It has been that period of time where people tend to look back over the last year. Indeed I did it myself in December with my post called A dog is not just for Christmas which if you missed it, you can read by clicking the highlighted link. Now I know some people think that all these reviews of previous years winners and loser is pointless, but given the momentum effect whereby the previous years winners and loser tend to carry on in the same vein, then perhaps it is not such a waste of time looking at these lists after all.
Now coincidentally the stock I covered in the dog piece above was Man Group (EMG) which happened to be on this years list of best performers over the year. The reason I happened upon it was because it had been a bit of a dog and had appeared on a three year under performer screen that I run. I also run a three year out performer screen which I call my Icarus screen after the character from Greek mythology who flew too close to the sun.
I saw an interesting post on this the other day at Alpha Architect which covered the research on this that I alluded to in my earlier post above. The chart below is from their post which show the performance of previous 3 year losers versus previous three year winner over the following three years. You can read the post and get access to the original research paper, if that is of interest to you, by clicking on the chart. So after my experience with Man Group I'll be paying more attention to these
screens this year. So with that in mind and as it is still just about the time for looking back, what can we learn from looking at the screens now? Well on the under performers which are showing some signs of life maybe after seeing some earnings upgrades some controversial names crop up like Quindell (QPP) which is on the turn maybe with a new highly regarded management team just being parachuted in. While Lamprell (LAM) was also there but they have just issued a profits warning this morning. So it show that you would need to tread carefully and do your own research with stocks on this list.
See the following file for the list of 30 or so under performers which have had some upgrades recently.
Meanwhile in terms of the out performers or Icarus stocks which may be flying too close to the sun some typical highly rated stocks with no yield getting down grades recently include Allergy Theraputics (AGY), but it does vaccines so who knows? While Earthport (EPO) which apparently does cross borders payments is one that stands out for me as it has not made a profit in the last 6 years and sells on 20x sales. it looks dangerous and as though it could fall back to earth to me, although I haven't researched it so I could well be wrong.
Meanwhile more mainstream names appear on the list including Talk Talk (TALK), Hargreaves Lansdowne (HL) and Restaurant Group (RTN), which coincidentally I sold recently having held for nearly three years. Of course just because they are on this list doesn't mean they will underperform, but certainly worth watching if they have a high rating, little or no yield support and down grades as that is usually a toxic combination. Again if it is of interest you can see the 60 or so names that have done well over three years but seen downgrades more recently and therefore might need watching more closely if you hold them.
I mentioned in my posts this weekend hedge funds in relation to the stronger US Dollar and also when I reviewed Man Group the hedge fund manager. In passing I suggested that the current market conditions could be more favourable for global macro type hedge funds which have had a tough time of it in recent years and provided fairly dull returns, although they did well in the years running up to and over the financial crisis.
The problem for individual investors is that hedge funds, if you want to invest in them, are generally only open to high net worth individuals / mega rich. However, there have been a few funds listed on the London Stock Exchange over the years which offer access to these strategies in a listed, easily traded vehicle. These tend to act as feeder funds to their larger unlisted funds.
One such fund define their Macro Strategies as follows:
"Macro": multi-asset global markets, mainly directional (for the Fund, the majority of risk in this category is in rates)
"Rates": developed interest rates markets
"FX": global FX forwards and options
"EMG": global emerging markets
"Equity": global equity markets including indices and other derivatives
"Commodity": liquid commodity futures and options
"Credit": corporate and asset-backed indices, bonds and CDS
"Systematic": rules-based futures trading
"Discount Management": buyback activity for discount management purposes
Summary & Conclusion
This is just a thought that with the recent macro moves and after such a strong performance in conventional asset classes, this could be a reasonable time to consider diversifying into something that may not be as correlated and which could do well if other traditional assets start to struggle or fall. Given the performance in recent years they have also drifted onto a small discount.
If that is of interest you can open today's Advent Calendar Window to learn more about an example of this type of fund, but once again it is just a suggestion and not a recommendation and the past is no guide to the future and investments will go up and down.
I have written about this one a few times recently and they have confirmed the rumoured acquisition of Numeric Holdings which it was thought could lead to 20% upgrades. The deal itself is slightly complicated as they are paying $219 million cash up front with a further "earn out" payment of $275 million possible after five years dependant on the performance of Numeric over that period. This seems like a good idea as it will lock in the management and align their interests, especially as they will also be entitled to a 10.5% dividend based on each relevant years profit.
