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mhdousa

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Posts posted by mhdousa

    The 400% Man!

    in General Discussion

    Posted

    From his letter:

    Dear Arlington Investors,

    First, Ben and I would like to extend our thoughts/hopes that all partners are healthy and safe during this incredibly challenging time. I’m writing with an important and difficult update.

    In January I made the hard decision to step down from managing Arlington’s portfolio sometime this year. This was not an easy decision, as I still love business and investing and I’m not that old; however, my doctor, wife, and family all encouraged me to step down in the interest of my long-term health. I made this decision with the belief that it was the responsible course of action.

    Since making the decision to step down, Ben and I examined the mechanics of dissolution and also explored various options to provide longevity to Arlington and avoid disruption to LPs. We considered merging with a colleagues fund that would preserve Arlington but allow me to step back, while adopting a chairman of the board-like role. Ultimately, we decided that dissolution would be best and planned to wind down the fund over 6-9 months. On the heels of our decision, the coronavirus pandemic engulfed markets and everyday life, making our decision difficult, complex, and stressful. Unfortunately, our experience during this unprecedented market drawdown deviates from our historical performance in bear markets, as we’re lagging the major indices by a wide margin.

    I’m very disappointed with our recent results and have spent many sleepless nights analyzing what we could have done different or better. Given the unusual market environment, we’ve reconsidered our initial plan to proceed with a traditional dissolution process. However, it’s not practical to continue on with the current structure long term, so we’ve thought about various options for LPs to consider.

    While perhaps unorthodox, we’ve worked to create a sensible alternative to redeeming in cash or “in- kind” via a sub-advisor arrangement with Brave Warrior Advisors. The three options to consider are as follows:

    • A sub-advisor arrangement with Brave Warrior Advisors. Brave Warrior is a $2.3 billion dollar investment manager founded by Glenn Greenberg out of NYC. Glenn’s 36-year track record is elite, with few peers. Brave Warrior shares a similar investment philosophy and they are familiar with our top holdings. We’ve arranged for this to be simple and not disruptive to LPs by allowing Brave Warrior to assume investment management of our funds at a future date.

    • Redemption in cash.

    • Redemption “in-kind” via shares.

    We plan to discuss these options with LPs further over the next 3-4 weeks. Based on those discussions, we will then follow up with full details of options, timeline, and next steps.

    The 400% Man!

    in General Discussion

    Posted

    Arlington is closing due to some possible health issues for Meacham. Current investors are being given the option of an in-kind subadvisor arrangement with Glenn Greenberg of Brave Warrior.

    Anyone have any thoughts on Greenberg and his fund?

     

     

    The 400% Man!

    in General Discussion

    Posted

     

    I take particular umbrage specifically with funds that are underperforming the market on an unlevered basis, risking investor's capital with high levels of margin (and I make a distinction between margin and leverage overall), throwing up good numbers and receiving the accolades from outside investors who aren't paying attention to this "parlor trick". And it happens ALL the time.

     

    I'm curious what funds do this. I know you don't want to name names, but presumably this info is in their letters and out there.

    The 400% Man!

    in General Discussion

    Posted

    An investment advisor in Utah is questioning Arlington's track record.

     

    https://www.valuewalk.com/2017/09/arlington/?all=1

     

    I think he's barking up the wrong tree as it's unlikely Arlington is a fraud of any kind.

     

    That said, I've seen some (plausible?) commentary on Twitter recently about Arlington possibly using some interesting strategies to generate some of its returns (selling puts and covered calls, lending out shares to shorts, etc.).

     

    I know some members follow Arlington closely. Any thoughts?

     

    I've been thinking about this some, as I know some people invested with Arlington, and they've been spooked by this.

     

    I certainly don't think Arlington is a fraud, but how might one convince yourself that it's definitely not? That is, is there anything that would provide definitive proof? 

     

    -M

     

    It is very easy to show it isn’t a fraud, you have the auditors check the reported account balances, which I’m sure they do every year.

