According to a recent press release, 13D Activist Fund (DDDIX), an event-driven mutual fund focused on 13D filings, was named “Category King” by the Wall Street Journal for the one year period ending July 31, 2014. The Category King recognizes the top 10 performing funds in each equity category for one-year performance, based on total returns. The 13D Activist Fund ranked #2 in the multi-cap growth equity category, out of 585 funds. During this period the fund generated a return of 20.10%.
According to How Individual Investors Can Invest Like a Hedge Fund (WSJ), the largest to use a long/short investing strategy is MainStay Marketfield, which has assets of about $20 billion and has been around since 2007. However, returns haven’t looked so good.
In contrast, the 13D Activist Fund combs through 13D filings of activist investors and bets on companies where it believes activist campaigns have the best chance of winning. WSJ points out,
The problem with copycat investing is that the information can be quite stale by the time it’s released; 45 days can be an eternity in the hedge-fund world. Also, funds may own shares simply as a hedge against a stock in the same sector, or as part of other moves that don’t necessarily reflect how a manager feels about a company.
Looking at their top holdings, the lists I see are from 3/31/2014 and the loads are also fairly hight. However, the strategy seems to be working. The following table highlights the 13D Activist Fund’s performance since its inception on December 28, 2011:
Fund Founder and Portfolio Manager Ken Squire has been actively analyzing shareholder activism and 13D filings since 2006, when he founded 13D Monitor. Squire said:
Our fund is the first of its kind to allow an investor to hold a basket of activist stocks and pursue a pure activist investment strategy.
The Fund seeks capital appreciation and is designed to potentially outperform market indices by generating returns that are not correlated to the broader market. The adviser defines an activist situation as one where an investor holds more than 5% of a company’s shares and has a history of activist investing and/or a publicly disclosed catalyst for change such as seeking Board seats, improving operations and/or corporate governance practices, approving a merger, spinning-off an operating division or selling a significant amount of company assets. It is non-diversified.
From the Fund’s description of their investment process:
The average holding period for these types of 13D investments is 15 months. The success of the Fund does not depend on being able to capture the initial price bump that occurs when a 13D is filed. In fact, we expect that we will never capture the return on that price bump. For the types of investments we focus on (investments in companies with $1 billion+ market caps by premium activist investors), 13D Monitor data shows that historically there is an average 2.65% one-day bump in the stock price. However, 13D Monitor data also shows that these 13D filings produce an average return during their 15-month life that outperforms the S&P 500 Index by approximately 16%, after the 2.65% bump. We focus on capturing this long-term growth for shareholders, and are not as concerned with any initial, small bump in return.
The only downside I see is the fees. Apparently, there is a 5.75% front-end load. However, according to Should you follow an activist into a stock? (Fortune, August 11, 2014), that front-end fee is waived for Schwab and Fidelity clients. Looking at TD Ameritrade, I don’t see that front-end load — but maybe I’m missing it.
13D Activist Fund: Good Governance or Dismantling
So readers, any opinions. Is the 13 D Fund promoting good governance by investing with activists who will replace entrenched directors and improve corporate governance? Or are they mostly facilitating the parting out and dismemberment of good companies? Perhaps a little of both? Who has been tracking their investments? Here’s their latest quarterly fact sheet. I think I’ll at least try to check in now and then on their activities.