| Richard (Mick) McGuire III (Bloomberg) |
Each quarter investors eagerly sift through 13F filings, documents filed with the Securities and Exchange Commission that detail what stocks fund managers are holding in their portfolios, in the hopes of discovering the latest investments made by the most high-profile hedge fund managers. Some exchange-traded funds are designed specifically to emulate these quarterly hedge fund holdings. There are obvious flaws in this exercise, such as that the quarterly holdings are generally disclosed about 45 days after the period ends, and the 13F filings don’t include non-U.S.-listed stocks. But another major issue is that managers can get permission to delay dislcosing a position by a few quarters until they finish buying all the shares they want.
These drawbacks are especially apparent when it comes to activist investors, since many of them typically run portfolios of ten or fewer stocks. In other cases, their core holdings run only a handful of stocks. If one or two of their important holdings are not disclosed, this makes a big difference for those who want to imitate them, especially since stocks held by activists frequently move up rapidly once they are disclosed.
Earlier this year ValueAct Capital’s Jeffrey Ubben told me that one reason he filed fewer than usual 13D forms, which managers are required to file when their stake in a company exceeds 5 percent, is because often stocks on his so-called farm team rose before he could build a meaningful stake due to the earlier required disclosures. What’s more, he speculated that these disclosures could wind up shaving as much as 3 percent to 4 percent from returns.
One good current example of this kind of hide-and-seek is being played by Marcato Capital Management, the San Francisco-based hedge fund firm founded by Richard (Mick) McGuire III in 2010. McGuire worked at William Ackman’s Pershing Square Capital Management from 2005 to 2009 before founding Marcato. His firm’s Marcato International hedge fund is up 2.94 percent for the first eight months after gaining 2.8 percent in August.
McGuire has been able to legally avoid disclosing his two current biggest activist campaigns on a timely basis. For example, we earlier noted that at the end of the first quarter, he told his investors he owned two undisclosed stocks that he hinted were likely to result in activist campaigns.
Sure enough, in late May, Marcato disclosed that it owned 7.2 percent of Life Time Fitness, the high-end health club and gym chain. The stock initially jumped more than 12 percent in the final hour of trading after Marcato disclosed the holding and rose another 2 percent or so the following day.
According to its 13D filing, Marcato had been buying the shares since March 24. However, it did not include the stock in its first-quarter 13F regulatory filing, presumably because it obtained a waiver from the SEC so it could finish establishing its stake.
Then, in late May, Marcato disclosed in a press release that it owned 3.8 percent of hotel chain InterContinental Hotels Group and called on the company to merge with a larger competitor after public reports surfaced that the company turned down an unnamed merger partner. Yet, in mid-August, when Marcato filed its disclosure detailing its second-quarter holdings, InterContinental was not among them.
Of course, Marcato could have bought the shares in the second quarter and sold them before June 30, the day that the 13F takes its snapshot. In that case, no disclosure would have been required.
Interestingly, a fund-of-funds firm with a stake in Marcato told its clients that InterContinental was Marcato’s biggest winner in the second quarter. However, in early August, Marcato said in another press release that it owned 4 percent of InterContinental and hired investment bank Houlihan Lokey to conduct a “full strategic review” of InterContinental.
What’s up here? Well, keep in mind that InterContinental trades on both the London Stock Exchange and the New York Stock Exchange. So it is possible Marcato’s entire position was accumulated on the LSE. This holding, therefore, would not be required to be included in the 13F. Of course, if Marcato owned even a few U.S.-listed shares, it also could have received a waiver to delay the disclosure. In any case, it looks like Life Time and InterContinental are the two unnamed stocks Marcato teased about, right?
Maybe not.
Marcato still has not submitted amended 13F filings disclosing either of these positions, which of course would not be required for InterContinental if Marcato had bought its stake solely on the LSE. And of course there could be new positions for which Marcato received waivers. With activists, we never know until after the fact.
