New Hedge Fund Newsletter Just Released Today

The new Q3 issue of our hedge fund newsletter was just released today.  Subscribers please login at www.hedgefundwisdom.com to download it.


Inside the New Q3 Issue:


- Reveals the latest portfolios of 25 top hedge fund managers: David Tepper, Seth Klarman, Stan Druckenmiller, Bill Ackman, Dan Loeb, Chase Coleman & more (full list here)

- Commentary on each fund's moves: Quotes from recent conference talks and hedge fund letters, performance numbers, occasional short positions, and more

- New consensus buy / sell lists: Most popular stocks of Q3

- Investment thesis summaries of 2 stocks that hedge funds have been buying


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Reasons to Oppose the SEC's New 13F Proposal

The U.S. Securities and Exchange Commission (SEC) has proposed amendments to 13F filings.  Currently, investment managers with holdings of US securities totaling $100 million or more are required to file a 13F each quarter.  The proposal seeks to increase that level 35x to managers holding $3.5 billion or more.

The result?  A 90% reduction in the number of 13Fs filed.  This would reduce the number of hedge funds that file from 800 down to less than 100.  It would decrease total filers from around 5,283 to a mere 549.   $2.3 trillion in investment holdings would no longer be disclosed.

The proposal lays out the pros of making this change, so herein we'll examine the counterpoints to their arguments and the cons of making such a drastic change.  

There's also information at the bottom on how you can provide feedback to the SEC.  The deadline to submit comment is tomorrow (September 29th, 2020).


Counterpoints to the SEC's 13F Proposal

1) 13F Filing Costs For Managers Are Negligible

The SEC's main rationale for the proposal is that it would provide relief for smaller managers.  It argues that smaller managers that would no longer file 13Fs would save direct compliance costs that "could range from $15,000 to $30,000 annually per manager."

One hedge fund told us that at worst they see around $3,500 in costs per quarter to file a 13F, or around $14,000 per year, just below the low-end of the SEC's estimates.  Another hedge fund noted that costs and time associated with filing 13Fs are negligible.  Any 'relief' that would fall to smaller managers is de minimis, at best. 

Examining a hypothetical scenario of firms currently most impacted showcases this: a firm managing $100 million with only a 1% management fee and no performance fee theoretically earns $1 million in revenue a year.  Taking the SEC's highest estimate of yearly filing costs ($30,000) and dividing that by the firm's hypothetical yearly revenue ($1 million) means that annual filing costs would be only 3% of revenue.

And using the SEC's own estimates, that's the worst case scenario since it's the smallest firm required to file a 13F.  A $500 million firm in the same scenario would only spend 0.6% of its revenue on 13F filings a year, while a $1 billion firm would only spend 0.3% of revenue on 13F filings a year, and so on.   

Given the technological advancements implemented by the SEC such as XBRL and automation, it's easier and cheaper than ever to submit a 13F.  Filings are straightforward and not time consuming.



2)  It's Hard To Front-Run Someone 6 Weeks Later 

The proposal argues that there are also "indirect costs faced by smaller managers, such as those associated with potential front-running."

A frontrunner is defined as: one who trades “in front of an expected trade by another investor, thereby making the same trade on the terms the other investor would otherwise have got.” 

13Fs are filed with the SEC 45 days after quarter-end.  It's hard to front-run someone if you're receiving the information of their actions six weeks later.  This argument does not hold weight and would only apply to unique situations such as illiquid shares.  The time-delayed reporting of holdings via 13F filing already nullifies the vast majority of any potential front-running.

 

3)  Negative Consequences for Smaller Managers

The SEC must also consider the negative ramifications for smaller managers who would no longer file 13Fs.  Many limited partners utilize 13Fs to corroborate portfolio level details of managers they're invested in.  This helps prevent another Madoff situation and furthers transparency.

It would also reduce small manager discovery.  One institutional allocator told us that under the proposal, it would be increasingly difficult for them to consider investing in smaller managers due to the lack of transparency that otherwise aides in monitoring of potential managers to allocate capital to.



4)  Drastically Reduces Transparency & Limits Future Academic Research 

The loss of 90% of 13F filers and $2.3 trillion of investment holdings will drastically reduce market transparency and should be reason enough to reject the proposal.  It would also hinder academic research about markets and securities.  In a world that's becoming more data-driven by the day, going in the opposite direction is not progress.



5)  Capital Formation Exists in Current Setup

An argument can be made that the fact that X respected investor invests in Y stock leads to capital formation because other investors are then more inclined to examine and potentially invest in a company they might otherwise not have known about or bothered to look at.  This is particularly the case in small caps, where there's less sell-side coverage and less eyeballs on the companies in general.  

So capital formation can be achieved in the current structure because these managers are disclosing stakes in said companies. And again, due to the 45-day lag for disclosure, they are insulated from front-running.

And as far as we're aware, most investors want other people to be interested in and to buy the stocks they've already built stakes in.  Increased demand can lead to an increase in share price, thus benefiting the investor that already built a position, not burden them with increased costs as the proposal suggests.  

Idea sharing will happen regardless of the proposal or not via idea dinners, conferences, passing around quarterly letters, instant/direct messages, email, word of mouth, etc.  Humans by nature are mimetic beings.



