#$alfa

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Corporate Raiding Like Carl Icahn With The Global X Activist Investor ETF

Photo Credit: Insider Monkey

I’m a big believer in doing independent investment research. But I also believe that it’s never a bad idea to look over the shoulder of some of the best investors in the business for ideas. We shouldn’t blindly copy every trading move of a Warren Buffett or a Carl Icahn. But you never know when you might find a stock that is a perfect fit for your investment strategy in the portfolio of a great money master. 

I’ve written before about guru-following ETFs (see “A New Guru ETF That Mimics The All-Time Greats” and “Five Stocks The Billionaires Are Buying” as recent examples). The Direxion iBillionaire Index ETF (IBLN), Global X Guru Index ETF (GURU) and the AlphaClone Alternative Alpha ETF (ALFA) are solid ETF products that fit their own particular niches, and I’ve written favorably about all three over the years 

Last week, the guru ETF space saw a new competitor step into the ring: Global X Guru Activist Index ETF (ACTX). 

ACTX differs a little from the competition in that it narrows the universe of high-profile investors to just those considered to be “activist investors.” 

Activist investors are the heroes of the investment world…or at least that is how they see themselves. (Managements of the companies they target are more likely to view them as villains…) Activist investors seek to shake up companies they view as complacent or inefficient by accumulating large positions, forcing their way onto company boards and then forcing major changes. Some of their common tricks of the trade include ousting management (or separating CEO and Chairman positions to make the board more independent), making a major acquisition or spinoff, or making a major shift in dividend or share buyback policy. 

Perhaps the best recent examples have been the efforts of veteran activist Carl Icahn to force eBay, Inc. (EBAY) to spin off its Paypal unit and his relentless prodding of Apple Inc. (AAPL) to aggressively buy back its shares. 

So, what is the story with the ACTX ETF? 

In a nutshell Global X is looking to give investors access to the trading moves of the best activist investors while avoiding the high fees usually associated with hedge funds. The standard in the industry is 2% of assets and 20% of profits. ACTX has a far more reasonable expense ratio of 0.75% 

Global X bases its holdings on the Solactive Guru Activist Index, which goes through the following selection process. First, they narrow the field to the 50 largest activist investors in the United States. These would include the usual suspects, such as Icahn, Bill Ackman, Daniel Loeb, Nelson Peltz and others. Next, they mine the 13F and 13D filings of the activists to build a superlist of all long stock positions ranked by dollar amount invested. And finally, they narrow the list to the 50 largest positions and weight equally across the portfolio, rebalancing quarterly. 

There are a couple points to note. First, this ETF will tend to overweight the activist investors with the highest assets under management. For example, by virtue of having $32 billion under management, Carl Icahn will carry twice the weight of Bill Ackman, who has $16 billion under management. This means that a middling portfolio pick by Icahn could carry the same weight as a high-conviction pick by Ackman. And certainly, this will be even more pronounced for the smaller, lesser-known activists further down the list. 

Secondly, it will also tend to have a large-cap bias for essentially the same reasons. Because ACTX ranks the top 50 by dollars investing, you’re going to see a lot of mega-cap stocks like Apple and eBay making the list. You can check out the full list of holdings here, and I guarantee you will recognize the vast majority of the names. So while ACTX does indeed give you access to the biggest bets of the hedge-fund masters of the universe, don't expect to uncover any hidden micro-cap gems. 

Apple and eBay make the list, of course, as does tech rival Microsoft Corporation (MSFT). Two other holdings I particularly like--and own personally--are Williams Companies (WMB) and McDonald's Corporation (MCD). 

All in all, ACTX is another solid addition to the growing number of guru-following ETFs. 

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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Validea Market Legends ETF: A New Guru ETF That Mimics The All-Time Greats

When it comes to investing, originality is overrated. You get no brownie points for using only your own research. Returns are returns. So, if you can piggyback on the research of famous investors like Warren Buffett or Peter Lynch, why wouldn’t you?

