Tag Archives: alt-investing

Risk Factors Drive Lazard’s Systematic Approach To Core Investing

By DailyAlts Staff Core investments are those that anchor the portfolio. Typically, investors pursue exposure to broad-market benchmarks, such as S&P 500 or MSCI indexes for stocks, and the Barclays Aggregate Index for bonds, as part of their core holdings, with the intent of minimizing the unexpected. But rather than passively investing in index funds, Lazard (NYSE: LAZ ) thinks investors should take a systematic approach to implementing core investing strategies, and that is the subject of the firm’s latest Investment Focus white paper: Core Advantage: The Case for a Systematic Approach to Core Investing . The Non-Systematic Approach Managers pursuing non-systematic approaches to providing core exposure suffer from several pitfalls, first among which is the tendency for them to introduce unwanted risks to a portfolio in pursuit of benchmark-beating returns. This can happen from overweighting stocks according to style, market cap, or geographic region. While it might prove rewarding under certain market environments, it can result in outsized losses when trends unexpectedly reverse, and this is not what most investors are looking for from their core holdings. The image below shows how market favor has vacillated over time, shifting between growth and value stocks; large caps and small; and developed and emerging markets: The Systematic Approach The authors of Lazard’s paper believe the systematic approach is the best for core investing, because it allows managers to maintain stricter parameters relative to their benchmark, by ensuring against concentration according to market cap, sector, or country. Additionally, using a rules-based, data-driven, and systematic approach allows managers to analyze hundreds, even thousands of stocks within a given universe, in real-time using a bottom-up process; and to combine “robust risk management” with stock selection. How does it work? Well, according to Lazard, various risk factors have been rewarded by markets over time, including valuation, sentiment, and quality, as depicted in the image below: Valuation compares a company’s price to its peers and its own historical record, and favors companies that are inexpensive and offer long-term value. It’s a contrarian approach, and investors need to be prepared to endure short-term, unrealized losses. Sentiment is gauged by looking at the stock’s price strength, relative to the other stocks in its sector and broader benchmark, as well as analyst upgrades. In Lazard’s approach, liquidity is also taken into account by looking at volume-weighted momentum, and companies with strengthening momentum are favored while those with weakening momentum are disfavored. Quality is assessed by stability of returns and low earnings-volatility. According to Lazard, quality stocks are often those in the process of “migrating” from the realm of growth stocks to that of value. Systematic Evolution Systematic investing avoids concentrating investments in any one area and seeks to maintain a composition similar to that of its benchmark. This requires what Lazard calls an “evolving approach,” wherein investment professionals are constantly researching and testing potential improvements to the investment process. Lazard’s own approach, as implemented by the Lazard Equity Advantage team, is “uniquely positioned to help clients achieve their investment goals,” according to Lazard. “This has proved to be a solid foundation on which to build equity asset class exposure – especially through core approaches – and long-term investment program success.” For more information, download a pdf copy of the white paper .

Can Investing With Activist Investors Produce Alpha?

Investing the day after an activist investor announces a large stake can produce alpha. The strategy over 34 activist stakes generated 18.12% per year, nearly 4% more than the S&P 500. We can replicate the process through 13F and 13D filings. The hedge fund industry’s current AUM is about 2.5 trillion. Of that number, about half is allocated to public equity and an even smaller number is dedicated to activist investment. So why do we care about activist investment so much? Perhaps it is American sensationalism or maybe we just like a good story, but whatever it is, every day we hear from the likes of Carl Icahn or Bill Ackman on CNBC, or in another media outlet. These brilliant and powerful investors outline their plan to unlock value in company XYZ, as if they are screaming from the top of the mountain for all to hear, through share buybacks, managerial shakeups, spin-offs, or