6)  Investors & Companies Won't Know The Shareholder Base; Public Companies Will See Increased Costs & Time

Removing 90% of 13F filers drastically reduces the data available to companies as to who their shareholder base is, especially in small and mid cap names.  While major holders are revealed via 13D, 13G, and Form 4 filings, the rest of the shareholder base would become opaque.

When asked if the proposal would result in increased costs and time for their publicly traded company, one head of investor relations at a small cap replied, "Definitely." 

They also noted they're "not entirely sure how to prove who is actually a (share)holder" for companies that don't pay a dividend, while companies that do pay one can glean some potential insight.

Another investor relations professional said that the proposal would add costs for their company each year because they'll have to pay a firm to analyze trading activity in their shares to figure out the rest of the shareholder base.  And even then, this data wouldn't be accurate or even complete.

Investors also often want to know who their fellow shareholders are, particularly when it comes to hedge fund 'crowding.'

Also, the National Investor Relations Institute (NIRI) submitted a letter on behalf of 237 publicly traded companies, 26 investor relations consulting firms, and five industry associations.  All of them oppose the SEC's proposal.  This includes the likes of Sherwin-Williams, Mastercard, Chipotle, FedEx, Procter & Gamble, Marriott, Delta Air Lines, among many others.

Lastly, the NYSE along with 381 undersigned public companies also sent a letter opposing the proposal.



7)  Commissioner Allison Herren Lee Opposes the Proposal

Via a statement published on the SEC's website here, she writes:

"I am concerned that the projected cost savings in today’s proposal are greatly overstated and wholly inconsistent with the Commission’s past analysis—and, importantly, that the actual cost savings do not justify the loss of visibility into portfolios controlling $2.3 trillion in assets. Additionally, the Commission’s assertion of authority to raise the threshold conflicts with the plain text in the Exchange Act that requires us to collect the information. Specifically, section 13(f)(1) withholds authority from the Commission to raise the threshold, and the proposal fails to address that conflict."

 

8)  Negative Public Response

In a poll asking if the SEC's proposal was a good idea or not, 75% of respondents said it was a bad idea and 25% said it was a good idea.

A follow-up poll asked what the 13F filing threshold should be if the SEC is deadset on raising the limit:

62% of respondents said $500 million

29% of respondents said $1 billion

5% of respondents said the proposed $3.5 billion

4% of respondents said $5 billion or higher

Not to mention, the overwhelming majority of public comments the SEC has received thus far regarding the proposal have vehemently opposed it.  Here's a link to all the comments.

Additionally, here are a just a few of the headlines/articles reacting negatively to the proposal:

- Financial Times: SEC disclosure change would allow activists to 'go dark', lawyers warn

- Bloomberg: Goldman warns SEC proposal could shroud hedge fund crowding

- Nasdaq: President of Nasdaq says transparency is at risk with proposed changes to form 13F

- Harvard Law Forum on Corporate Governance: Adoption of the SEC’s current proposal would impede companies and their shareholders from promptly identifying the company’s institutional investors, hinder shareholder/public company engagement, and increase the potential for market abuse by sophisticated investors who wish to accumulate shares on a stealth basis

- Columbia Law School Blog on Corporations and the Capital Markets: Why the SEC's proposal to amend rule 13f-1 should fail

- National Investor Relations Institute: An average company would lose visibility into 55 percent of its current 13F filers and 69 percent of the hedge funds on its 13F list

- IHS Markit: An astounding 86% of (activist investors) would no longer be required to file 13F's

- CNBC: Jim Cramer rips SEC's proposed rule change for institutional investors

9)  Proposal Goes Against Original 13F Goals & SEC's Own Mission

Here are the original goals of the 13F (from page 9):

"The section 13(f) disclosure program had three primary goals. First, to create a central repository of historical and current data about the investment activities of institutional investment managers.  Second, to improve the body of factual data available regarding the holdings of institutional investment managers and thus facilitate consideration of the influence and impact of institutional investment managers on the securities markets and the public policy implications of that influence.  Third, to increase investor confidence in the integrity of the U.S. securities markets."

A higher reporting threshold resulting in a drastic reduction in the amount of data does not 'improve the body of factual data.'  It does the exact opposite.  Reduced transparency as a result of the proposal would decrease investor confidence, not increase it as the original goal states.  And the repository of historical data would be severely impaired going forward.

The SEC's own website lists its mission as:  "The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC strives to promote a market environment that is worthy of the public's trust."

The proposal severely reduces transparency, which does not protect investors.  Such reduced transparency also erodes the environment of public trust that the SEC aims to achieve.

If the SEC is deadset on raising the filing threshold for the sake of modernization or to reduce its own burden, utilizing the inflation metric and setting the threshold at ~$500 million would reduce the number of filers by 50% (thus reducing any burdens on both the SEC & the smallest managers) while maintaining more transparency.  The poll above also shows this is more palatable than the proposal's $3.5 billion threshold. 

Simply put though, the negatives associated with the proposal greatly outweigh any perceived positives.

 

How to Provide Feedback to the SEC

The SEC is seeking input on the proposal and the deadline for comment is tomorrow (September 29th).  You can submit your feedback via these methods:

- Send an email to: rule-comments@sec.gov and make the Subject: S7-08-20

or

- Go to the comment page: https://www.sec.gov/rules/proposed.shtml?  and then click on "Submit comments on S7-08-20"

Updated Top Hedge Fund Holdings: New Q2 Issue Now Available

The new Q2 issue of our hedge fund newsletter is now available.  Subscribers please login at www.hedgefundwisdom.com to download it.


