Before we dive into this week’s content, I want to let everyone know that this Friday, Nov. 29th MO is having a special Black Friday surprise for all Value Hive readers. I don’t want to spoil anything, but I will say that if you like to trade equity earnings announcements, you won’t want to miss this offer… So keep an eye on your inbox the day after Turkey day!
With that, let’s feast!
November 27, 2019
Turkey Trivia: We’re back with more festive trivia! This week’s question is all about Thanksgiving. You know the rules. No Google. First one to email the correct answer receives $5 Venmo from yours truly.
Are you ready?
Here it is: Which President made Thanksgiving an official, annual holiday?
Clock starts now!
Investor Spotlight: Big Names Stepping Down From Funds
Many investors are struggling to match the S&P’s torrid 24% YTD rise. In fact, numerous funds are shutting their doors and returning capital to outside investors. This week we take a look at a hedge fund giant closing shop, as well as the overall trend towards hedge fund liquidations.
No More Bacon: Louis Steps Down at Moore Capital
The investment world lost access to one of the greatest global macro investors of all time this week. Louis Bacon of Moore Capital Management, closed the doors to outside investors.
Bacon consolidated the company into one investment vehicle, returned capital to outsiders and stepped away from day-to-day operations.
According to the Barron’s article, Bacon’s going back to his roots. His pre-hedge fund days. He explains the decisions, saying (emphasis mine):
“For me this new arrangement is in some ways a return to my market origins in that my original pre-hedge fund track record was generated off of my own proprietary capital while overseeing a financial business devoted to commissions. And now I am once again concentrating on my personal investment account while overseeing a large multi-asset alternatives platform.”
Enviable Track Record
Bacon’s track record was impressive to say the least. He revealed some of those figures in his closing letter to investors. Here’s a quick run-down:
- Net annualized return of 17.6%
- Cumulative return of over 21,000% since inception of flagship Remington funds
- 15% annualized return for Moore Global Investments
- Cumulative return of 61x original investors capital.
- 11% return for Moore Macro Advisors (newest fund)
Bacon turned every $1 of outside investor capital into $61 by the end of his run. That’s incredible. But were his returns due to broad market forecasts and large global bets? Or were they a product of a longer-term trend following system?
Global Macro = Trend Following?
The Barron’s article features Avi Tiomkin, an adviser to global macro hedge funds. According to Tiomkin, these impressive returns were due to trend following / momentum strategies. Not pitch-perfect correct global macro hypotheses.
He says, “Many legendary macro hedge funds managers were really momentum players following trends.”
Regardless, Bacon’s achievements in the markets are historical. He created vast wealth for his investors.
The Liquidation Trend: Bacon’s Not Alone
Reading the piece on Bacon made me think about the broader hedge fund industry. What were the trends like at a 30,000ft view? With the S&P up near 25% YTD, there’s bound to be managers closing shop.
And there were. A quick Google search led me to this article by Pensions & Investments. The article notes that hedge fund liquidations have outpaced hedge fund openings for four straight quarters. Granted this report was from September 2019. But recent enough to remain valid.
The Struggle is Real
There’s reason to worry for the hedge fund industry. Investors aren’t willing to accept the 2/20 fee structure. And why should they when they can buy the S&P index ETF for 0.09% expense ratio?
It’s harder to raise money in today’s hedge fund industry. Don’t believe me? Ask Peter Lynch’s replacement, Jeffrey Vinik. Before starting his own fund, Vinik oversaw Lynch’s pride and joy; the Magellan Fund.
Vinik had no problems raising money for his first fund, which he launched in 1996. According to this Reuters article, Vinik raised $800M on launch day. Not bad!
Yet this time around, in his quest for $3B in assets, Vinik fell short. Way short. All he had to do, Vinik thought, was to meet with 30-40 pension funds and wealthy individuals and he’d have his $3B. He got a paltry $456M instead.
Hedge Funds to Family Offices
The new fad for hedge funds is to close shop and run internal / founder money. There’s no benchmarks to hit, no outside investors to worry about. Just an internal team running a single pool of concentrated wealth.
Movers and Shakers: Schwab 1, TD Ameritrade 0
It’s happening. As of 3:00AM PST, Charles Schwab announced its acquisition of TD Ameritrade. The price tag? A cool $26B. The move marks one of the largest consolidation efforts in the history of the discounted brokerage industry. Here’s a quick snapshot of the new combined company:
- 24 million brokerage accounts
- More than $5 trillion (with a t) in client assets
- $17B in combined annualized revenues
- $8B in combined annualized pre-tax profits
That’s a lot of fun coupons!
