“We can make money just by focusing on the core business and getting rid of the distraction of peripheral businesses,” Ubben says. “And it's not hard — you don't have to find a new market; you don't have to come up with a new product even. You just have to refocus.” Kellogg Alumni Profile
Jeff Ubben (Trades, Portfolio) started his own firm in 2000, after more than a dozen years working for Fidelity Investments and Blum Capital.
His approach to activist investing set him apart from most other activists—he believed, and believes, that carrots work better than sticks when trying to turn around undervalued companies.
And he has the results to prove his strategy works: between 2000 and 2015 he generated average net returns of 17%, and in the last three years his fund has done even better, despite a bad 2015.
Who is Ubben?
Little has been published about his early years or personal life. However, Bloomberg.com reports he was born in 1961, and earned a B.A. at Duke University, then went on to receive an M.B.A. at J. L. Kellogg Graduate School of Management at Northwestern University in 1987.
After managing the Fidelity Value Fund at Fidelity Investments for eight years, Ubben became the Managing Partner of Blum Capital from 1995 to 2000.
In 2000, he co-founded ValueAct Capital, a San Francisco-based hedge fund, and in 2017 announced he was stepping down as portfolio manager. His long-time associate Mason Morfit will take over the portfolio, while Ubben will stay on as CEO. In that new iteration of the CEO position, he will concentrate on find new investments and serving on boards.
Ubben is known as a friendly activist, working with companies in some form of distress. Those companies include: Martha Stewart Living Omnimedia, Inc. (MSO, Financial), Twenty-First Century Fox, Inc. (FOX, Financial), Willis North America, Inc., United Talent Agency, Inc., Vision Energy, Inc., and Valeant Pharmaceuticals International, Inc. (VRX, Financial), among others.
Biography based on information at Wikipedia.org, Alumni Profiles at the Kellogg School of Management, Financial Times, and Bloomberg.com.
By having directorships in multiple companies, Ubben and ValueAct have a front seat in observing corporate turnarounds. What’s more, these positions make them ultra-networkers, able to gain corporate intelligence and connections.
What is ValueAct?
The firm says it provides discretionary investment advice and management to private investment funds. Also, according to the Form ADV Part 2A, it manages two families of private funds; one of those funds (the Legacy Fund) takes a long-term, concentrated, active value approach, working with companies that have a market cap of at least $3 billion.
The second family comprises co-invest funds; they invest in fewer companies, and do it in tandem with the Legacy Fund. The characteristics of investments by the Co-Invest fund are long-term, and “strategic-block equity”. In addition, there is a Fund A, which co-invests with both the Legacy Fund and the Co-Invest Fund, in individual companies.
According to the firm’s Form ADV, it serves only pooled investment vehicles, but not investment companies. The firm managed $17.6 billion, as of March 17, 2017.
This is one of the biggest hedge funds, with more than $17 billion in assets under management. It serves its investors with two families of funds, the Legacy and the Co-Invest.
Strategy
Ubben and ValueAct begin by identifying and making significant investments in a limited number of companies that are fundamentally undervalued (according to their Form ADV Part 2A). The rationale for the undervaluation may be out-of-favor status, restructuring, poor business execution, changes in management, or other forces.
After having made a significant investment, the firm then sets out to work productively with management and/or the board of directors, to develop a strategy that aims to maximize returns for all shareholders.
- For the Legacy Fund specifically, they focus on equity and equity-related securities. To a limited degree, the firm also sells short and invests in corporate debt and related securities. Although they have a concentrated portfolio, no more than 25% of the fund may be invested in any one issuer.
- The Co-Invest Fund, as noted, will invest alongside the Legacy Fund; it does not make investment decisions independently.
Ubben uses a variety of information sources for due diligence. This involves consultants, independent analysis, and meetings with management of candidate companies.
The Kellogg Alumni Profile reports the firm is particularly interested in, “intellectual property rights in healthcare, technology and information services”, and, “Ubben knows how to make changes that quickly generate value, such as replacing a CEO, buying a competitor or dropping acquisitions that detract from the company's core business. By zeroing in on the business's foundation, he explains, a company will become stronger, tighter and more valuable in a relatively short period of time.”