Inside the New Q2 Issue:


- Reveals the latest portfolios of 25 top hedge fund managers: David Tepper, Seth Klarman, Stan Druckenmiller, Bill Ackman, Dan Loeb, Chase Coleman & more (full list here)

- Commentary on each fund's moves: Excerpts from hedge fund letters, performance numbers, occasional short positions, and more

- New consensus buy / sell lists: Most popular stocks

- Investment thesis summaries of 2 stocks that saw notable buying activity


33% Discount:

Take advantage of the savings below.  After signing up, you'll get immediate access to the new 92-page issue as well as the full archive of past issues.

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What Hedge Funds Bought & Sold in the Volatility: New Q1 Issue Just Released

The new Q1 issue of our hedge fund newsletter is now available.  This portfolio snapshot coincides directly with the pandemic market sell-off, which means this is a chance to see what stocks top investors have long had on their watchlists that they finally got a chance to buy due to the volatility.

Subscribers please login at www.hedgefundwisdom.com to download it.


New Q1 Issue Includes:


- Reveals the latest portfolios of 25 top hedge fund managers: David Tepper, Seth Klarman, Stan Druckenmiller, Bill Ackman, Dan Loeb, Chase Coleman & more (full list here)

- Commentary on each fund's moves: Excerpts from hedge fund letters, Q1 performance numbers, occasional short positions, and more

- New consensus buy / sell lists: What they dumped & what they bought during the pandemic panic

- Investment thesis summaries of 2 stocks that saw notable buying activity


33% Discount:

Take advantage of the savings below.  After signing up, you'll get immediate access to the new 95-page issue as well as the full archive of past issues.

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New Hedge Fund Newsletter Just Released

The new Q4 issue of our hedge fund newsletter is now available.  It reveals the latest portfolios of 25 top hedge funds and also features summaries of 2 stocks that Dr. Michael Burry (of The Big Short fame) has been buying.

Subscribers please login at www.hedgefundwisdom.com to download it.



Featured in the New Q4 Issue

- Investment thesis summaries of 2 stocks that value investor Dr. Michael Burry (of The Big Short fame) has been buying.  Quickly get up to speed on the situations

- Reveals the latest portfolios of 25 top hedge funds (full list here);  Now also includes Sequoia Fund

- Commentary on each fund's moves: Excerpts from hedge fund letters, 2019 year-end performance numbers, European short positions, and more.

- New consensus buy / sell lists of the most popular hedge fund trades in Q4



33% Discount

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Notes From Sohn London Investment Conference 2019

Below are links to notes from the recent Sohn London Investment Conference 2019 which featured investment managers sharing ideas to benefit charity.


Sohn London Conference Notes 2019

- Brian Baldwin (Trian Fund Management): Long Ferguson

- James Hanbury (Odey Asset Management): Long Plus500

- Catherine Berjal (CIAM): Long Accor

- Jason Ader (SpringOwl Asset Management): Long Playtec

- Per Johansson (Bodenholm Capital): Long LivaNova, Short Koenig and Bauer

- Tamas Eisenberger (Sikra Capital): Long Star Bulk Carriers & Scorpio Tankers

- Måns Larsson (Makuria): Short ICA Gruppen

- Arnaud Langlois (1798 TerreNeuve Fund): Short Air Products & Chemicals

- Lucy Macdonald (Allianz): Long Bloomsbury Publishing

- Fadi Arbid (Amwal Capital): Short Kuwait Finance House, long Ahli United Bank

- Pieter Taselaar (Lucerne Capital): Long Altice Europe (apologies, no notes from this one)

Brian Baldwin (Trian) Long Ferguson: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Brian Baldwin of Trian Fund Management who presented a long of Ferguson (LON: FERG).


Brian Baldwin's Sohn London Conference Presentation

Trian disclosed a 5.2% stake in Ferguson in June 2019. It’s an activist investment and Trian has been in discussions with the board and management. Trian is the largest shareholder.

Ferguson’s main business is selling parts for plumbing and heating (80% of profits). They also sell waterworks and fire protection products (20% of profits). They have 1700 branches and 11 distribution centres in the US.

Plumbing products distribution is an attractive business in the US. Trian likes businesses that provide products at a fair price to their customers. Ferguson’s products cost much less than the labour costs to install them. Eighty percent of sales are done through their branches. Ferguson has the scale to get good prices from suppliers. Its scale also allows it to provide a wide range of products (100,000SKUs) to meet plumbers’ need.

Ferguson has used this scale to take 3-4 percentage points of market share per year over the last nine years. Revenue has been growing at over 9% CAGR for the last five years. EBIT at 11% CAGR over the same period. It is the market leader with 20% market share. There is still room for growth.

Ferguson announced that the remaining part of the UK business, Wolseley, would be divested just weeks after Trian disclosed their stake. At the same time, the CEO was replaced by the head of the US business, Kevin Murphy.

While the US business is a leader in a fragmented market the UK business operates in a less attractive consolidated market with several large players. Once Wolseley has been sold off, Ferguson will be a completely US business.

Ferguson’s main listing is on the London Stock Exchange. The company is not well known by US investors and is under-owned by US institutions. Trian are pressing for a listing on the NASDAQ.  European analysts misunderstand Ferguson because they focus too much on the UK operations.