I’ve spilt quite a bit of ink writing about assorted smart-money, guru-following strategies (see “iBillionaire to Launch New Guru ETF”), all of which involve some variation of 13F mining. In a nutshell, if you want to know what a famous investor is buying, you need only look at the 13F filings they are required to file with the SEC. Several sites, including GuruFocus and Insider Monkey, track 13F filings, and there are currently three popular guru ETFs, including  the Global X Top Guru Holdings Index ETF (GURU), the AlphaClone Alternative Alpha ETF (ALFA) and the Direxion iBillionaire Index ETF (IBLN). 

Now, Validea Funds is taking the guru ETF in a new direction with the Validea Market Legends ETF (VALX). 

The Validea ETF, unlike its peers, does not mine the 13F filings of famous investors. Instead, it picks stocks by imitating the strategies of famous investors. It’s a matter of copying the style rather than the specific stocks. 

There are pros and cons to following this kind of approach. One obvious selling point is that you are not limited to the current pool of famous investors. The strategies used by investing legends that practiced decades ago, such as Benjamin Graham or Peter Lynch, can be included alongside those of managers that are in the trenches today. 

And there is also the matter of timing. The mining of 13F filings is an exercise in tracking what the smart money has already done, and by the time you get the information it might already be dated. By emulating the underlying strategy instead, you can potentially invest ahead of the manager whose strategy you are ostensibly cloning! 

Of course, the obvious downside, particularly when looking at the strategies of long-retired managers, is that we can’t say with any certainty whether that manager would still be using those strategies were they in the business today. Many of Benjamin Graham’s favorite strategies are all but unusable today because the market is a lot more efficient than it was when Graham was investing. If Graham were alive and practicing today, I have no doubt that he could compete with the very best value managers in the business. This is the man, after all, that literally invented value investing as we know it today with his publishing of The Intelligent Investor and Security Analysis. But would he still be hunting for stocks trading below their net current asset value per share, as he was famous for doing during the Great Depression? We can only guess. 

Let’s take a look under the hood of the Validea ETF. This guru ETF’s portfolio is comprised of 100 stocks using 10 distinct guru-based models, which are themselves chosen from a pool of 17 total models. The original pool of 17 is narrowed down to 10 based on their long-term performance and their correlation to each other. 

The Validea ETF is not beholden to any one strategy type; its 17 identifiable strategies are a mixture of value, growth and momentum strategies. It is also not hemmed in by market cap restrictions; its holdings span the small, mid, and large-cap universes. 

What is Validea buying today? Let’s take a look at the current portfolio. There are definitely some contrarian plays in the portfolio. Russian oil company Lukoil (LUKOY) and battered American handbag maker Coach (COH) are current top holdings, as is oilfield servicer National Oilwell Varco (NOV). 

So, what’s the verdict on the Validea Market Legends ETF? 

It’s too early to draw any conclusions based on performance, as the ETF has only been trading since December, but its methodology is interesting and warrants following. It’s definitely worth noting that the ETF’s manager, John Reese, is a respected researcher and a long-time contributor to Forbes. 

For the individual stock pickers out there, the Validea ETF—along with its guru ETF competitors—can be used as a convenient stock screener for investment ideas and a launching pad for further research.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Photo credit: DonkeyHotey

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Dividend Investing Like a Billionaire

iBillionaire—the creators of the index backing the Direxion iBillionaire Index ETF (IBLN)—are at again, launching a new index that tracks the dividend stocks being bought by hedge fund masters of the universe and other financial billionaires.

The iBillionaire High Dividend Index (IBD), which was just launched today, is an equally-weighted basket of 50 high-dividend stocks held by high-profile billionaires in the financial sector. iBillionaire currently tracks the trading moves of 22 billionaire investors, and recent additions include living legends like Stanley Druckenmiller, James Dinan and Nelson Peltz.

In a low-yield world in which “high dividend” is something of a relative term, the iBillionaire High Dividend Index actually lives up to its name. Its dividend yield is a solid 5.34% according to iBillionaire.