other strategic planning and then back up their story with war chests full of their investors’ capital. As average investors, we are intrigued to see what the pros are doing, but we do not have access to these investors’ funds. So, how do we join in on the fun with these modern-day yodelers? We follow them closely and invest with them. But will this strategy generate alpha? The following study will provide the conclusion. I looked at 34 previous activist investments from some of the biggest players in the business. I took the share price of the day after the activist announced a position and marked this as a buy. We can follow activist activity through 13F filings online and through 13D filings in Barron’s. I then compared it to the day after the activist either won or lost proxy vote, or exited the position. The study will focus on long only as many average investors do not short or have the capability to do so. For example, we would buy Valeant Pharmaceuticals (NYSE: VRX ) the day after Bill Ackman announces a hostile takeout bid for Allergan (NYSE: AGN ), and then sell Valeant Pharmaceuticals the day Allergan rejected the offer and took the actavist’s bid. I then compared the returns of the individual stock to the market return of the S&P 500 over that time period to find if investing alongside the most famous hedgies in the world can generate alpha. Please read through for the data and the conclusion. Company Activist Activity Date Bought Date Sold Total Time held Share Price Buy Share Price Sell P/L S&P 500 Return Beta of Stock Reason for Activism Pershing Square Capital Management Allergan and Valeant 4/21/2014 10/18/2014 0.49 135 142 5.19% 0.79% 0.46 Buy out of Allergan. I calculated until the failure date to purchase Allergan. Pershing Square still owns a large portion. Bill Ackman J.C. Penney (NYSE: JCP ) 10/9/2010 9/2/2013 2.90 34 14.27 -58.03% 41.00% 1.34 Shake up of company. Appointment of Ron Johnson to CEO. Board Member. Failure. Air Products and Chemicals (NYSE: APD ) 9/1/2013 6/26/2015 1.82 109 143.83 39.95% 28.21% 1.42 Shake up of management, mainly CEO. Canadian Pacific Railway (NYSE: CP ) 10/31/2011 6/26/2015 3.66 61 162 167.67% 67.75% 1.07 Shake up of management. Trian Partners Nelson Peltz DuPont (NYSE: DD ) 7/18/2013 5/18/2015 1.83 57 70 27.81% 25.83% Spin-off of chemical units, break up of company. Tiffany (NYSE: TIF ) 2/27/2007 9/30/2011 4.59 45 63 48.00% -18.44% 1.93 Management shakeup. Undervalued. Wendy’s (NASDAQ: WEN ) 5/3/2008 6/26/2015 7.15 7.35 11.4 66.10% 51.43% 0.51 Management shakeup. Undervalued. Icahn Enterprises Carl Icahn Apple (NASDAQ: AAPL ) 10/25/2013 6/26/2015 1.67 75 127.5 72.50% 19.47% 1.07 Share buyback. Undervaluation. Dell 3/7/2013 9/10/2013 0.51 14 13.85 0.43% 8.56% — Transocean (NYSE: RIG ) 1/15/2013 6/26/2015 2.45 56.76 16 -62.81% 42.71% 1.6 Increase dividend. Undervalued Navistar (NYSE: NAV ) 11/20/2011 6/26/2015 3.60 38 22.75 -40.13% 81.44% 3.12 Restructuring. Management changes Starboard Value Jeffrey Smith Darden (NYSE: DRI ) 12/23/2013 6/26/2015 1.51 54.5 71.83 37.80% 15.01% 0.69 Restructuring, reevaluate strategic positioning, and managerial changes. MeadWestvaco (NYSE: MWV ) 6/3/2014 6/26/2015 1.06 43.63 47.89 17.76% 9.25% 0.55 Spin-off of specialty chemicals unit, undervalued, and sale of company. Brink’s (NYSE: BCO ) 5/4/2015 6/26/2015 0.14 30.61 30.23 -1.24% -58.00% 1.72 No plans as of yet. Office Depot (NASDAQ: ODP ) 8/8/2013 6/26/2015 1.88 4.2 8.89 111.67% 23.85% 2.75 Push for OfficeMax deal and sale of company to Staples (NASDAQ: SPLS ). AOL (NYSE: AOL ) 12/22/2011 6/15/2012 0.48 15.5 25.5 64.52% 6.13% — Managerial shakeup. Loss in proxy vote. Smithfield 6/18/2013 9/26/2013 0.27 33.11 33.99 2.66% 4.28% — Attempted breakup of company and sale. Failure and Chinese takeover by Shanghui took place at 34 a share. Gamco Mario Gabelli Brink’s 12/16/2014 6/26/2015 0.53 22.92 30.17 32.38% 6.57% 1.72 Gabelli claims that Brink’s is undervalued and should be private. Griffin Land (NASDAQ: GRIF ) 11/26/2013 6/26/2015 1.58 33 32.26 -1.49% 16.62% — Gabelli wants GRIF to examine itself as a REIT or MLP. Superior Industries (NYSE: SUP ) 11/26/2013 6/26/2015 1.58 18.9 18.69 4.89% 16.62% 0.93 Gabelli wants a share repurchase program. Third Point Dan Loeb Yahoo (NASDAQ: YHOO ) 10/3/2011 7/29/2013 1.82 15.47 27.65 78.73% 49.66% 1.46 Proxy vote success and shake up of board. Marissa Meyer new CEO. Jana Partners Barry Rosenstein McGraw-Hill (NYSE: MHFI ) 8/2/2011 9/12/2011 0.11 37.77 40.51 7.25% -7.78% 1.64 Breakup of company. Marathon Petroleum (NYSE: MPC ) 1/21/2012 2/20/2012 0.08 31.24 35 12.04% 4.15% 1.02 Operational changes to company and