Ferguson should be compared to other specialty distributors in the US. If Ferguson was listed in the US and traded in line with other specialty distributors its shares that sell for £68 today could be worth £105.


Be sure to check out the rest of the presentations from Sohn London conference 2019.

James Hanbury (Odey) Long Plus500: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is James Hanbury of Odey Asset Management who presented a long of Plus500 (LONG:PLUS).


James Hanbury's Sohn London Conference Presentation

Long Plus500 (LON: PLUS)

Plus500 is a CFD trading business. Its main competitors are IG Group, Saxo bank, CMC. It’s a fintech business and very much a technology company. In the last 3 years: revenue 38% CAGR, EPS 58% CAGR, EBIT margin 59%. It is best in class with a very high return on equity. Cash conversion has been excellent. At the IPO in 2013 they raised £22m in primary net proceeds. Since then, they have returned nearly £850m to shareholders, mainly in dividends. Over and above this, there is £200m excess cash on the balance sheet.

Can Plus500 keep generating this level of cash and what are the barriers to entry? Plus500 offer negative balance protection to all customers. As a customer with Plus500 you can use lots of leverage but not lose more than your deposit. The competition does not offer balance protection because it’s difficult and expensive requiring good risk control. Plus500 also offer spreads that are 10% to 15% inside other CFD brokers.

Hanbury said that you can tell a good disruptive business by its revenue / employee. Plus500 £1.5m/ employee compared to the two strongest competitors: IG Group £300,000/ employee and CMC£200,000/ employee.

Plus500 has good marketing. It has invested in machine learning and artificial intelligence to produce algorithms that place adverts on Google, Twitter and other web sites. It spends more on marketing in absolute terms than competitors and more as a percentage of sales. Even though they spend more on marketing their fixed costs are lower: Plus500 12%, IG Group 50%, CMC 60%. Plus500 has been taking market share every year. It is the market leader in the UK, Germany, Spain, Australia.

What are the risks? Plus500 has been hit by ESMA regulatory changes over the last year that have reduced customers’ ability to take on high levels of leverage. The European area represents 70% of its revenues. There are also similar regulatory changes taking place in Japan and Australia. Hanbury believes that in a tough regulatory environment the tough will get stronger and the weak will get weaker. Expect the number of operators to decline. Having less leverage will be better for customers. Since the ESMA changes, Plus500 have reported falling customer acquisition costs, churn has hit record lows and the win/lose ratio for customers has been improving.

Part of the bear case for Plus500 is that customers are often inappropriate, low value and don’t last long. However, the percentage of customers who have been with Plus500 for more than 1 year is high at 73%. Expect that number to improve further in the new regulatory environment.

It’s important to remember that one of the most important drivers of revenues for a CFD trading business is market volatility. Plus500 do well in difficult markets.

Another aspect of the bear case is that the business is high risk. Plus500 now has a full listing on the main market and has the best transparency in the industry. The market has not fully appreciated that it doesn’t hedge its positions. Instead they limit customers’ position sizes. They are very happy to have whale traders, but they don’t like single whale trades. Their profile of winning/ losing days is extremely impressive: 85% of days are winning days. They do have big losing days. The biggest one came on a day in the Crypto craze in Oct 2017 where they lost £3.5m. Hanbury’s view is that is easily coverable by the £200m cash on the balance sheet. When there are high levels of downside volatility, Plus500 tends to make back money that it has lost quickly because volatility stimulates activity elsewhere.

Plus500 has started to buy back stock. In the current market there is potential for them to make a good acquisition. They could move into new markets like stockbroking, ISAs and new geographies. It is the best business in the industry yet it has the cheapest valuation 2.3x EV/EBIT 2020. PE 5.3x 2020.


Be sure to check out the rest of the presentations from Sohn London conference 2019.

Jason Ader Long Playtec: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Jason Ader of SpringOwl Asset Management who presented a long of Playtec (LON: PTEC).


Jason Ader's Sohn London Conference Presentation

Long Playtec (LON: PTEC)

Spring Owl’s active approach could be referred to as private equity in public markets. It acts as a sponsor and focuses on turnarounds. Jason Ader has been involved in turnarounds in the gaming industry for several years, including Lss Vegas Sands, Bwin Party and The Stars Group.

SpringOwl disclosed their stake in Playtec in August 2018. Early in 2019 they were successful in getting two independent directors added to the board. They view Playtec as a technology company:a provider of gambling software. It would be hard to for another software company to duplicate what they have. With the US moving forward with the legalisation of sports betting – 10 States so far– there is a huge opportunity. Playtec has the potential to double its EBITDA in the US alone. Ader has encouraged the company to focus on the more regulated markets in the US and to operate through New Jersey.

SpringOwl has made recommendations to the company on how to improve the existing core business and pushed it to divest its stake in the UK Fintech, Plus 500. They have pushed for and achieved the introduction of share buybacks. They have tied management compensation to an incentive-based scheme. There is value in the Asian business even though analysts don’t see it. Ader wants an Asian investor to come in and take a minority stake in 2020. That would demonstrate the value of the business to the rest of the market.There is less risk in Playtec since SpringOwl got involved. The share price is a bit lower than their entry price. The end game is to sell to private equity.


Be sure to check out the rest of the presentations from Sohn London conference 2019.