The Profile also quotes him as saying, “Nobody does what we do,” Ubben says. “Public market investors generally have much shorter time horizons and they're not interested in being illiquid. There are very few people in the market who want to get all the information about an underperformer and make a fully informed decision on behalf of all shareholders. It's easier to sit behind a screen and generate reasonable returns without getting on a plane all the time to meet with directors.”
The Financial Times says of Ubben’s activist approach, “ValueAct pioneered a friendlier activist investing style that stands in contrast to industry heavyweights such as Carl Icahn (Trades, Portfolio) or Bill Ackman (Trades, Portfolio). It typically shuns public battles in favour of gaining board seats and pushing internally for a turnround, as it has at current investee companies that include Microsoft and Rolls-Royce.”
To illustrate how Ubben works, Investopedia went through his activist experience with Adobe Systems Inc (ADBE, Financial).
On one side was Adobe, which experienced uneven and underperformed in the 2000s. On the other was ValueAct, which the article describes as “excelling at boardroom politics and successful collaboration with corporate executive teams”.
ValueAct believed existing trends could be value-drivers for Adobe; these trends included the shift to digital software, mobile applications, and cloud-based subscriptions.
Ubben's firm bought a 5% stake in Adobe in 2011, and in 2012 the two sides agreed that Adobe would expand its board to seat Kelly J. Barlow, a ValueAct partner. In exchange, ValueAct agreed to buy no more than 12% of Adobe's outstanding shares, and to not solicit proxy fights with the board.
The board acted on several of ValueAct's major recommendations, and Adobe's shares began rising. This GuruFocus chart shows how the price of Adobe shares stagnated until Ubben got involved in 2012:
Ubben and ValueAct initially bought Adobe in 2011, paying an average of about $27 per share. They began selling their holding in 2014, and David Goodloe reported on May 31, 2016 that Ubben had reached “near-divestiture” by selling almost all his 14-million shares for an average of $86.58 per share. Current GuruFocus data indicate he has since disposed of the remaining 6,000 shares.
As to the overall experience, from the perspective of targeted companies, Investopedia says, “It's widely understood that corporate boards don't fret with ValueAct in the same way they might with other activist firms, largely thanks to Ubben's calm and cooperative reputation.”
Being a friendly activist should make the work of an activist more productive. Without the drawn-out process of trying to impeach each other, the activist and targeted company can work together to increase the company’s value, with fewer distractions.
Holdings
Ubben runs a high-conviction portfolio; at the end of the third quarter, he held just over a dozen stocks and the following sectoral profile:
This edited GuruFocus table shows the portfolio stocks, their value, and their performance YTD:
Note that NetScout Systems (NTCT) was sold out during the third quarter; it still is listed but no longer held, reducing the number of equities to 13. Also, all but one of his current positions held since at least the beginning of 2017 produced outstanding results this year.
A portfolio of mostly well-known stocks has been assembled, some of them the results of his activist work, and others that represent simply good stock picking.
Performance
Investopedia reports that ValueAct produced an average annual net return of 17% between 2000 and 2015. And, after seeing how his portfolio equities have performed in 2017, it seems he will meet or beat that average this year.
This TipRanks chart illustrates the bigger picture, showing how Ubben and ValueAct have outperformed both the S&P 500 benchmark and the hedge fund industry average:
Ubben is one of the few hedge fund managers who has done well in the past five years; many other managers have had dismal strings of years, individual bad years that suppressed their overall average, or just plain underperformance every year since the last financial crisis.
Conclusion
Can we link these results with the friendly approach to activism? It’s a question for which we do not have enough information to confidently answer.
However, Jeff Ubben (Trades, Portfolio) apparently thinks it does. As he steps back from active portfolio management, he’s appointed his long-time second-in-command to step up to the top investment job, which suggests he wants continuity rather than a change in strategy.
And, why not? With results like his, there is no reason to change directions. He’s brought in well-above average returns for his clients, and they’re sure to stay with him for quite some time, based on their previous experience.
For value investors, Morfit's buying and selling may create opportunities (Morfit is Ubben's chosen successor as portfolio manager). In this case, following a guru may be both feasible and potentially rewarding (but do your own due diligence).
Disclosure: I do not own shares in any of the companies listed, and I do not expect to buy any in the next 72 hours.