potential breakup. Agrium (NYSE: AGU ) 10/20/2012 3/5/2014 1.38 68.7 93.56 43.19% 30.69% 0.87 Return of capital to shareholders and split business. Ashland (NYSE: ASH ) 4/28/2013 5/13/2015 2.04 86 128.59 52.52% 31.81% 0.71 Restructuring, recapitalizations, spin-offs. Safeway (NYSE: SWY ) 8/20/2014 1/29/2015 0.44 24 35.1 46.25% 1.45% — Merger arb. and restructuring. QEP Resources (NYSE: QEP ) 10/22/2013 10/16/2014 0.98 32.9 23.33 -29.09% 6.66% 1.23 Midstream unit breakup. Elliot Management Paul Singer Hess (NYSE: HES ) 12/1/2012 6/26/2015 2.57 50 68.48 40.96% 49.16% 1.78 Managerial shake up and capital allocation changes. ValueAct Jeffrey Ubben Adobe (NASDAQ: ADBE ) 12/27/2011 1/13/2015 3.04 38.13 74.04 98.18% 58.32% 1.31 Managerial shake up. Moody’s (NYSE: MCO ) 7/20/2011 6/26/2015 3.93 35.61 110.2 213.46% 56.30% 1.36 Managerial shake up. Motorola 7/17/2011 6/26/2015 3.94 46.5 58.1 33.95% 56.30% 0.59 Work with management to unlock value. Relational Ralph Whitworth Occidental (NYSE: OXY ) 8/3/2010 5/3/2013 2.75 72.35 85.58 27.29% 43.22% 1.17 Removal of CEO, Ray Irani. Clinton Group Greg Taxin Violin Memory (NYSE: VMEM ) 12/19/2013 10/16/2014 0.83 4 4.16 4.00% 2.44% — Sale of company. (Taxin leaves Clinton Group on 10/16/14) XenoPort (NASDAQ: XNPT ) 10/15/2013 10/16/2014 1.00 6.02 6.41 6.48% 8.20% — Replace CEO. Total 34 Averages: 1.90 34.44% 26.93% 1.31 Return Per Year: 18.12% 14.17% Based on the data set, we see that following activist hedge funds does produce alpha. Over the course of the average investment of 1.90 years, the activist strategy returns an average of 18.12% per year versus the S&P 500 return of 14.17% over that time period. However, not taken into account are the trading costs of the transactions or the value of your time following the hedge fund activists. One important aspect to consider is that the average betas of the stocks are about 1.31. The higher return of the activist hedge fund strategy could just be a product of taking on more volatility to the market and may not represent any innate stock-picking ability. Another aspect to consider as an investor is whether or not activists add value (if you care about such a thing), as this can be widely debated. Did Valeant or Allergan add value when Ackman attempted to play matchmaker? Probably not, but there was still money to be made. Another important aspect to consider is when this study was done. All of the activist investments were done during the recent bull market that has generated returns of over 200% in six years. It has been shown that activists can even beat the market in periods of rapid asset appreciation, so I would hypothesize that a strategy of following activist investors would also be successful in a sideways or bear market. However, I do not have the empirical research to prove such a claim as the proliferation of activist investors has only just begun. This can provide a potential issue. As activist investors prove to make a lot of money and beat the market, we will see an influx of assets to this strategy that could dull down returns. I believe that this will not be an issue as you should always follow the big guys that have been doing this type of investing for a long time, for example, Bill Ackman, Dan Loeb, Mario Gabelli, Carl Icahn, Jeffrey Smith, Nelson Peltz, and Barry Rosenstein. There is one takeaway that is important to note after conducting this study. Picking activist investors are just like picking stocks, some are good during some times, and some not. Not all activist investors will always lead to gains every time, just like stocks. My advice is to evaluate an activist pick and only if you like the stock independently of the activist involvement, then buy in, otherwise you are better off in an index, like the SPY or MDY . If you do not know why you own something, don’t own it. Do your own work, but you can use these guys as idea generators. Do not follow Carl Icahn blindly into battle, even if he seems to be on a hot streak, because the market humbles everyone, even Mr. Icahn. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

MLP Returns In Your IRA Or Tax Protected Account: Number 3 In The Series

