Tag Archives: management

Invest With Paul Singer

Summary Fondul Proprietatea is one the largest closed-end funds in the world. The fund currently trades at 29% discount to its NAV. The largest shareholder Elliott Associates run by Paul Singer has been recently increasing its position to 21.6%. Bill Gates entered the play with a 1% stake. This update concentrates on the highlights from the fund’s investor day. This is a pure, activist-driven restructuring play. Investment summary: Stable 6.3% non-taxable “dividend” yield. The fund is buying back up to 25% of the daily volumes of its share trading. The fund is motivated and pushed by activists to reduce the 29% discount. Portfolio restructuring should allow the fund to increase the payout to shareholders in the near future. Introduction to Fondul Proprietatea Fondul Proprietatea (LSE:0OKS) (BUH:FP) was created by the Romanian state to reimburse Romanian citizens for the assets that were taken from them by the communist regime. Since 2010, the fund is managed by Franklin Templeton, and since 2011, the fund is listed on Bucharest Stock Exchange, and its GDRs trade on the London Stock Exchange. The fund has a total NAV of USD2.9 billion, the market capitalisation of USD2.1 billion and trades at a 29% discount to the NAV. Source: Fondul Proprietatea Investor Presentation, December 2015 The main reason for the high NAV discount lies in the high proportion of the unlisted portfolio, which currently represents 55% of the total assets. The fund is 85% invested in Romanian energy companies. Source: Fondul Proprietatea Investor Presentation, December 2015 The fund is well managed by Franklin Templeton . The fund manager is working hard to narrow the NAV discount. Over the last four years, the fund has paid out over USD1.6 billion to its shareholders in the form of dividends and buybacks, which is quite significant relative to its size of USD2.9 billion. Despite this significant payout, the fund’s NAV remained stable. Source: Fondul Proprietatea Investor Presentation, December 2015 The fund’s investment strategy is simple: No new investments (except buying back its own shares, currently at a 29% discount), restructure the current portfolio to narrow the NAV discount through listing or disposal of unlisted securities, and distribute profits to shareholders. Motivation to Templeton Elliott recently pushed through a new fee structure that is quite an unusual for closed-end funds; the management fee is based on market capitalisation of the fund, and not its NAV. An additional fee is due for each day – the NAV discount is below 15%. An additional fee is paid on cash distributions to the shareholders. Why the fund will make you money This is a textbook case of shareholder activism that creates value for all shareholders. Paul Singer has a team of lawyers in Romania who put pressure on Templeton to deliver. There are major value drivers ahead: Portfolio restructuring The reason for the high NAV discount lies mainly in its high 55% proportion of unlisted equities in the fund’s portfolio. Source: Fondul Proprietatea Investor Presentation, December 2015 The largest unlisted position is the stake in Hidroelectrica , which accounts for 34% of the unlisted portfolio. In 2014, Hidroelectrica was the most profitable Romanian company with an EBITDA margin of 65%. The preliminary results in the first five months indicate even better performance for 2015. The government plans to IPO Hidroelectrica in late 2016. Morgan Stanley has been appointed for the lead manager role. The remainder of the unlisted securities represents the main stakes in local electricity distribution companies. Most of them already have foreign majority owners. Fondul has retained the investment banks to advise on the sale of the stakes. The most advanced are discussions on the sale of four electricity distribution companies to local Electrica . The companies currently represent approximately 12% of the unlisted portfolio. The fund manager in the conference stated that “the agreement on the sale is very, very close”. The market rumor is that the deal has been already agreed and is just awaiting the approval of Electrica’s newly appointed board of directors. Negotiations with Enel ( OTC:ELPSY ) on the sale of other distribution subsidiaries, which account for 13.6% of the NAV, have been restarted very recently too. If only these two transactions get executed in 2016, the unlisted portfolio would decrease from the current 55% to 30%. Active buybacks The fund is currently buying back 25% of its daily volumes. In addition, over the last two years, it has done an annual tender offer for its shares, in which every shareholder could sell 8% of their Fondul shares at around 20% premium to the market price. Each participating shareholder collected an additional 2% income through this transaction. At the conference, the fund manager stated that the fund is considering another tender offer at an appropriate time. It has been rumored, once the sale of Electrica’s distribution companies is completed, that another tender offer will be announced. High dividend yield The fund offers a dividend yield of 6.3%. The dividend is structured as a return of capital (reduction of the nominal share value), which is tax free in many jurisdictions. The fund has already called a shareholder meeting for January to approve a 0.05 RON distribution for 2016. Romanian economy is strong The fund owns mainly electricity production and distribution companies. Energy companies are proxy to the Romanian economy. Romania has been one of the best-performing EU countries which is expected to grow at 2.8% in 2015 and 3.3% in 2016. In 2014, the good macro situation was reflected on the performance of the companies in Fondul’s portfolio, causing it to report the highest dividend income ever. The strong economic performance in 2015 is reflected in the fund’s performance. Despite the decrease in energy prices, the top portfolio holdings reported a 50% increase in profitability relative to the previous year. Source: Fondul Proprietatea Investor Presentation, December 2015 Fondul Proprietatea is “the cheapest fund in the world”, said Mark Mobius , executive chairman of Templeton Emerging Markets Group, in a press conference in Bucharest, after the GSM on October 29. The investor conference introduced a list of concrete milestones that should allow investors to capitalise on the opportunity. Conclusion The investor conference brought only good news for Fondul’s investors. The most important one was the confirmation that the completion of the disposal of Electrica’s distribution companies is imminent. When completed, investors should look forward to another tender offer for Fondul’s shares at a premium to the market price. The tenders always drove Fondul’s share prices up significantly . It would be quite surprising if the same would not happen again.