Catherine Berjal Long Accor: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Catherine Berjal of CIAM who presented a long of Accor (EPA: AC).


Catherine Berjal's Sohn London Conference Presentation

Long Accor (EPA: AC)

CIAM is an activist but Accor is not currently an activist position.

Accor is the perfect target for Private equity. PE like the travel and Tourism sectors because of the high returns on capital. In particular, they like the hotels businesses as they are: asset-light, scalable, it’s easy to bring in new management, there are often opportunities to sell off assets.

Accor is a European leader in hotel management. It’s the sixth largest hospitality conglomerate worldwide with 5000 hotels and is the market leader in Europe and the Middle East.

It has above average cash generation. EBITDA will grow at 14% CAGR over the next 5 years.

There are multiple opportunities for a PE firm to unlock value: sell non-core assets, sell luxury brands. A PE takeover would bring 50% upside from the current share price. CIAM will support a PE takeover at the right price.

Write-downs in recent years have scared investors off. Accor is undervalued and out of favour. A sum of the parts valuation suggests 30% upside.


Be sure to check out the rest of the presentations from Sohn London conference 2019.

Per Johansson Short Koenig and Bauer, Long LivaNova: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Per Johansson of Bodenholm Capital who presented a short of Koenig and Bauer (GER:SKBX) and a long of LivaNova (NAS:LIVN).


Per Johansson's Sohn London Conference Presentation

Short: Koenig and Bauer (GER: SKBX)

Koenig and Bauer is a German based printing press manufacturer. It has less conservative accounting. Cashflow and earnings expectations are set for a big reset.

Demand for the presses has structural challenges. Bank notes in circulation are not shrinking yet but may do in the future. Bank note printing makes up 20% of revenue, 40% of profits. They used to have a monopoly in the bank note printing area but now buyers are tendering contracts. Japanese competitors have started to win contracts recently. The other part of the business, sheetfed offset printing, is also facing headwinds. Volume is slowing and margins are contracting.

They have taken a lot of ones offs and restructuring charges making the accounts look better than they are. This may have been incentivised by management bonus targets.


Long: LivaNova (NAS: LIVN)

LivaNova is a medical device company. Bodenholm like spinoffs and they like companies that are de-conglomerizing. They have been invested in the company for 4 years and its one of their largest positions.The neuromodulation business is high quality. It’s almost a monopoly, there are high barriers to entry. They can grow revenue at 5-8% per year.

The other part of the business is better than analysts think and has market leading positions in most businesses. It can grow revenue at 5-6% and profit at 10% per annum.

They are also running clinical trials to see if the neuromodulation technology can be used to treat depression. If it can, it will be a game changer for the company because the market is huge.

LivaNova is a prime acquisition target.


Be sure to check out the rest of the presentations from Sohn London conference 2019.

Måns Larsson Short ICA Gruppen: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Måns Larsson of Makuria who presented a short of ICA Gruppen (STO: ICA).


Måns Larsson's Sohn London Conference Presentation

Short: ICA Gruppen (STO: ICA)

ICA is a Swedish based supermarket/ grocery business. It’s the largest Swedish supermarket. ICA isrun on a franchisee model.

ICA is significantly overvalued at 25x accounting earnings. It has made good returns for shareholders over the last decade, but Larsson thinks that is about to change. Given the headwinds, 14x earnings would be a fairer valuation.

Challenging fundamentals: sales volumes are declining, the store footprint is contracting, the competition in Sweden is heating up especially with Lidl quietly gaining share.The Swedish grocery market is moving online quite quickly (expect 15% of total by 2022). Online is growing at about 30% per year. ICA doesn’t make money from online sales. ICA’s offline grocery sales are declining at about 1% per annum. Lidl is growing at about 10% CAGR over the last 5 years.  ICA has stores in the Baltic region, but Aldi and Lidl will be opening stores there next year.

Larsson’s research that looks at the accounts of individual franchisees suggests that profitability is heavily skewed towards the large out of town stores (maxis). In the large cities like Stockholm and Gothenburg where online adoption is higher profitability is lower or non-existent. Because many of the franchisees are not making money, ICA as the franchisor may have to lower fees.

Quality of earnings and cash conversion is poorer than it looks: EBIT looks okay, but they have taken a lot one offs. ICA’s cash conversion is poor. Cash flow to equity holders is less than 20% - it doesn’t cover the dividend. Since 2016 about 30% of cash generation has come from non-operating items like networking capital. Reverse factoring is a big component. Management’s capital allocation has not always been good. They have invested too much in online.

ICA is a low-quality supermarket that is going ex-growth yet it is one of the most highly valued food retailers in the developed market.


Be sure to check out the rest of the presentations from Sohn London conference 2019.

Tamas Eisenberger Long Star Bulk Carriers & Scorpio Tankers: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Tamas Eisenberger of Sikra Capital who presented longs of Star Bulk Carriers (NAS: SBLK) and Scorpio Tankers (NYSE: STNG).


Tamas Eisenberger's Sohn London Conference Presentation

Long: Star Bulk Carriers (NAS: SBLK) & Scorpio Tankers (NYSE: STNG)

Large ships usually burn low quality, highly polluting fuel. One cruise liner can put out the same amount of sulphur dioxide over a year as 20m cars. A Finnish study found that if shipping emissions continue at their present level, they will cause 600,000 premature deaths over the next 5 years.