     

    That's what I thought as well. So, if that's the case, and Arlington sends out audited financial statements every year, then why would someone (the original investment advisor in Utah) go through all this effort to try to show it's a fraud?

    The 400% Man!

    in General Discussion

    Posted

    An investment advisor in Utah is questioning Arlington's track record.

     

    https://www.valuewalk.com/2017/09/arlington/?all=1

     

    I think he's barking up the wrong tree as it's unlikely Arlington is a fraud of any kind.

     

    That said, I've seen some (plausible?) commentary on Twitter recently about Arlington possibly using some interesting strategies to generate some of its returns (selling puts and covered calls, lending out shares to shorts, etc.).

     

    I know some members follow Arlington closely. Any thoughts?

     

    I've been thinking about this some, as I know some people invested with Arlington, and they've been spooked by this.

     

    I certainly don't think Arlington is a fraud, but how might one convince yourself that it's definitely not? That is, is there anything that would provide definitive proof? 

     

    -M

    Longleaf Mystery Investments

    in General Discussion

    Posted

    One of them is is indeed GE. If you look at their 12/31 portfolio, there is an undisclosed position that makes up 1.95% of the fund and that they hold 3,672,615 shares of. That total dollar value and number of shares matches up to the price of GE on 12/31 (17.50).

     

    The other position was priced at $163 as of 12/31 in case that helps anyone figure it out.

     

    Baupost Q4 2017 letter

    in General Discussion

    Posted

    MH was bored and apparently had little to do on Friday night.

     

    Close.

    I was drinking on a Friday night and for some reason decided to check two of my favorite value investing message boards (the other being the subreddit "Security Analysis") before going to bed. Both of them had lots of people asking for the Baupost q4 letter. So I decided to have some fun...

     

    I had forgotten I had done that until I woke up to a few PMs asking for the letter.

     

    Very happy at least a few people appreciated it.

     

    Baupost Q4 2017 letter

    in General Discussion

    Posted

    He discusses "disruptive change" in the tech sector and while he feels traditional value (e.g. companies like Macy's that are being "attacked by Amazon") will never "let you down", he's convinced that "the new firms that are seeking to displace the older incumbents" won't "give you up" though "many of these companies seem very fully valued."

     

    Baupost Q4 2017 Letter

    -M

     

    Japan opportunity

    in General Discussion

    Posted

    Was emailed this by the manager of Denali, Kevin Byun. Curious what others think of his reasoning:

     

     

    Japan is Unlocking the Greatest Opportunities in the World

    by H. Kevin Byun

     

    Japan has quietly unlocked the greatest opportunities in the world for value investors.

     

    As a value and special situations investor, the April 1, 2017 tax reforms in Japan hit me like a lightning bolt. Yet there was, and still has been, no market appreciation to this seismic change. This tax reform, for the first time ever, allows Japanese companies to effectuate spinoffs in a tax-free manner. Until then, Japan was the only major market in the world in which tax-free spinoffs were not allowed. Japan boasts the largest field of the most deeply undervalued conglomerates in the world. More broadly, half of Japanese companies trade below book value. As of April 1 of this year, the stage is set for decades of value creation much like the US in the 1980s and 1990s.

     

    Tax reform is part of the Three Arrows policy under the Abe Administration. The three arrows are monetary easing, fiscal stimulus, and structural reforms. Similarly, there are three reasons why Japanese equities are on the cusp of favorable performance. First, shareholder engagement and shareholder rights are increasingly influential. Importantly, the influence of the Bank of Japan, a substantial holder of Japanese equities, is already being felt. The BOJ is mandating the prioritization of shareholder interests and value creation for shareholders. Second, management and board engagement and incentives are modernizing and aligning with shareholders. The Tokyo Stock Exchange has mandated that boards must have two independent directors. Tax reform last year created tax advantaged issuance of restricted stock compensation and we can see an increase in insider ownership already taking place. Third, activism has gained acceptance and is increasingly effective in creating value for shareholders. Investors such as Third Point’s Dan Loeb (Sony, Seven & i, Fanuc, IHI, Suzuki) and Oasis Capital’s Seth Fischer (Nintendo, PanaHome, Toshiba Plant, Kyocera) have had a string of successes in Japan while effectively engaging with management.