Acceleration In The Underperformance Of Dividend And Value Stocks

The top 20% of SPY components in Dividend and Value have lagged the benchmark for 18 months. The last few weeks have been especially harmful for them. Momentum stocks have widely outperformed. This article compares the trends of four investing styles: Value, dividend, quality and momentum. It doesn’t suggest that investors should use these simplistic models, but it shows how stocks may be influenced by cycles, not only in asset classes and sectors but also in dominant investing styles. Large groups of S&P 500 stocks selected on value, dividend and quality factors have been lagging SPY since the third quarter of 2014. This phenomenon is not limited to small groups. It can be observed in the 100 best stocks of the index in each category. These categories are defined by taking the top 20% of the S&P 500 ranked on a unique factor. The top 20% of value stocks is defined as the 100 S&P 500 stocks with the lowest price/earnings ratio (P/E). The top 20% of dividend stocks is defined as the 100 S&P 500 stocks with the highest yield. The top 20% of quality stocks is defined as the 100 S&P 500 stocks with the highest return on equity (ROE). The top 20% of momentum stocks is defined as the 100 S&P 500 stocks with the highest price increase in one year. Variations in the relative performance of such large groups of stocks on long periods are the expression of behavioral changes in the market. My aim here is to observe and quantify these changes, not to explain them. The next charts show equity curves and statistics of the four “top 20%” groups for one month. The groups are updated and equal-weighted on market opening of the first trading day every week. Dividends are reinvested. Top 20% Value: (click to enlarge) Top 20% Dividend: (click to enlarge) Top 20% Quality: (click to enlarge) Top 20% Momentum (click to enlarge) The next table gives the annualized excess return over SPY of the top 20% group for each category since 1/1/2000, then on the last 12, 6, 3 and 1 months. Annualized excess return of the top 20% stocks in… Since 2000 Last 12 months Last 6 months Last 3 months Last month Value 6.60% -7.45% -16.30% -15.30% -27.76% Dividend 4.61% -7.31% -8.93% -9.55% -32.9% Quality 3.14% -4.29% -6.31% -12.94% -5.82% Momentum 1.12% 2.82% 5.24% -7.06% 8.49% Value stocks have outperformed for 16 years but they have lagged the benchmark since June 2014. The meltdown in energy companies is an incomplete explanation: It’s accountable for less than half of the negative excess return of value stocks. The relative loss of value stocks has accelerated in the last month. Dividend stocks also have lagged for at least one year. Their underperformance has accelerated considerably in the last month. It seems that expectations of a rate hike this week have made some dividend investors more nervous. Momentum stocks have outperformed their own historical excess return for at least one year. They started to lag in the last few months, but their excess return surged again in the last weeks. The transfer of excess return from value and dividend to momentum started more than one year ago and seems to continue. I have written in a previous article that such a pattern is not a reliable clue of a market top . Value and dividend offer a statistical bias on the long term, but in the short term investors following strategies based on these investing styles may experience more frustration before getting back their edge. Indeed, momentum stocks traditionally benefit from “window dressing” at the end of the year: some fund managers buy them to make their portfolios look better in annual reports. If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article. Data: portfolio123

GDXJ – Limited Downside And Great Upside Potential In A Rising Gold And Silver Price Scenario