A new International Maritime Organisation regulation will come into force in Jan 2020 that will drastically reduce the amount of sulphur ships can emit. Shipping companies have been slow to gear up for new emission standards. Ship operators have two choices. Either they pay 50% more for better quality fuel or they install scrubbers that allow the ships to run on the old low-quality fuel but with less emissions. Well capitalised forward-thinking owners are installing scrubbers. Installing scrubbers will save $8-10,000 per ship/day compared to running on the high-quality fuel.

The shipping industry is highly cyclical. The last eleven years has been a bear market in which many players have gone out of business or were taken over. It has been destructive including many shipyard closures. Supply is now quite tight. It will stay tight for quite a few years because of the long lead times in shipbuilding.

The introduction of the new regulation in 2020 will cause chaos for at least the first six months. High quality fuel prices are likely rise because most ships have not been fitted with scrubbers. Those without scrubbers that will be burning the high-quality fuel may have to start slow steaming in order to use fuel more efficiently. If they travel 10% more slowly, cargo will take 10% longer to get to its destination. Ships fitted with scrubbers will have a significant advantage. Less fuel-efficient old ships will be uneconomic and scrapped.

Shipping can be unprofitable for long periods but this can be made up for in a two or three year period of super profits. In good times, a ship can earn 20-30% of its equity value in a single month.  The new emissions regulations are the catalyst that can usher in a period of super profits.

Star Bulk Carriers has one of the largest and most diversified fleets. They are the low-cost operator and their fleet is 100% fitted with scrubbers. Scorpio Tankers will be 100% fitted with scrubbers by the end of next year. They have a young fleet and the management team are good.


Be sure to check out the rest of the presentations from Sohn London conference 2019.

Arnaud Langlois Short Air Products & Chemicals: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Arnaud Langlois of 1798 TerreNeuve Fund, Lombard Odier who presented a short of Air Products and Chemicals (NAS:APD).


Arnaud Langlois's Sohn London Conference Presentation

Short: Air Products and Chemicals (NAS: APD)

The stock is up 59% this year. APD is trying to grow at 10% per annum. To achieve this, in 2018 the company set out a plan to invest $17bn between 2018-2022 mostly into coal gasification – making gas from coal. There are risks with this process:

- Country risk, projects take place in countries that are trying to exploit coal assets like China, Indonesian and Indian

- Concentration risk, APD is investing too much into coal gasification

- Joint venture risks, their partners are in the mining industry which can be unstable

- Environmental risks. Coal gasification is a water intensive process. Plants have been stopped in China due to water shortages. It is also CO2 intensive emitting x2 coal fired power stations

Langlois’s research suggests that APD’s CO2 footprint could be 100m tons by 2025. That would give it one of the largest footprints in the S&P 500. Any new legislation that limits or taxes greenhouse gas emissions would hurt the company. Carbon pricing is established in Europe and seems likely to spread. No investor with a long-time horizon should support the APD’s business model.


Be sure to check out the rest of the presentations from Sohn London conference 2019.

Lucy Macdonald Long Bloomsbury Publishing: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Lucy Macdonald of Allianz Global Investors who presented a long of Bloomsbury Publishing (LON:BMY).


Lucy Macdonald's Sohn London Conference Presentation

Long: Bloomsbury Publishing (LON: BMY)

The UK market and publishing sector are loathed at the moment. Publishing is quite a way through the digitalization process and much further than most other industries. It will soon be entering the post-digital phase. Half of books sales go through Amazon. The publishing industry has survived.  Quality is king. Publishers have had to redefine their part in the eco-system.

Bloomsbury has a strong content back catalogue. The books they have are still popular and high quality e.g., they have all the rights to the Harry Potter books.

They have strong growth drivers, especially the rise of audio books. Initially audio books sold to preschool children and to the visually impaired but now Millennials are listening to them on their phones. Bloomsbury have been supplying audio books since 2005. Children’s books have been Bloomsbury’s mainstay, but they have been developing a new market in academic and professional publishing that have a higher margin.

Bloomsbury also has international growth in areas like India, again with Harry Potter leading the way. They have invested in digitization in the academic area by building online archives on: Winston Churchill, The National Theatre and Shakespeare.

Revenue growth is steady in single digits. Margins have been improving due to the contributions academic and international sales. The founder is still CEO and in his early 60s.


Be sure to check out the rest of the presentations from Sohn London conference 2019.

Fadi Arbid Long Ahli United Bank, Short Kuwait Finance House: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Fadi Arbid of Amwal Capital who presented an arbitrage trade: short of Kuwait Finance House and a long of Ahli United Bank.


Fadi Arbid's Sohn London Conference Presentation

The Saudi market is inefficient. Approx. 60% of daily volume is conducted by retail investors. It has a low level of analyst coverage. Shorting has only been allowed recently.

Idea: merger arbitrage. Short Kuwait Finance House, Long Ahli United Bank (AUB).

Both are Islamic banks that are listed in Kuwait. Kuwait Finance House is the largest Islamic bank operating mainly in Kuwait, Malaysia and Turkey. AUB is focused on Kuwait, Bahrain, UAE, Egypt.

Both banks have a common shareholder in the government of Kuwait.  There is still a 12% spread. Expect the deal to close in Q1 2020.


Be sure to check out the rest of the presentations from Sohn London conference 2019.

