [NYTimes]

Q&A with Blackrock's (BLK) Larry Fink [Bloomberg]

Why Facebook (FB) keeps beating every rival: it's the network of course [NYTimes]

A look at the first decade of augmented reality [Ben Evans]

Barry Ritholtz's rules of valuations [The Big Picture]

The making of a brand [Collaborative Fund]

Is American retail at a historic tipping point? [NYTimes]

E-commerce is a bear [Andy Dunn]

American Express, challenged by Chase, is losing the 'snob' war [NYTimes]

The potential of graphene to revolutionize the airline industry [Richard Branson]

A day in the life of a food vendor [NYTimes]

What We're Reading ~ 4/5/17

Modern Monopolies: What It Takes to Dominate the 21st Century [Alex Moazed]

How moats make a difference [Intrinsic Investing]

Boyar Research's thesis on QVC and Madison Square Garden [Barrons]

Autonomous cars and second order consequences [Benedict Evans]

The hardest question in portfolio management [A Wealth of Common Sense]

Diversification, adaptation, and stock market valuations [Philosophical Economics]

Noise: how to overcome the high, hidden cost of inconsistent decisions [Harvard Biz Review]

How Domino's built a $9 billion empire [Bloomberg]

How do winning consumer goods companies capture growth? [McKinsey]

Airlines make more money selling miles than seats [Bloomberg]

At Blackrock, machines are rising over managers to pick stocks [NYTimes]

What's next for malls? [Fashionista]

Andrew Ng on what AI can and can't do [Harvard Business Review]

Margin debt hit all time high in February [WSJ]

The 1% rule: why a few people get most of the rewards [James Clear]

Jeff Ubben & Paul Hilal: Future of Shareholder Activism Panel at Reuters Live

At the Reuters Live Newsmaker Event, a panel on The Future of Shareholder Activism featured Jeff Ubben of ValueAct Capital and Paul Hilal of Mantle Ridge and they were later joined also by Zach Oleksiuk of BlackRock and Richard Brand of law firm Cadwalader. 


Jeff Ubben (ValueAct Capital)

He said "The last fat pitch was financials in summer of 2016.  We're very late cycle."  He's seen some activity that's concerning to him where companies are just doing silly deals or allocating tons of money to stupid things.  He says the markets are loving it, but he's not.  He says he's had to be "Mr. No" in board rooms which is the kind of thing he has to do at tops, whereas at bottoms he needs to tell people to buy.  Ubben's got $3 billion in cash right now (manages $16 billion) and is clearly cautious.

Thinks Morgan Stanley's (MS) earnings will go from $2.50 to $4.50.  They've sold some shares but still own it.  Sounds like he only sold because shares have gone up so far so fast.

"One of the hardest things to do is refresh a board."  "The hedge fund activist is putting us on a very awful path.  These are guys with 1 year money and want 1 year returns.  The hedge fund activist is a big problem."

Thinks activist investing should be its own asset class.  You've got private equity with 10 year lockups, hedge funds mainly with 1 year lockups, so perhaps activist investors could slide in at 4-5 years.

Ubben also noted that he thinks large cap activist plays are 'treacherous' with high PEs and then not a lot of growth.  Argues that so much money flowing into alternatives has inflated things.  "Everything about Trump I think is inflationary."

"It's uncomfortable for directors to talk to shareholders" due to regulations (Reg FD).  "Boards are just ... ugh." Thinks this is a 'young' business (i.e. younger people have the energy to do the legwork) and doesn't think he'll be the portfolio manager of ValueAct in five years.  For more on this fund, we've highlighted recent ValueAct portfolio activity here.



Paul Hilal (Mantle Ridge)

Prior to founding Mantle Ridge, Hilal worked at Bill Ackman's Pershing Square.  Has a 5-year lockup at his fund with over $1 billion with a vehicle designed to hold 1 company.  Purposefully moved away from an annual payment structure and he gets paid at the end of the lockup if he's done his job and created value.

Argues longer lock-up helps when dealing with management as he's not just in for a quick hit.  He's been working with railroad CSX (CSX).  Hilal notes that "(Trump) likes the thought of a manufacturing renaissance here."  If a railroad can be a facilitator then that will be welcome by the administration.  Thinks it's very useful for companies to hear from various types of shareholders: hedge funds, institutional investors, etc. 