A potential long term investment with limited downside and great upside potential. Diversity of holdings mitigates the downside risk. Virtually every component of the index would be on many people’s list of junior precious metals stocks to buy to take advantage of a rising price scenario. There are few sectors which have such a huge potential for massive gains as resource sector juniors, but to achieve these one not only has to pick a company which on its own has enormous potential in what is one of the riskiest sectors for any investor to dabble in, but also any gains may be doubly enhanced should the resource sector in which the chosen company operates also move from being extremely depressed into a strong recovery phase. Pick the right resource, and virtually any surviving junior will serve you well but, as was seen following the 2008 resource market crash, if you pick well gains could be massive – 1,000 percent or more. Arguably, now could be a really good time to buy into resource stocks. They have seldom been more depressed, particularly the precious metals, and industrial metals copper and iron ore. However the writer does not see any kind of sharp recovery ahead for either copper or iron ore in 2016, although looking further ahead one would still have to consider survivors in the industrial metals sector as being potentially very strong investments, but the fallout between now and then could be perhaps a risk too far. That leaves us with precious metals – perhaps the riskiest sector of all. However the collapse in prices has seen precious metals stocks come down dramatically over the past three years, since gold reached its top of around $1920 an ounce in 2012. Gold for example has fallen by 44% since, and has dragged the other precious metals down with it. Is now the time to climb back in? If one reads the mainstream media one could be forgiven for assuming that the gold price fall had been far greater – but a much bigger drop has been suffered by most precious metals mining stocks – and by the junior sector in particular – ‘so here there be bargains galore’ one would think. And so there most definitely are, but the risks in buying junior precious metals stocks can be enormous. Any prolonged continuation of gold’s fall, and that of the other precious metals could yet see some serious casualties in terms of corporate shutdowns, and/or sales at hugely below potential valuations, even for juniors who, on the face of things, have some really good potential projects, but do not have the wherewithal to progress them. Now we see the fundamentals for gold in particular on a supply/demand basis as being extremely strong, but it may still take time for the investment sector to come to terms with this. Demand for physical metal has been growing – particularly in Asia and the Middle East – and central banks have been net buyers further increasing demand for physical metal. Meanwhile gold inventories in the West have been declining drastically. Sales out of the Precious Metals ETFs, which kept the market well supplied particularly in 2013 when the price began to dive, are dwindling with the weaker holders already having exited. Low gold prices are beginning to see new mined production starting to fall back, while the same low prices keep the incentive for scrap sales low – so these have been dropping too. So here the prospects for junior gold and other precious metals miners look potentially strong. If there is a supply crunch coming ahead – see 2016 a crunch year for physical gold supply as we suggest – then precious metals, and precious metals juniors in particular should be a major beneficiary and we could see some dramatic stock price gains even on comparatively small upwards movements in the metals prices. The high risk investor is poised to climb back in given many feel the gold juniors are bumping along the bottom. So how does one mitigate the very serious risk element here. It’s all very well jumping into a junior stock, however good it seems on paper, but then some external black swan factor comes into play which completely wipes you out. This could be political, geological, financial, weather related, fire, flood, earthquake etc. – any number of things could bring an under- or tightly-funded project (the nature of most juniors) to a grinding halt. There is a way, though, of investing in this sector in a much safer manner, but still with phenomenal growth potential. As we noted above, if the metals prices rise the whole sector will accelerate – except perhaps a few players who get left in the wake. Consider here investing in an ETF which follows a major junior precious metals index. The diversity in the stocks followed helps mitigate the downside risk, but virtually all the individual holdings in the ETF have great upside potential in a rising precious metals market environment. OK, it also will mean that the whole is perhaps not as profitable as some key elements within it, but the overall potential remains massive. Such an investment is the Market Vectors Junior Gold Miners ETF (NYSEARCA: GDXJ ) (listed on the NYSE Arca Exchange) which seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Global Junior Gold Miners Index. It has been bouncing along what many see as the sector bottom of late. It peaked back in November 2010 at around 171.84 and those who invested in it at the time, and stayed with it, would have lost just short of 90 percent of their investment given it is now, at the time of writing at least, at 18.95. Many feel the chances of it falling lower are decidedly limited, while the potential for recovery, if precious metals prices pick up, is very large. If it gets halfway back to its former high that would mean a gain of around 350 percent from its current level. While this might be a tall order in 2016 it is certainly not outside the bounds of possibility should precious metals start to move. Interestingly trading volume has been high over the past year when the price has fluctuated from around 18.30 to 30.10 so it tends to be easily tradeable and there are obviously others out there aware of its potential. The Index on which the ETF is based is also not based on fly-by-night juniors with little or nothing to offer except hope and a prayer, but also includes some significant miners which are probably highly offended that they might even be classified as juniors, like Hecla Mining (NYSE: HL ), Pan American Silver (NASDAQ: PAAS ), Centerra Gold ( OTCPK:CAGDF ), Evolution Mining ( OTCPK:CAHPF ), Oceanagold ( OTCPK:OCANF ), Osisko Gold Royalties ( OTC:OKSKF ) etc. to name but a few. The top 10 companies held, which include all the above, account for 42.75 percent of the total holding. Note also these include some significant silver miners, and history tells us that if gold begins to move, silver moves too – but faster! Indeed running down the full list of holdings all of them would be on many people’s list of potentially strong performing juniors. They include Pretium Resources (NYSE: PVG ) (developing one of the world’s highest grade – underground gold mines), Detour Gold and Lake Shore Gold ( OTCPK:DRGDF ) – both Canadian junior gold high flyers, Silver Standard (NASDAQ: SSRI ), Coeur Mining (NYSE: CDE ), First Majestic (NYSE: AG ) (all three prominent in the silver space). So – do take a look at GDXJ as a long term punt on a turnaround in precious metals prices. It is a junior investment which nowadays offers what we see as very limited downside, but has great upside potential in a more favorable pricing environment.