Ken Squire // Portfolio Manager // 13D Activist Fund (DDDAX)

Comments & Outlook

We invest in companies in which an activist shareholder has taken a substantial stake (announced through a “13-D” filing with the Securities & Exchange Commission). And this activist is shaking things up to improve the company’s management, strategy or capital allocation.

Such activists often end up creating real value for all shareholders, allowing the stock price to outperform historically.

Yahoo! (NSDQ: YHOO) is a great example. Without Dan Loeb’s involvement, its share price wouldn’t be anywhere near where it is today.

There’s a trend towards more activism, driven by higher tolerance and acceptance of activists by institutional investors and companies listening to activists more than they used to. And so shareholder activism has become a much larger investment category. There are now a handful of activist funds with over $10 billion in assets each.

Portfolio Strategy

We think of ourselves as running an event-driven fund, with the event being 13-D filings. When a 13-D is filed, we look at who the activist is, their track record, and what strategy they’re using now and in the past.

Most importantly, we evaluate the activist’s chances of success. Who are the other shareholders and do they ever support activists?

Based on that, we’ll do our analysis and put together a portfolio of 20—40 situations that we believe are the most compelling, where the activist can unlock value.

Last year, we tracked 72 13-D filings in companies with market caps of at least $100 million, and at any given time we follow about 200 13-D situations.

Portfolio Picks

A company like Compuware (NSDQ: CPWR) is an example of transactional activism. Elliott Management came in when the stock was trading around $8 and made an offer to buy the company at $11, where the price is at now. Based on its track record, we know Elliott Management will follow through. Elliott is likely to buy Compuware at $11 or maybe even higher, creating a floor under the share price.

The other type of activism we like is when an activist gets on the Board of an already good company and helps make it even better. Canadian Pacific Railway (NYSE: CP) is a great example of this. Pershing Square brought in new management, and the company’s been running much more efficiently since then, with the shares up almost 50 percent since Pershing’s initial purchase.

Sean Sun // Equity Analyst // Thornburg Core Growth (THCGX)

Comments &Outlook

Thanks to the Fed’s accommodative monetary policy, and recent affirmation that it will likely continue for a while longer, the US market seems poised for continued returns. The US economy is clearly in recovery mode; however the pace is moderate enough for the Fed to maintain its Quantitative Easing program, an almost ideal scenario for investors. Another plus: there’s still a significant amount of money that has been in the sidelines earning little yield that could rotate into US equities.

Investment Strategy

We generally look for promising growth companies with good business models and management, a sustainable competitive advantage, secular growth drivers, and which are also trading at a discount to their intrinsic value.

We evaluate each stock carefully to make sure it will improve our overall portfolio. In terms of valuation, we are careful about over paying. We look at the relative value of a stock versus other companies in its industry and opportunities across the broader market.

Valeant Pharmaceuticals (NYSE: VRX) is a Canadian specialty pharmaceutical company that is unique in that it acquires undermanaged businesses and makes them more efficient. This is a private- equity like type of approach. Traditional pharmaceutical companies, by contrast, focus on R&D, which is fraught with risk since most new drugs don’t make it past the clinical testing phase.

Valeant just bought eye care company Bausch & Lomb for $8.7 billion. We think Bausch & Lomb is a really good asset with a strong brand and durable cash flows. Post-purchase, Valeant plans to realize $800 million in cost synergies.

Mead Johnson Nutrition (NYSE: MJN) is a global leader and pure-play on the rapidly growing $28 billion pediatric nutrition business. A strong brand really matters in this category, creating barriers to entry and pricing power.

The company gets over 70 percent of its sales from faster-growing emerging markets, where birth rates are relatively high and an expanding middle class is trading up to premium brands like Mead Johnson’s Enfamil. That’s especially true in China, one of MJN’s fastest-growing markets and where they have leading market share. The company could also see increased earnings power in the US as the economy continues to recover. Birth rates generally track economic growth.