I’ve written about iBillionaire and the Direxion iBillionaire ETF before (see “Investing Like a Billionaire”), and I’m a big fan of iBillionaire’s methodology as well as those of competitor ETFs like the Global X Top Guru Holdings Index ETF (GURU) and the AlphaClone Alternative Alpha ETF (ALFA). I don’t believe in mindlessly copying the trading moves of other investors, no matter how storied their careers, but I do consider guru-following strategies to be a fantastic source of trading ideas.

The iBillionaire High Dividend Index comes along at an interesting time. The 30-year U.S. Treasury is scraping along near all-time lows, and most income-focused investments have gotten prohibitively expensive. This is perhaps the trickiest market in history for income investors to navigate, so it’s instructive to see what the big boys are buying.

Let’s take a look at the top 10 holdings. (Note: Though equally weighted, position weights will shift between rebalancings, hence the larger allocations you see here.)

Interestingly, General Motors (GM) is a top-ten holding of both the original iBillionaire Index and the new iBillionaire High Dividend Index.

At 24%, the iBillionaire High Dividend Index has a high allocation to energy shares. Given the volatility in the sector, that very well might change once the next batch of 13F filings is released. But there are several high-quality energy names in the index worth noting, such as Kinder Morgan Inc (KMI), Williams Companies (WMB) and BP (BP).

Also worth noting is that the index has a fairly high allocation to high-yielding mortgage REITs, such as Northstar Realty (NRF), American Capital Agency (AGNC), and Chimera Investment Corp (CIM). Investors right now are scared to death of mortgage REITs, fearing that eventual tightening by the Fed will pinch their interest spread. It’s interesting that the billionaire masters of the universe appear to see looking past this and seeing value. (Incidentally, I noted that mortgage REITs were attractively priced earlier this month.)

So, what are we to do with this information? There is no mutual fund or ETF that currently tracks this index. That’s ok. In its current form, it gives us a “fishing pond” of good income investment ideas to research further.

Disclosures: Long GM, KMI, WMB BP

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Photo credit: Thomas Galvez

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Investing Legends: Seth Klarman

“In capital markets, price is set by the most panicked seller at the end of a trading day. Value, which is determined by cash flows and assets, is not. In this environment, the chaos is so extreme, the panic selling so urgent, that there is almost no possibility that sellers are acting on superior information. Indeed, in situation after situation, it seems clear that fundamentals do not factor into their decision making at all.”

– Seth Klarman

In a recent issue of the Idea Farm, Meb Faber starts a great profile on investing demigod Seth Klarman with this quote. Really stop for a minute and reread it a couple times. Print it out and tape it to your monitor. Next time you live through a good market crash, recite it like holy writ.

The dirty little secret of the money management profession is that we all have Klarman envy. We don't just want his returns; we actually want to be him, have his super-human emotional control, and be able to wield the power of that brain of his.

Alas, we mortals will have to settle for reading his out-of-print book--which sells on Amazon for thousands of dollars. So desperate are value investors to get their hands on a copy of Margin of Safety, I expect that plenty would be willing to do back-alley deals with men in trenchcoats.

At any rate, here is an excerpt of the profile:

Since founding Baupost Group in 1983, Klarman has grown it into a hedge fund giant managing as much as $30 billion. It’s flagship fund has churned out more than 17% annual returns since its founding, handily beating the S&P 500 rise of about 11% annually during that period, and doing it while often holding 40% or more of assets in cash...

How does he do it? Klarman explained his basic philosophy to television talk-show host Charlie Rose during a 2010 interview.

“Investing is the intersection of economics and psychology,” Klarman said. “The economics – the valuation of the business -- is not that hard. The psychology – how much do you buy, do you buy it at this price, do you wait for a lower price, what do you do when it looks like the world might end – those things are harder. Knowing whether you stand there, buy more, or something legitimately has gone wrong and you need to sell, those are harder things. That you learn with experience. You learn by having the right psychological makeup.”