     

    Importantly, companies are focused on three key areas to increase shareholder value. First, an increased focus on return on equity. Japan has the world lowest ROE and a higher ROE would result in higher valuations. Second, the sale of non-core assets and businesses. Japanese companies are increasingly selling non-core assets such as cross-shareholdings and land to unlock value. Third, balance sheet optimization. Many Japanese companies have inefficient balance sheets with low returns and will benefit by returning excess capital to shareholders, further increasing returns.

     

    For students of financial market history, one does not need to look far back in time to find precedents close to home. US conglomerates have created substantial value through spinoffs. The iconic conglomerate ITT completed a three part spinoff into New ITT Corp, ITT Hartford, and ITT Industries in 1995 as well as a three-part spinoff into New ITT Corp, Xylem, and Exelis in 2011. Another iconic conglomerate Tyco completed a three part spinoff into New Tyco, Covidien, and Tyco Electronics in 2007 as well as a three part spinoff into New Tyco, ADT, and Flow Control (via a Reverse Morris Trust with Pentair) in 2012. Also, one of the more well known examples is the 1988 LBO of RJR Nabisco, the food and tobacco conglomerate. RJR Nabisco was trading in the low $40s per share before the initial $75 offer from CEO Ross Johnson to the eventual $109 buyout by KKR. There are many ITT, Tyco, and RJR Nabisco equivalents of undervalued conglomerates in Japan.

     

    As a value and special situations investor, I believe we are on the cusp of one of the greatest eras in the Japanese markets and look forward to capitalizing on the opportunities that will create value for all stakeholders.

    Fund fee question

    in General Discussion

    Posted

    IMO, all are too expensive. Does NOT make sense to pay BOTH a management AND a performance fee. Huge challenge for a professional manger to beat the markets over time due to a number of logistics. Challenge becomes close to insurmountable when fees are factored in.

     

    I don't know of anyone with that structure that has beaten the "best" index over a period of 10-15 years. Would suggest going with a) 0%MER and performance fee with a high water mark hurdle structure, or b) low fee manager or c)index funds.

     

    Getting into a situation with management fee and performance fee, means getting into a lot of nebulous hedge fund structures that have not made sense to me when I have tried to understand them.

     

    Look forward to hearing other opinions,

    A fund that doesn't charge a management fee, but only a performance fee is IMO not ideal. Without regular income there is a strong incentive to try to get performance fees, whatever the cost. Better to blow-up trying to get to high-water mark, than getting stuck with zero income.

     

    A good reason to ask how much of the manager's personal wealth is currently invested in the fund.

     

    +1

     

    I have the vast majority of my net worth invested in my fund - I am very uninterested in "blowing-up" to possibly make a performance fee.

     

    Curious what your fee structure is, if you don't mind disclosing. Thanks.

    Fund fee question

    in General Discussion

    Posted

    IMO, all are too expensive. Does NOT make sense to pay BOTH a management AND a performance fee. Huge challenge for a professional manger to beat the markets over time due to a number of logistics. Challenge becomes close to insurmountable when fees are factored in.

     

    I don't know of anyone with that structure that has beaten the "best" index over a period of 10-15 years. Would suggest going with a) 0%MER and performance fee with a high water mark hurdle structure, or b) low fee manager or c)index funds.

     

    Getting into a situation with management fee and performance fee, means getting into a lot of nebulous hedge fund structures that have not made sense to me when I have tried to understand them.

     

    Look forward to hearing other opinions,

    A fund that doesn't charge a management fee, but only a performance fee is IMO not ideal. Without regular income there is a strong incentive to try to get performance fees, whatever the cost. Better to blow-up trying to get to high-water mark, than getting stuck with zero income.

     

    Yeah, I've heard this argument made and it makes some sense. What I'd like to see is a fund that has a management fee up until a certain AUM and then just goes with a performance fee.

