Richard Blum (Trades, Portfolio) is a long-time value investor, but he has built a couple of niches within that philosophy. He searches for bargains among small- and mid-cap stocks, and in the private equity sector.
He was one of the high-flying hedge fund gurus in the years before the financial crisis, but what are we to make of his record since then?
Who is Blum?
This San Francisco native is a relatively prominent hedge fund manager. His public profile, however, is dominated by his marriage to Dianne Feinstein, the former San Francisco mayor and current U.S. senator. Their connection has led to several controversies, including conflict of interest accusations, none of which appears to have stuck.
According to SFGate, Blum went to school in San Francisco and then to UC Berkeley, where he received an MBA. Along the way, he had a year-long break, allowing him to study philosophy at the University of Vienna.
After getting his degree, he went to work at Sutro & Co., a San Francisco-based brokerage. While at Sutro, he headed a partnership that bought the two most prominent circus corporations, Ringling Brother and Barnum & Bailey. The partnership paid $8 million for the pair; four years later they sold them to Mattel Inc. (MAT, Financial) for $40 million. That no doubt helped him become a partner at the firm.
In 1975, he started his own firm, which would become Blum Capital Partners LP. According to Blum Capital's website, in addition to running his own firm and its subsidiaries, he has served on many corporate and non-profit boards. The highest-profile position was serving as a member of the President’s Global Development Council under President Obama.
What is Blum Capital?
In big letters, on the home page of the Blum website, are the words, “Pioneers in Private Equity Investing” and to drive the point home, they add “specializing in corporate private equity transactions.”
Based in San Francisco, Blum Capital Partners L.P., is a registered investment advisor, of which Blum is the majority owner.
The firm serves pooled investment vehicles. It uses private equity funds, currently invested in one public and three private securities. It also uses co-investment and alternative investment vehicles on a transaction-by-transaction basis.
The firm had $312.2 million in assets under management, according to the Form ADV filed March 31, 2017, while GuruFocus reports it has just $30 million (or less than 10%) in equities on Nov. 14, 2017.
Strategy
On the strategy page of the firm’s website, Blum and his team say they focus on small- and mid-cap companies and look for strategic block and control investments. They like to work with management and boards to increase shareholder value.
Six key principles that guide their investing, according to the website:
- High-quality businesses.
- Opportunities to add value.
- Small/Mid-cap focus.
- Long-term horizon.
- Concentrated portfolio.
- Rigorous research process.
Blum elaborates on these and other criteria in the Form ADV Part 2A:
- High-quality businesses: Companies that have defensible franchises, long-term growth potential, high returns on invested capital and lots of cash flow that exceeds operational requirements.
- Entry valuation: They look for "compelling" entry valuations, especially where they can structure the terms to increase the incremental margin of safety to guard against capital losses.
- Value-add: They seek to be influential investors, and work constructively with management to implement leadership, business and financial strategies. The goal is positive change and enhanced improvement of the investment, regardless of the market.
- Small/Mid-cap focus: Allows them to find opportunities that might be flying under the radar, but also increases the likelihood of being able to wield influence as a shareholder/owner.
- Long-term horizon: Their time horizon is comparable to those of private equity investors. In other words, they see themselves as long-term investors rather than traders.
The one equity listed in Blum’s portfolio is Avid Technology Inc. (AVID, Financial), which develops and sells both software and hardware applications for digital media production and digital media management.
It has had a rough ride over the past 10 years, as shown in this GuruFocus chart:
It appears Blum first took a position in Avid in 2009; the trade listing shows him establishing a new holding of 8.7 million shares at $9.58 (the current price, as of Feb. 8, is $4.66).
He has reduced and increased his holding from time to time since then, even selling out and buying back in. Most recently, he trimmed his stake by 4.66% on Dec. 31, 2015. As of the latest 13F filing, he held 6.5 million shares.
Blum's continuing stake in Avid must be a contrarian position given the state of the Avid dashboard at GuruFocus:
One of the few bright spots for Avid is its earnings growth power of $12.11, compared to the current price of $4.66. Several other gurus are cycling in and out of Avid as well, including Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Avid’s generally—and enduring—downward sloping chart calls into question his activist work. Presumably, he bought in with the expectation of helping it recover its lost momentum. Yet, it has failed to sustainably recover since he took his first position in 2009.
Holdings
Blum manages a unique portfolio, made up of one stock, exchange-traded funds and preferred shares, as shown in this GuruFocus chart:
The one stock is Avid, which makes up 100% of Blum’s conventional equities.
While Avid is his current stock, Blum has held a large stake in a couple of other companies since the beginning of 2015: CBRE Group Inc. (CBG, Financial), Career Education Corp. (CECO, Financial) and MoneyGram International Inc. (MGI, Financial). Incidentally, critics have hammered Blum over the years because of alleged conflicts of interests involving CBRE and Career Education.
We do not know the composition of the ETF/preferreds section of the portfolio, but it will be interesting to see what happens if the market takes a deep slide; some of the ETFs may be protective instruments.
A highly concentrated equity portfolio, but one that has been left in the dust over the past few years, as we will see in the next section.
Performance
The equity portion of Blum’s portfolio has been a disappointment over the past five years, as this TipRanks chart shows:
Remember, this is just the conventional equity piece of the portfolio and represents less than 10% of the fund’s total holdings.
This chart shows his total equity holdings rose to some $3 billion in mid-2007, then precipitously have fallen since then:
While we do not know how the rest of his portfolio has performed, that decline in equities and sickly performance chart suggest poor returns in the last decade.
Conclusion
It appears Blum is among the many gurus who were superstars until the subprime mortgage crisis changed the investing world. Why they fell off the up escalator is a good question, not only for Blum, but also for so many hedge fund managers and active managers.
We do not know how Blum’s private portfolio is faring, however. It may well be that private equity has been far more rewarding, and that public equity isn’t worth much of his time now.
For value investors, private equity may have seemed unavailable, but it now can be accessed through ETFs dedicated specifically to this asset class. These EFTs have good potential for both capital appreciation and diversification; some even pay dividends. Solid due diligence is needed, however; these ETFs need to be thoroughly vetted with value criteria before being bought.
Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours.