Klarman has a special knack for complex transactions that often come with limited liquidity. He has purchased real estate that was acquired by the U.S. government in the savings and loan collapse of the 1990s, dabbled in Parisian office buildings and drilled into Russian oil companies...

Although Klarman seems to delight in fishing for opportunity in obscure and complex deals, he is no slouch when it comes to stock picking. He runs concentrated portfolios, as is evidenced by his positions as of the third quarter of 2014. The top five represented the lion’s share of his invested assets...

As a long-term investor, Klarman doesn’t spend much time monitoring the daily movements of markets. His office features a desk piled high with papers, a computer, some half-filled water bottles, but no Bloomberg terminal, the device with access to market data that traders rely upon...

What Klarman prides himself on as much as making money is not losing it. He has had only two negative years (1992 and 2008).

And here's a quote that will simultaneously make you love and hate Klarman: "When Charlie Rose asked Klarman to name his biggest mistakes, the Sage of Boston thought a moment but came up empty. 'I have never really screwed up a lot,' Klarman said."

I wish I could say the same...

I, like the rest of investing humanity, will have to content myself with learning from my mistakes rather than not making them to begin with. 

Here's to a prosperous 2015,

Charles Sizemore

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Photo credit: City Year

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iBillionaire Index: What are Billionaires Buying and Selling?

The Direxion iBillionaire Index ETF (IBLN) is about to get a quarterly overhaul. Its underlying index announced it latest rebalancing last month based on the latest 13F filings by financial billionaires. 14 of IBLN’s 30 holdings are being replaced.

iBillionaire is one of several guru-following strategies currently competing in the ETF space along with the AlphaClone Alternative Alpha ETF (ALFA) and the Global X Guru Index ETF (GURU), though the iBillionaire ETF takes an interesting twist. It specifically limits its portfolio to the 30 S&P 500 stocks being purchased by billionaire fund managers. You can think of IBLN as the sliver of the S&P 500 being accumulated by masters of the universe like George Soros, Julian Robertson or John Paulson.

So, what are the billionaires buying? Healthcare, mostly.  Healthcare jumped from a 13% to a 20% allocation, and new additions included AbbVie (ABBV), Humana (HUM), Tenet Healthcare (THC) and Thermo Fisher Scientific (TMO).

In technology, we see Facebook (FB) and Google (GOOG) making the list. And Air Products & Chemicals (APD), CBS Corporation (CBS), Delta Airlines (DAL), General Motors (GM), Masco Corporation (MAS), Monsanto (MON), National Oilwell-Varco (NOV) and Whirlpool (WHR) make up the rest of the new additions. Portfolio wide, about two thirds of the iBillionaire Index is in consumer discretionaries, technology and healthcare stocks with materials, energy, industrials and financials being underweighted and utilities and consumer staples not represented at all.

And what are the billionaires selling? There were six stocks added during the last quarterly rebalancing that are already making an exit: Transocean (RIG), Netflix (NFLX), Williams Companies (WMB), Comcast (CMCSA), McKesson Corporation (MCK) and Intercontinental Exchange (ICE).  With the exception of McKesson and Intercontinental Exchange, all had lost money over the past quarter.

iBillionaire is booking gains with the rest of the stocks leaving the index. Cigna Corporation (CI) and Cognizant Technology Solutions (CTSH) are up 135% and 112%, respectively, since joining the index.  And AIG (AIG), Microsoft (MSFT), McGraw Hill Financial (MHFI), Motorola Solutions (MSI) and The Gap (GAP) all had respectable gains.  Andarko Petroleum (APC) was roughly flat since being added to the index in August of 2013.

What are we to do with this information? I not a big fan of hero worship when it comes to investing, and we should never mindlessly ape the investment moves of others, no matter how good their long-term track record might be. I do, however, take their moves into consideration and view them as a useful starting point for further research.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. 

Photo credit: Thomas Galvez