Bloomberg News

A Fund That Piggybacks on Corporate Raiders

April 18, 2013

Kenneth Squire

Kenneth Squire of 13D Monitor

It's far from a sexy name: The 13D Activist Fund. Until you realize it's built around the machinations of such glamorous and infamous corporate raiders as Carl Icahn and Bill Ackman.

The term 13D refers to the form shareholder activists must file with the Securities and Exchange Commission when they’ve acquired a 5 percent position in a stock and, in many cases, plan to agitate for change. Kenneth Squire has been following such filings at his Manhattan-based research service, 13D Monitor, since 2006.

The 565 13D situations Squire reported on from April 1, 2006 to February 28, 2011 delivered an average 22.2 percent annualized return, compared to 3.7 percent for the SP 500 Index. Because of this strong performance, he decided to launch the 13D Activist Fund at the end of 2011. It too has outperformed the market, with a 30.7 percent annualized return from its inception to March 31, compared to a 22.1 percent annualized return for the SP 500. (The 5.75 percent load can be avoided by purchasing the fund directly from the company.)

Q: This is not like an index fund of hedge fund activists, right? It’s a customized strategy.

A: Yes, that’s a key point. There are 1,500 to 2,000 13D filings a year and another 4,000 amendments. From those we invest in only the most compelling situations. We look at who the activists are, their track records, what sector they're investing in and what strategy they're employing. Finally, what are their chances of getting their agenda implemented? We generally have an idea of which shareholders vote for activists and which don’t. Based on all of that we put together a portfolio of the activist situations that we think are best.

Q: Who are some of the activists you follow?

A: Obviously Carl Icahn, Pershing Square, ValueAct Capital, Jana Partners, Corvex Management we like. There are about 10 to 15 we follow closely.

Q: Compuware is one of your top holdings, at 4.1 percent. What’s its story?

A: Elliott Management is the activist hedge fund on this software and IT company’s case. They’ve offered to buy Compuware at $11 a share and it looks like others want to buy the company too. We think it’s a great company with a great catalyst to break it up and sell it to the highest bidder. There’s also some downside protection in that Elliott is a willing buyer for at least $11 a share.

Q: What are some other activist campaigns you like?

A: DineEquity, which operates 3,600 Applebee’s and IHOP restaurants, is one that Marcato Capital Management is in. Most of this company’s business is franchised to restaurant owners, so all it really does is receive a royalty stream. Though it has no need for capital, it has a ton of cash coming in. Marcato is urging the company to pay a $6 dividend. The stock is trading for about $70. We think it’s worth $120. Marcato owns 9.4 percent of DineEquity.

Q: What about Marcato as activists do you like?

A: Mick McGuire, who runs Marcato, used to be at Pershing Square with Bill Ackman. He’s one of the first investment professionals Bill hired and we know him to be very smart and very experienced with activism.

Q: Are you getting a sense of not only the activists but of the company itself and how hostile its board is to these recommendations?

A: That clearly goes into our calculations. Here’s an activist coming in and you have all this cash and you need to use it in the best way to increase shareholder value. That’s a much more palatable situation to a company than an activist's saying ‘You don’t know what you are doing; we’ve got to replace management.’ Marcato is basically saying, ‘You are doing such a good job that you are generating cash and we are going to come in and figure out the best ways to use the cash.’ That’s a situation we don’t expect to be contentious.

Q: Are you willing to invest in ones that are contentious?

A: Sure. Fertilizer company Agrium has a proxy fight with Jana Partners. When Jana comes into an activist situation, it normally has a very well-thought-out business plan. In Agrium’s case, Jana wants the company to do some cost cutting and split its retail and wholesale businesses into two entities. Jana doesn’t think Agrium’s board has done a true analysis of these strategic alternatives. So it's fighting to change some directors on the board. [It failed to win any board seats in an April 9 proxy vote.]

Q: Any deals with Icahn or Ackman you like in particular?

A: I’m in a lot of their deals. I like liquor company Beam, which Ackman is in. I think that’s a great, stable company. It’s the only pure-play liquor business, and I think it will ultimately be sold to somebody. With Icahn we’ve had a bunch of his positions, including Netflix and Transocean.

Q: What's an example of a deal that fell apart?

A: We invested in J.C. Penney, which Ackman is involved in, but it ended up being a longer activist campaign than fit our criteria. It turned out to be a four-year restructuring that ultimately could be very successful but we’re no longer in it. That’s one we sold early.

(Lewis Braham is a freelancer based in Pittsburgh.)

To contact the editor responsible for this story: Suzanne Woolley at swoolley2@bloomberg.net


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