Investor Attendee List - Ritz Carlton Investor Event

Guest Post by Richard C. Wilson, Founder of the Family Office Club:

Our next investor club meeting, the Super Summit is at the Ritz Carlton featuring 700 participants, 200+ investors, and 75 family offices and private investors speaking on stage over a fast-paced 1.5 day agenda.  This event is called the Family Office Super Summit and some investors speaking do not want to be listed on our website or in this email due to privacy but here are 66 of the 75 speakers you will hear from and be able to network with while attending this event.

Please keep in mind not a single speaker at any of our 32 live events a year is a "paid speaker" - they are not paid to go on stage just to share their theories and insights for a speaking fee, they are here to get deals done, place capital, JV, and do business.  To attend yourself and make great connections please register here: http://FamilyOffices.com/Super

1.     Kevin Harrington (Single Family Office from Shark Tank)
2.     JD M.  (Single Family Office/ Fund Of Funds)
3.     Jonathan B. ($1B+ Multifamily Office)
4.     William P. (Single Family Office/ Angel Investor)
5.     Marco Antonio S. (Single Family Office)
6.     Bo M. (Angel Investor)
7.     Gregor K. (Single Family Office)
8.     Cristina C. (Multifamily Office)
9.     Marc L. (Wealth Manager)
10.   Nazar "Nick" N. (Single Family Office)
11.   Peter H. (Single Family Office)
12.   Bharat H. (Single Family Office)
13.   Paul K. ($1B+ Multifamily Office)
14.   Sarah H. (Single Family Office)
15.   Joshua  C. (Single Family Office)
16.   Carlos I. (Single Family Office)
17.   Rick S. (Single Family Office)
18.   Jose V.  (Multifamily Office)
19.   Eric M. (Single Family Office)
20.   Bharat S. (Single Family Office)
21.   Candice B. (Single Family Office)
22.   Julie N. ($1B+ Multifamily Office)
23.   Brian D. (Single Family Office)
24.   Dan K. (Private Investor)
25.   Simon L. (Single Family Office)
26.   Teresa E.  (Angel Investor)
27.   PJ M. (Multifamily Office)
28.   David G. (Single Family Office)
29.   Paul K. (Single Family Office)
30.   Sasha B (Single Family Office)
31.   Pierre D. (Single Family Office)
32.   Fillipo P. (Single Family Office)
33.   Moshe  L. (Angel Investor)
34.   David F. (Single Family Office)
35.   Duel G. (Single Family Office)
36.   Andrew A. (Angel Investor)
37.   Greg S.  (Corporate Venture)
38.   Dan G. (Multifamily Office)
39.   William A. (Wealth Manager)
40.   Randy W. (Wealth Manager)
41.   Charles S. (Angel Investor)
42.   Brian S. (REIT)
43.   James S. (Single Family Office)
44.   Joe B. (Private Investor)
45.   Eddie L. (Private Investor)
46.   Gene S. (Single Family Office)
47.   Pratik S. (Single Family Office)
48.   Jason P. (Angel Investor/ Seed Investor)
49.   Michael Blank (Single Family Office)
50.   Manuel B. (Single Family Office)
51.   Sheetal J (Single Family Office)
52.   Molly G. (Wealth Manger)
53.   Tom W. (Private Investor)
54.   Alejandro L. (Angel Investor)
55.   Wan Li Z. (Angel Investor)
56.   Geoff T. (Single Family Office)
57.   Demian W. (Multifamily Office)
58.   Luiz P. (Multifamily Office)
59.   Thomas Z (Single Family Office)
60.   Adam F. (Single Family Office)
61.   David B (Single Family Office)
62.   Rob B. (Single Family Office)
63.   Cliff O (Single Family Office)
64.   Manny F. (Single Family Office)
65.   Robert H. (Single Family Office)
66.   Kamil H. (Single Family Office)

In case this is your first time interacting with the Family Office Club, we are a 20 person team, 12 year old organization, and we have hosted 130 events over the last 12 years.  We provide the Family Office Club media and event community, and help families with their direct investment strike zone development and deal flow access.  Please let me know if you have any questions about this event or our organization overall.

Hopefully, we will be shaking hands in 11 days at the event.  The speakers, benefits of attending, agenda, venue details, and registration form are here: http://FamilyOffices.com/Super

Richard C. Wilson
Team Help Line: (305) 503-9077
Membership Director
Family Office Club
328 Crandon Blvd. #225
Key Biscayne, Florida 33149
http://FamilyOffices.com/Super

The Family Office Club has over 1,750 registered investors and 30 live events a year

New Q3 Hedge Fund Newsletter: Investment Thesis Summaries of Square (SQ) & New Media Investment Group (NEWM)

The new Q3 2019 issue of our quarterly hedge fund newsletter is now available and reveals the latest portfolios of top managers.

Subscribers please login at www.hedgefundwisdom.com to download it.



Inside the New Q3 Issue

- Investment thesis summaries of 1 growth stock & 1 value stock that hedge funds were buying:  Square (SQ) and New Media Investment Group (NEWM).  Quickly get up to speed on the current situation and bull / bear thesis on each stock

- New consensus buy / sell lists of the most popular hedge fund trades in Q3

- Reveals the latest portfolios of 25 top hedge funds (full list here): Now also includes Sequoia Fund



33% Discount Ends Soon

Take advantage of the savings while you still can.  After signing up, you'll get immediate access to the new issue & the archive of past issues.