Talked about the rules around disclosing activist positions (i.e. 13D filings etc).  Thinks there's a decent balance now.  Seemed to think potentially moving disclosure requirements down to a 1% threshold would be difficult as shares can move against you.

Thinks it's useful for Directors of companies to go on a 'listening tour' to hear what people think about the company first.  It's in the company's interest to attract smart investors to give input. 



Zach Oleksiuk (BlackRock)

"We are skeptical of directors who are focused on a single issue or a single thesis."  Notes there's a lot of different types of activists in terms of style and quality.  Thinks there will be more investor focus on environmental and social issues going forward, especially if the issues impact the business.



Richard Brand (Cadwalader) 

Settlement outcomes should be driven by two things: what's right for the company (shareholder value) and the relative leverage of the parties.  The opinions of large institutional shareholders matters a lot.  Thinks there will be a convergence of private equity style and activist style investing in the future.  Also argued hedge funds could start to buy companies (cites Elliott Management, Carl Icahn).  And then private equity investors could start behaving more like activists. 

Jim Grant Bearish on BlackRock: Invest For Kids Chicago 2016

We're posting up notes from the Invest For Kids 2016 investment conference.  Next up is Jim Grant of Grant's Interest Rate Observer who was bearish on BlackRock (BLK).


Jim Grant's Presentation at Invest For Kids Chicago 2016 

•    So much data – how do we know what is true?

•    Easy to be overwhelmed

•    Narratives as a belief system

•    Active investors accept or reject narratives; passible investors always accept the narrative by default

•    Markets are episodically efficient; they are no more coolly analytical than the people in them or the algorithms they write

•    Interest rates are certainly low – not good for my business model

•    Since 1997, the number of public companies in U.S. has been cut in half

•    Now we have the first nominally negative bond yields in 5,000 years

•    If Fed were late to raise rates it wouldn’t be the first time; likewise wouldn’t be the first time the bond market underestimated the fallibility of human beings



•    Bearish on Blackrock (BLK) 

•    Its motto should be “built for a time of falling rates, rising asset prices, massive inflows…”

•    Tailor-made for the financial moment

•    Hand-in-glove with the Fed – Blackrock is the Federal Reserve’s Wall Street doppelganger

•    BLK took in 18% of all mutual fund and ETF inflows in 2015

•    Assets may come, assets may go

•    Margins? There is a price war in passive. Fees are ~69 bps at BLK versus 15 at Vanguard. Further compression is likely.

•    BLK is at 18x EPS vs. 14x industry average

•    Massive amounts of insider selling at BLK without any buys


Be sure to check out the rest of the presentations from Invest For Kids 2016.

Notes From Invest For Kids Chicago 2014: Ackman, Zell, Robbins & More

The sixth annual Invest For Kids Chicago just took place and featured hedge fund managers sharing their latest investment ideas to benefit local children's charities (100% of the money raised goes directly to the charities).  Below are links to notes from each speaker's presentation.  Enjoy!


Invest For Kids Chicago 2014 Notes

- Fireside Chat with Bill Ackman (Pershing Square)

- Larry Robbins (Glenview Capital): 4 long ideas

- Sam Zell's Fireside Chat 

- Mason Hawkins (Southeastern Asset Management): long Level 3 Communications 

- Wally Weitz (Weitz Investment Management): long Liberty Media

- Steve Kuhn (Pine River Capital): On Japan

- Nehal Chopra (Tiger Ratan Capital): long Actavis and Charter Communications

- Jonathan Kolatch (Redwood Capital): Puerto Rico Power Authority

- Mike Wilkins (Kingsford Capital): On Short Selling

- Emerging Managers: Nancy Prial (Essex) long iCAD

- Emerging Managers: Tim Hurd (Blue Spruce) long BlackRock 

Tim Hurd Long Blackrock: Invest For Kids Chicago

We're posting up notes from Invest For Kids Chicago 2014.  Next up is the emerging manager panel featuring Tim Hurd of Blue Spruce Capital who pitched long Blackrock (BLK).