Two MLP CEFs that offer yields over 7% at current prices. Using these CEFs allows one to keep them in an IRA or Tax protected account without concern over the $1000.00 UBTI limit. Both of these CEFs is currently selling below NAV. This is the third article to cover various CEFs, ETFs and ETNs that cover high return issues like MLPs and REITs that are useful for an IRA and/or other tax deferred accounts. The first article in the series is here and the second is here . This piece examines several funds that were suggested in the comments section of my first article, NML and CEM . Neuberger Berman MLP Income Fund distributes payments monthly and currently pays $0.105 per share on the last day of the month. At a price of around $16.00 per share, the fund offers nearly an 8% yield. The chart below indicates that the fund is selling at its low for the year. (click to enlarge) Source: Interactive Brokers NML originated on 3/25/2013 as a CEF and the value of the fund has increased just short of 6% over the past 2 years. The fund is selling at about an 8% discount to NAV since the NAV was $18.43 as of 6/18/2015 and sold for about $17.00 per share on the same date. The CEF’s holdings as of 5/31/2015 are displayed below: (click to enlarge) Source: Neuberger Berman Web Site The current list of holdings is showing either a yield that is the same or greater than last year, which should indicate that the current dividend is relatively safe. However, there is no guarantee that there will not be decreases in the monthly payment at some future time if the prices of oil and gas don’t hold up. The managers of the fund are Douglas Rachlin with 29 years of investment experience and Yves Siegel who has 30 years of investment experience. Both managers personally own several thousand shares of the fund, assuring investors they have a vested in interest in the CEF doing well. The portfolio turnover ran at 10% for 2014 and expenses for the fund excluding income tax were 1.77%. Total expenses including income tax ran near 8%. Since the fund pays income tax on MLP earnings, one does not have to deal with a K-1 or have any concern about having this fund in an IRA. The fund uses leverage and recently updated its lending facility. The fund has the ability to finance $500 million of leverage with a $300 million floating rate facility and a $200 million fixed-rate facility. Clearbridge Energy MLP Fund Inc. (NYSE: CEM ) is a MLP closed end fund run by Legg Mason Global Asset Management. Total assets of the fund amount to $3.12 billion with quarterly distributions that have been increasing gradually since the fund was first started in 2010. Distributions started at $0.35 per share in 2010 with the latest distribution at $0.42 per share. This fund like the others covered in the series sends a 1099 at the end of year so an investor does not need to be concerned about K-1s. Michael Clarfeld, a CFA with 15 years of investment experience, Chris Eades with 23 years of investment experience and Peter Vanderlee, a CFA with 16 years of investment experience are the directors of the fund . The investment objective of the fund is to provide a high level of total return with an emphasis on cash distributions. The fund has grown both the dividend and the NAV since inception, see below: (click to enlarge) Source: Clearbridge Web Site The top 10 holdings of the fund are listed below: Source: Clearbridge Web Site One can see from the fund’s asset allocation below that it is not dependent upon drilling for oil and gas the dividend: Source: Clearbridge Web Site CEM recently completed a private placement of preferred stock and notes totaling $258 million to make new investments. So it is certain that the managers of the fund are planning to exercise leverage in the portfolio. The current expense ratio for this CEF is 2.19%. The current price of CEM is around $23.00 per share with a quarterly distribution of $0.42 per share so that the current yield of the fund is around 7.3%. The fund is selling about 7.5% below NAV just as NML is, so one can buy either of these funds at a discount to the actual worth of their holdings. The holdings of these 2 funds are somewhat different, so an investor desiring greater diversification with one’s MLP holdings could consider buying some of both funds. Conclusion: Both of these CEFs offers a yield over 7% at current market prices and is selling considerably below NAV. Although both have relatively high expense ratios, the leverage these CEFs uses helps cover these costs so that yields remain high. CEM has been in existence longer and has shown greater appreciation and growth in yield than NML and could be the better CEF. However, buying a bit of both gives one greater diversification in the MLP industry without having to deal with K-1s. Using these CEFs as well as others I have covered in the past allow one to have MLPs in a tax-protected account without the concern over the $1000.00 limit imposed by the IRS on UBTI. In addition, they also offer greater diversification and no concern about K-1s if one desires to use them in a regular account. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.