ValueAct Capital Master Fund posted a 26 percent gain in 2021, according to the firm’s fourth-quarter letter obtained by Institutional Investor.
The fund has also compounded at nearly 23 percent per year over the past three years, according to the letter. This is especially impressive for an essentially long-only, value-driven fund in a period when investors were aggressively bidding up the prices of tech and internet companies and other risky investments.
“We have maintained valuation discipline,” the firm stressed in the letter. “We have not used private investments, or private marks, to drive our numbers — every dollar of return has come from public stocks. The returns have not been driven by leverage or by sponsoring a SPAC. We have not bought any cryptocurrencies.”
ValueAct Capital, which was founded in 2000 by Jeff Ubben and has often been described as an activist firm, declined to comment. Ubben fully left ValueAct in June 2020, and since his departure, the firm appears to have maintained a much lower public profile.
ValueAct is now run by Mason Morfit, the firm’s first investment analyst, who was added to the management committee in 2007 and tapped to be Ubben’s official successor. Morfit was named president in 2013 and promoted to chief investment officer and portfolio manager of the ValueAct Master Fund in 2017.
At the end of 2019, Morfit was promoted to chief executive and Brandon Boze to president, while Ubben transitioned to chairman before ultimately leaving the firm altogether several months later.
In its fourth-quarter letter, the firm — which according to its website currently manages more than $16 billion — stressed that its portfolio skews to value and away from growth. Roughly two-thirds of its assets are allocated to the U.S., another quarter goes to Japan, and 8 percent is allocated to Europe, according to the letter.
ValueAct generally runs a concentrated portfolio, but it has capped its largest positions at 12 percent to 14 percent of the fund, according to the letter.
Last year’s gains were driven by data-storage giant Seagate Technology Holdings and investment manager and private equity pioneer KKR. Both stocks were up around 85 percent in 2021.
“Each company is a case study in transformation to align with a mega-trend,” ValueAct told clients in the letter. “[In both cases], we have worked with the company to improve fundamentals and perception.”
The hedge fund explained that Seagate has repositioned itself from a supplier of personal computer components to a provider of storage media for cloud service providers. “Data is growing exponentially,” the letter said. “Every technology service you use spews out data. The more services you use and the more you use them, the more data you create. Video-rich content has increased the ‘weight’ of data by orders of magnitude. Data stored is practically never deleted. It just piles up. This is what we mean by ‘mega-trend.’”
ValueAct said its Seagate team began working with the company’s board in 2016. At the time, the company had a generally poor reputation. “Our team worked with Seagate on two separate Investor Days, in 2019 and 2021, to outline new segmentation and KPIs (key performance indicators) that illuminated the growth potential of the business,” it stressed.
ValueAct began investing in KKR in 2017, when the equity security was a partnership unit. “Our thesis was [that] the company was transforming from a North American buyout firm to a diversified alternative asset manager,” it explained in the letter.
The hedge fund noted that at the time, the founders were transitioning leadership to the second generation, and that ValueAct felt its corporate structure needed to shift to a publicly traded C-corp. “This was all happening in the context of massive capital flows into private alternative assets that scale players like KKR were uniquely positioned to capture,” it added.
ValueAct said its team worked closely with KKR for nearly five years. And sure enough, since 2017 KKR has been ValueAct’s best investment among 15 investments as measured by multiples of money — or multiples of capital invested — while its internal rate of return has been a not-too-shabby 34 percent.
In terms of MoM, KKR was followed by Olympus, the Japanese maker of optics and reprography products, and LKQ, a provider of alternative and specialty parts for the automobile repair and accessorizing industry.
Heading into 2022, ValueAct asserted that its portfolio of companies is growing faster than the market and is cheaper than the market. The three-year earnings growth rate of these companies averages somewhere in the mid-teens, while the portfolio’s average P/E ratio is 15 times. This compares with 10 percent and 21 times for the S&P 500, respectively.
ValueAct also has board seats at six of its core positions and is working under a non-disclosure agreement (NDA) at four others. Over the course of the firm’s 21 years in business, ValueAct executives have held more than 50 public company board seats.
The firm did not identify its largest positions. As of the end of September, its largest U.S.-listed stocks were KKR, Seagate, and Fiserv, the last of which is a fintech and the only one among ValueAct’s 15 core stocks with a negative IRR since 2017.
“Our companies have big upside potential from fundamentals (earnings) and perception (P/E),” the firm said. “It is our job to help them turn potential into reality.”