1-year Subscription (4 issues): Normal Price $299.99 Discount Price $199.99 per year

Quarterly Subscription: Normal Price $89.99 Discount Price $59.99 per quarter

Want to pay by check or soft dollar account?  Please email us: info (at) hedgefundwisdom (dot) com

The Man Who Solved The Market Book Review: How Jim Simons Launched The Quant Revolution By Gregory Zuckerman

  Three-time winner of the Gerald Loeb award, author Gregory Zuckerman has just released his latest book, The Man Who Solved The Market: How Jim Simons Launched The Quant Revolution. 

Before diving in, let's take a second to acknowledge that it's amazing such a book exists in the first place.  The subject of the book, Jim Simons and his firm Renaissance Technologies ('Rentec'), have always been shrouded in secrecy.  Most on Wall Street have at least heard of their mysterious Medallion Fund and heard rumors of the insane returns it generates.  But little was actually known about the firm and how it made money.

For those unfamiliar with Rentec, a quote from the book jacket sums up why you should care (emphasis ours): "No other investor - Warren Buffett, George Soros, Peter Lynch, Steve Cohen, or Ray Dalio - can touch the track record of Renaissance Technologies founder Jim Simons.  Since 1988, Renaissance's signature Medallion fund has generated average annual returns of 66 percent.  The firm has recorded trading gains of more than one hundred billion dollars.  Simons himself is worth twenty-three billion dollars." (The book also has a yearly performance breakdown in the Appendix.)

While value investors look up to Warren Buffett and Seth Klarman, and traders look up to Stan Druckenmiller and George Soros, in the quant world Medallion is quite literally the gold standard.  And while many hedge funds charge 2 and 20 (percentage management fee and performance fee), Medallion charges an audacious 5 and 44.

Over the years, we've talked to a few former employees of the firm and even then they would be very vague about their work, never giving specifics, and certainly wouldn't go on the record about anything.  'Googling' the founder and his firm yields only a handful of rare interviews with Simons (mostly about mathematics) and some performance numbers, but that's about as in-depth as it gets.

So the fact that Zuckerman was able to interview more than 40 current and former employees, Simons's friends and family, as well as Simons himself, says a lot.  It's safe to say that doesn't happen without Zuckerman's excellent work in the past as a journalist and author.  His previous book, The Greatest Trade Ever about John Paulson is one of our favorite financial reads and no doubt laid the groundwork for him to be able to write this new book on Simons.

The Man Who Solved The Market profiles Simons's journey from mathematician and Soviet code breaker to quant pioneer in a Long Island strip mall.  It highlights how he hired physicists, mathematicians, and computer scientists to blaze an entirely new path on Wall Street, one dominated by fundamental analysis and human traders at the time.

Some of the biggest takeaways from the book were the lessons on culture, management, and alignment of interests.  For a firm so reliant on computers, the human aspect was perhaps the most intriguing, from managing people to building models around human behavior in order to exploit it.

Interlaced throughout the story are also interesting anecdotes, like when Rentec once had a 'fat-finger' trade buying 5x more wheat contracts than they were supposed to and the next day the media blamed a 'poor harvest' for the price move.

One unanticipated turn the book takes is by examining some of the inner turmoil at the firm and in particular the effects of all the wealth Rentec partners and employees wound up with, like how Rentec senior executive Robert Mercer is basically responsible for Donald Trump's presidency.

Normally, we end each book review outlining who should read the book or might benefit from it.  But honestly, we think everyone would enjoy it.  Even if you're not a quant or have zero interest in quants, there's still lessons to be gleaned and it's a very entertaining read.  After all, we're big believers in learning from all types of investors or traders, regardless of which strategy you follow. 

Obviously, the book isn't going to just give away Rentec's secrets and outline the blueprint to market success.  More than anything, The Man Who Solved The Market gives you a peek behind the curtain of a notoriously secretive firm and tells a previously untold story.  We highly recommend Zuckerman's profile of the 'modern-day Midas' and it's the perfect gift this holiday season for anyone interested in markets.

Sohn London Investment Conference: Only 2 Weeks Away

The 8th annual Sohn London Investment Conference is only two weeks away.  It will take place on the 14th November at London Marriott Hotel, Grosvenor Square. 

It will feature some of Europe's top fund managers sharing their best investment ideas to benefit charity including the Sohn Conference Foundation, which is dedicated to the treatment and cure of paediatric cancer and other childhood diseases.

This year also includes the second Sohn Women's Brunch, as a forum for women in finance aiming to promote diversity in the industry. 

You can get more information about the conference here: https://www.sohnconference.org/london/


Sohn London 2019 Speakers List

- Brian Baldwin, Trian Fund Management

- Catherine Berjal, CIAM

- Fadi Arbid, Amwal Capital

- James Hanbury, Odey Asset Management

- Jason Ader, SpringOwl Asset Management

- Lucy Macdonald, Allianz Global Investors

- Måns Larsson, Makuria

- Pieter Taselaar, Lucerne Capital Management

- Per Johansson, Bodenholm Capital

- Tamas Eisenberger, Sikra Capital


Conference Details

When: 14th November 2019

Where: London Marriott Hotel, Grosvenor Square


This should be another great event as always. You can click here to register for the conference.