Shareholder Activists
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By david clive stevenson in General Published: Saturday, 26 April 08 - 01:58 PM (GMT) |
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As the highly satisfied owner of a gaggle of bombed out real estate funds – Capital &Regional, Primary Health Property and TR Property IT – I can’t say I’m terrifically surprised by the emergence of the shareholder activists (Terra Catalyst and London & Stamford) in the sector. I’m not always convinced by the altruistic arguments offered by these (predominantly) hedge funds but I do think they’re absolutely essential in imperfect markets like small caps and investment trusts where investors frequently misprice risk, under-estimate value and generally ignore the nonsense that company managers come up with. But all this talk of efficacy and ‘re-aligning’ management’s interests with the shareholders is for me irrelevant – the more interesting question is whether these activist funds are actually a good investment. I’m prompted to ask this question because we recently reported that more and more wealthy high net worths have been quietly buying back into the listed private equity space. I’m a big fan of contrarian investing strategies and I absolutely like the alternative qualities of listed private equity houses like SVG and 3i (all companies I’ve owned in the past) but for the life of me I can’t quite work out why anyone’s daft enough to opt for these guys over the activists ? These hedge and active fund managers are ideally suited to make money in any market and should clean up as mainstream investors abandon risky shares and small caps....
The real pioneers in this space like the US fund manager Lens have been a great long term investment as has its UK sibling Hermes through their UK Focus Fund which has pretty much consistently outperformed the FTSE All Share Total Return Index since its inception in 1998. There are numerous hedge funds that now operate in this space - most are closed to private investors - although there are a number of pure plays listed on the market.
· The lightly traded Value Catalyst run by Laxey – this is a closed end investment fund recently relisted on AIM. This sits alongside the Laxey Investment Trust which emerged out of the shell of the Tea Plantations Trust in 2007. This is effectively close to being a clone of Value Catalyst. Both are run by Laxey, an aggressive hedge fund, that mixes and matches traditional value investing along with extensive use of hedging strategies that make the funds much less market sensitive – VCF in particular aims to be net long with a target exposure of approximately 50 per cent to the market. According to Donald Robertson at SVM (a fund manager that invests in the VCF) “in our opinion, the beauty of this fund is that it is a ‘true’ hedge fund, not one of the disguised leveraged long only funds”.
· Brian Myerson and Brian Padgett and their Principle Capital’s Investment Trust which aggressively invests in good value small caps but is still mainly a long fund – according to the managers their strategy “is to bring private equity style skills to investing in the public market arena”.
· Chris Mill’s Oryx International Growth Fund run by Christopher Mills of JO Hambro. This activist long only value fund is a good deal less vocal than the first three but no less active !
· Strategic Equity Capital isn’t strictly an activist fund but more a cross between a private equity house and activist - the fund invests primarily in publicly quoted companies that the managers believe are undervalued and could benefit from strategic, operational or management initiatives. According to Robertson at SVM “the advantage of this fund is the deal flow that is likely to come their way through their connection with SVG Capital. The fund takes a relatively small number of holdings and creates value through a combination of capital raising / restructuring / financial engineering and corporate transactions.”
Beyond these pure plays are a slightly longer list of what I’d call very active value investors who may not shout loud in the newspapers and the courts about their activities but who are extremely motivated investors who will force an investee company think long and hard about how to realise intrinsic value. In this list you’d probably see Cayenne, British & Empire, Iimia Investment Trust and Advance UK – with the exception of Cayenne which does some hedge fund investments, these are all long only, classic value investor funds.
So, within these two broad camps – activists and active value – who’s performed best in the last six months? The bottom line on my cursory analysis is that the active value boys have done rather better than most of the activists with the exception of the Laxey funds which have excelled. Crucially the Active Value fund in particular seemed to cope remarkably well with market volatility – here’s the managers own rather idiosyncratic commentary on how a supposedly active hedge fund had a rather boring time in the late summer of 2007....” So let’s cut to the chase: how did we fare in August and September? VCF returned -2.04% in August and +2% in September....Yes we do use leverage but we also build in margins of safety and permanently run well below our ability to borrow. ... We have not had to sell anything, we have had no margin calls or changes in our ability to finance and have in fact probably had our most inactive month for as long as I can remember (and that’s not because it was a holiday month!).”
Principle Capital and Oryx by contrast have both been badly hit, partly because they’re so heavily small cap biased – no matter how clever their managers have been in the past, it’s difficult to make money when all the markets wants to do is cut risks.
The active value funds have generally been very successful over the last few months – they’ve nearly all performed better than the FTSE 100 index with less volatility and relatively low correlation. Returns have been anaemic for sure but to have survived as well as they have done when markets have been actively selling off traditional value stocks and small caps is a minor miracle in my book.
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