These figures seem to represent 1.5% or up to 3.4% of the $14.7 billion funds under management, which is slightly less in total than the 4% figure that Man is trading on. It also represents an EBITDA multiple of 10.5x, although I note that 57% of their $89.3 million revenues came from performance fees which can melt away quickly if they have a spell of poor performance. In addition as they have set out a 52.5% expense ratio only $26.5 million of current run rate of profits would be expected to flow through to Man so more like 18 to 19x. I also note that much of their asset base also seems to be institutional in nature which can also be more demanding on fees and less sticky than retail assets.
The Board of Man believes that the Acquisition provides attractive strategic, commercial and financial benefits to Man and its shareholders through the:
· Creation of a diversified, global quantitative investment platform comprising AHL and Numeric, with over $25 billion of funds under management and a broad product range across alternative and long only, trend following, technical and fundamental strategies;
· Further development of Man's footprint in North America, through a recognised brand, a presence in an important investment centre and relationships with a range of institutional clients;
· Provision of investment capacity in a number of strategies with an attractive and long investment track record and therefore the potential to add incremental funds under management through combining Numeric's investment offering with Man's global distribution capability;
· Addition of a highly experienced and well regarded team with a strong cultural fit;
· Alignment of the interests of Numeric Management with those of Man's shareholders through having over 90% of the maximum aggregate consideration payable to Numeric Management being dependent on the run rate profitability of the Numeric business at the fifth anniversary of completion; and
· Opportunity to achieve a strong risk-adjusted return on capital; additionally the Acquisition is expected to be earnings accretive from completion.
Summary & Conclusion:
Overall a sensible looking deal which apparently utilizes around $325m of their $525 million surplus capital according to a report on Digital Look and is generally seen as being sensible by analysts. This was backed up by the positive share price response yesterday which saw the shares rise by 6% at the close. If the initial estimates of 20% boost to earnings are forthcoming then I guess there could be a bit more upside to the share price from the recent base it has been building.
Firstly we have had an acquisition from Man Group (EMG), which I have written about a couple of times recently as a bit of a dog / three year under performer which might be building a base for a turn around in its performance. This acquisition is not the one which was flagged last time but a much smaller US-based fund of hedge fund manager, founded in 1994, specializing in the management of credit-focused hedge fund portfolios with approximately $1.0 billion of assets under management. It will enhance Man Group's presence in the US and add to Man Group's fund of hedge funds business, FRM. Probably too small to have a significant impact, but indicative of their desire to acquire and diversify their business.
Meanwhile Fairpoint Group (FRP) which I wrote up a while back has issued an AGM statement and trading update today. In this they said that trading was modestly ahead of last year in the first four months of the year which they state is a quiet period for them. They also say that their Debt management activity has been boosted by their recent acquisitions. But they describe their core debt solutions activities as being challenging. They also flagged their acquisition in the Legal Services area which they expect to complete in the near future to diversify their business. So overall a mixed bag of a statement and the market has taken it badly first thing. Personally I have always been a bit uneasy about this one given the nature of its business and its size - so I think I have exited this one given the mixed messages today.
Brief update on Man Group which I wrote up recently in Watching Man a real dog. They have responded to press speculation recently to confirm that they are in talks with Numeric Holdings LLC concerning a possible acquisition, although they say these talks may or may not lead to a transaction.
The FT reported on this in which they suggest Panmure Gordon reckon this could boost their earnings by 20% given it would be paid for out of surplus capital / cash. This would also help to diversify Man's business further as I believe they are mostly a long only Quantitative Fund Management outfit. Indeed in a report on Bloomberg they describe them as "Boston-based Numeric, which trades equities based on signals from mathematical models, manages $13.9 billion, according to its website." So may be they can bring some new techniques to Man Group or teach them some new tricks.
The shares were up 5% or so on the back of this having bounced off the 200 day moving average just above my target level. Still worth watching to see if they can get this deal done and start a recovery from the base the shares have been building. It would also improve the already reasonable 13x rating and help underpin the 5%+ yield - also interesting as it scores 98 (100 best) on Stockopedia's QVM ranking system, see below for an example of this and click the link above for more details of their service and a free trial.