So far both companies seem to enjoy the new living arrangements.
Schwab’s (SCHW) chart shows a breakout above the 50MA, 200MA and downward trending channel:
TD Ameritrade’s (AMTD) chart shows strength since rumors surfaced in late October. It’s stock price blew through the 200MA and the 50MA:
Let’s get back to the press release for more details on the transaction.
The merger is expected to be an all-stock deal. If the deal works, AMTD shareholders will receive 1.0837 Schwab shares for each AMTD share. This represents a 17% premium over 30-day average price.
Synergies, Synergies, Synergies
According to the press release, the deal should be 10 – 15% accretive to SCHW earnings and 15 – 20% accretive to SCHW operating cash flow after three years.
On top of accretive top-line synergies, SCHW anticipates 18 – 20% reduction in expenses. This would result in $2B in savings.
A Better User Experience
The SCHW & AMTD merger creates one of the best brokerage experiences in the industry. Both firms are notorious for their client offerings and support services. For example:
- SCHW ranked #1 in Customer Satisfaction by J.D. Power and ranked #1 Broker Overall in 2019 Investor’s Business Daily survey
- AMTD ranked #1 for Best Online Broker in 2018 and ranked #1 in Overall Broker in Stockbrokers.com 2019 Online Broker Review.
Both SCWH and AMTD users should welcomet the merger with open arms.
Resources of The Week: John Malone & Meir Statman
We’re in the season of giving. You think we’d let you go Thanksgiving week without giving you two investing resources? How else will you drown out the political banter at the dinner table this week? We’ve got an interview with media legend John Malone and a podcast with Meir Statman.
Malone on Markets
David Faber of CNBC sat down with John Malone to discuss the media investments, streaming wars, cable cutting and more. For what it’s worth, I think it’s CNBC’s best interview that I’ve seen. Faber is an excellent host who knows how to ask great questions and then get out of the way.
Malone’s one of the greatest allocators and investors of all time. The interview is an hour long, but well worth the time. I’m on my second trip through.
Stocks, Watches and Roses
Here’s the run-down on what Meir discusses (via EMIP website):
- The difference between a rose, a watch and a stock
- The major cognitive bias that investors fall victim to, and how to avoid them to improve your investing
- How to make sure you’re not eaten by the lions of the market
- What the ‘greater fool’ means, and how you can take advantage in your investing
There’s a chance I pick up Statman’s book over the next few weeks. If so, I’ll make sure to leave a review in a future Value Hive.
Idea of The Week: More Value South of The Border
I’ve been on a Mexican-equity tilt over the last month. I don’t know if it’s because I spent last month’s Value Ventures uncovering two value plays in Mexico, or recency bias.
Nevertheless, this week’s IOTW comes from Mittleman Brothers Investment Management (MIM). I like reading their Global Value Equity Report each quarter. This quarter’s letter mentioned the Mexican company TV Azteca (AZTECA/CPO).
TV Azteca provides Spanish-language television programming. Like most Spanish TV broadcasters, AZTECA’s share price hasn’t done well. The stock’s down 86% over the trailing 5 years. Grupo Telvisa is down 57%, Atresmedia, 60% and Viacom 64%.
Despite sector weakness, MIM remains a believer in linear over-the-air (OTA) TV. Yet even if they’re wrong, AZTECA’s taking steps to diversify its assets. Here’s a few examples from the MIM letter:
- Mexican Liga MX football team Atlas of Guadalajara, bought for $50M in Nov. 2013, est. worth $60M today.
- Mexican Liga MX football team Monarcas Morelia, bought in 1996 est. worth $70M.
- 40% stake in Azteca Comunicaciones Colombia est. worth $40M.
- 100% ownership of a new fiber optic network in Peru called Azteca Communicaciones Peru est. worth $60M.
For those doing the math at home, that’s an asset value around $230M, or $0.08/share. That’s double the current share price.
Mittleman’s Past Success in Mexico
Mittleman Brothers is comfortable investing in Mexico. The firm’s generated healthy returns from Mexican companies like Telmex, Grupo Radio Centro and Cemex.
MIM still thinks the AZTECA thesis is in tact. With the stock trading at 50% to its asset value, might be an interesting idea.
That’s all I got for this week. Shoot me an email if you come across something interesting this week at email@example.com. Have a great Thanksgiving holiday.
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Student of value investing for over 13 years spending his time in small to micro-cap companies, spin-offs, SPACs and deep value liquidation situations.