Since my last commentary, the Absolute Returns portfolio has exited a number of positions including Vivendi (FR.VIV), which approached our estimation of fair value on a sum-of-the-parts basis.
I also exited a position in Woori Investment & Securities and, more recently, disposed of our holding in Lands’ End (LE), following its recent spin off from parent Sears Holdings (SHLD).
Positions were entered in a number of new stocks I consider undervalued or substantially mispriced, two of which are briefly discussed below.
The strategy has established a position in the commercial real estate company Ares (ACRE). This is a specialty finance company that trades at a discount to both its $19 per share IPO price back in early May and book value.
A post-IPO equity sale at below the market price had further soured market sentiment in the company’s shares. However, it offered us an opportunity to buy a position and we took it.
Ares used to specialize in junk bonds and leveraged loans. In recent years, it has diversified into lending to smaller, mid-market companies, buying companies and financing takeovers. The firm, which has $74 billion in assets under management, now employs about 700.
Ares’s funding model seems attractive in the current environment and we purchased the stock at what we consider to be a reasonable valuation.
In early March the portfolio also initiated a position in Noble Corp. (NE), the offshore drilling contractor planning to spin off 44 rigs before the end of the year into a separate company named Paragon Offshore.
This follows a failed earlier bid to sell off its lower quality rigs. Following a prolonged period of market underperformance and a depressed valuation, the position was entered at what we consider to be an attractive valuation on both an earnings and an asset basis.
The Absolute Returns portfolio’s larger additional holdings include Fairfax Financial Holdings (FFH), the Canadian insurer led by Prem Watsa, WPX Energy (WPX), a 2012 spin off from Williams Companies (WMB), and an American depository receipt (ADR) from the National Bank of Greece (NBG).
The portfolio also holds the common stock of MFC Industrial (MIL), which trades at a substantial discount to book value and had been the subject of recent activist shareholder campaign.
Despite occasional setbacks, we remain confident that, in aggregate, the portfolio’s holdings have the potential to offer reasonable returns over time and we continue to seek attractive opportunities.
DISCLAIMER: The investments discussed are held in client accounts as of April 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