Tim Hurd's Invest For Kids Chicago Presentation


Idea: BlackRock (BLK)

•    They pursue a private equity approach to public markets.
•    Background is Madison Dearborn. Concentrated fashion, no more than 15 stocks with 3 year or more holding period.
•    Grinder – a company with high FCF that can do well over time.
•    Thesis – highly diversified company across clients, product, style and regions.
•    BlackRock wins regardless of what happens in the capital markets.
•    Mostly passive.
•    iShares franchise is the gem. Grown 20% - 30% range, thinks it can grow 11% or more. ETF business is an oligopoly. Return/scale business hard to break into.
•    BLK’s ETF franchise includes equity and fixed income ETFs.
•    Retail AUM growing.
•    Fee growth leads AUM growth. iShares and retail generate margin accretive growth.
•    FCF share has historically exceeded net income (excluding changes in trading investments).
•    Myths about BlackRock : too big to grow, ETF are low fee/low margin business, great rotation fears.
•    PIMCO is the gift that keeps on giving to BLK and other competitors. Pimco Total Return lost another $25B +, BLK and others benefiting.
•    ETFs gain incremental margins of 80% - 90%.  Some ETF products like HY carry 50 bps fee.


Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

What We're Reading ~ Analytical Links 8/27/14

Profile of Alibaba's Joseph Tsai [Bloomberg]

Carol Loomis' latest on BlackRock: the $4.3 trillion force [Fortune]

Profile of 108 year old investor Irving Kahn [Telegraph]

Lessons learned in 30 years of investing [What Works on Wall Street]

Share sleuth's investment checklist [Interactive Investor]

A look at Post Holdings [View From the Blue Ridge]

A look at WL Ross Holding Corp [Brooklyn Investor]

What makes Warren Buffett a great investor? [Farnam Street]

Amazon: not an e-commerce company [Stratechery]

The inside story of how Netflix came to pay Comcast for traffic [Quartz]

Morningstar: a force to be reckoned with [FT]

Nonprofit hospitals' earnings fall as costs outrun revenue [WSJ]

Interview with Burger King's CEO [Financial Post]

The company speeding a genetic revolution [Forbes]

Google's valuation: much cheaper now than 10 years ago [WSJ]

Family Dollar bidding war suggests 'peak dollar store' is here [Yahoo]

Match.com might not light IAC's fire [WSJ]

Peculiar habits of incredibly successful people [Morgan Housel]

Interview with venture capitalist Bill Gurley [Forbes]

Grey Owl Capital on Investing in a Low-Return Environment: Q1 Letter

Jeff Erber and Grey Owl Capital are out with their Q1 letter to investors and in it they highlight how they're approaching investing in a low-return environment.  They're employing a three-pronged attack as follows:


1. Look for undervalued securities:  They've been "high-grading" their portfolio by buying cheaper, high quality US names.  This is a concept long echoed in commentary from Oaktree's Howard Marks as well as GMO's Jeremy Grantham for the past few years as rates have remained low for a prolonged period.

Here's what individual names Grey Owl's been trading in:

New stakes: Pepsico (PEP), Blackrock (BLK), BMC Software (BMC), and Excelon (EXC)
Added to existing stakes: eBay (EBAY)
Exited: Apollo Residential Mortgage (AMTG) and Western Union (WU)
Trimmed: Apollo Group (APOL), Bridge Point Education (BPI), Market Vectors Gold Miners (GDX), Lexmark (LXK), and Transocean (RIG).


2. Invest in short dated high-yield fixed income:  Given that the Fed has in the past signaled potentially raising rates in 2013, this short-dated approach makes sense.  They've purchased the following bonds (with full write-ups on each stake in the below letter):

MGM Resorts 6.75% 9/2012 - purchased in December 2011
CSC 5.5% 3/2013 - purchased in January
Western Alliance Bancorp 10% 9/2015 - purchased in early April


3. Hold plenty of dry powder anticipating better opportunities: This might look counterintuitive at first glance given that holding cash earns you practically nothing, especially in a low yield environment.  However, consider that many hedge fund managers often hold cash as a hedge and as a utility to deploy when better investment opportunities arise. That's exactly what Grey Owl has done as they've deemed the current set of opportunities less desirable and they think better prices to buy at lie ahead.


Embedded below is Grey Owl Capital Managment's Q1 letter & you can download a .pdf here:




For more investor letters we've posted up Dan Loeb's Third Point Q1 letter as well as Passport Capital's letter.