    Fund fee question

    in General Discussion

    Posted

    I have re thought in light of how much outperformance you think you can get.  For example, let's say stock expected returns going forward are 6% & you think the manager can outperform by 5% per year (B. Graham's minimum per the Intelligent Investor), then with a 1% & 20% over 6% you are paying the manager 40% of the excess return.  What business do you know of that you can invest in & get 60% of the incremental return for just providing the capital & collecting the check in the mail?  Not too many being a passive investor.  Now if you are adding to the outperformance then you can expect more.  If you want to DIY you can save the fees but those are the alternatives I see. 

     

    Packer

    Interesting perspective, Packer, especially as you may be fairly familiar with fee structure #1 above.  ;)

     

    Thanks for the thoughts.

    Fund fee question

    in General Discussion

    Posted

    Hi all -

     

    I'm looking at three funds with different fee structures. Wanted to see what you thought in terms of whether they seem reasonable. Assuming you can't manage your own money but trust each of these managers would you invest with a fund where the fee structure is one of:

    1) 1% management and 20% performance fee above 6% hurdle

    2) 1.5% management and 20% above 6% hurdle

    3) 1.5% management and 25% above 6% hurdle

     

    Thanks!

    -M

     

    Chou vs Berkowitz

    in General Discussion

    Posted

    2 contrarians.

     

    The US vs Canadian mutual fund managers of the decade.

     

    You have one to give your money to for the next 30 years (in their available open-end mutual fund vehicles).

     

    Who do you pick and why?

     

    This is a real exercise in that, while I personally manage my non-qualified account, I prefer to invest my retirement money with managers and am trying to decide between Fairholme and Chou America.

     

    -M

     

    In the 5 years since I first asked this question the Chou Opportunity fund returned 4% a year, and Fairholme returned 8% a year (7% if you take out the spike since the election). Both of them badly underperformed the indexes.

     

    Shows you it's REALLY hard to pick active managers.

    What's your current portfolio?

    in General Discussion

    Posted

    PEFIX ~ 11%

    FNMAJ ~ 9%

    FRFHF ~ 8.5%

    SAN/BSMX ~ 8%

    FCAU/EXO ~ 8%

    ATUSF ~ 6.5%

    SBRCY ~ 6%

    PDER ~ 5%

    ZROZ ~ 4%

    OGZPY ~ 3%

    LUKOY ~ 1.5%

    Cash ~ 26%

     

    Not including sub 1% positions or my shorts, the gross exposures are above.

     

    Can you talk a little about PEFIX?

     

    PIMCO/RAE fundamental index for emerging markets.

     

    Uses a Total Return Swap proxy for Research Affiliates' value weighted emerging market index and then invests the collateral in fixed income instruments to beat the Libor+spread on the TRS. Very similar to PIMCO's StocksPlus fund (also a high performing fund), but for emerging market, value weighted exposure instead of cap-weighted S&P.

     

    Was heavily overweight Brazil and mineral companies last year and was up ~50% as EM rallied. Top 1% of EM performers last year so may not do as hot this year and I've taken some gains, but ultimately I like the structural potential of returns from both fixed income and equities and its' value focus. Will probably be a long-term holding to get diversified EM exposure along with the single names I select.

     

    I used to hold that.  Think I "traded" out of it at one point after a quick inconsequential gain.  I'm sure to my detriment.  I think I also got spooked out about PIMCO's use of derivatives generally, at some point.

     

    Certainly anytime you have leveraged exposure and then invest the collateral, it has the potential to go disastrously wrong. The long-term returns of the StocksPlus fund gives me some confidence that they are able to manage those risks appropriately.

     

    The key is to make sure the collateral isn't positively correlated with the underlying leveraged exposure. Nothing worse than having your collateral diminish in value just at the the time you need it. A portfolio of highly rated, highly liquid bond securities should be a reasonable hedge to a portfolio of EM equities. It's not like they're investing it all in EM fixed income as an offset to EM equities.

     

    Do you own the institutional version? Is there somewhere where you can get if for less than the $1m minimum?

     

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