| TCI’s Christopher Hohn (Bloomberg) |
Christopher Hohn’s London-based activist hedge fund firm, The Children’s Investment Fund Management, said it is accepting new investments into its main hedge fund and creating new share classes that will offer lower fees, according to a letter the firm sent to clients.
The firm, which manages about $4.7 billion, says the new share classes will create “better alignment between the investment manager and investors,” according to the letter, its most recent quarterly communication with investors. The Children’s Investment Fund, also known as TCI, is enjoying a strong year built on a concentrated portfolio of eclectic global holdings. The fund racked up a roughly 18 percent gain through the first nine months of the year, depending upon the dollar-denominated asset class you choose to look at, according to its third-quarter letter sent to clients.
It is launching three new share classes, in addition to a new quarterly share class that it launched on September 1. The new share classes have a one-year, two-year and three-year hard lock, respectively, meaning investors cannot withdraw their money before the end of those time periods. “We have developed these terms in consultation with a number of our investors,” the letter stated.
The fund is lowering the management fees, lowering the incentive fees, and requiring the fund to hit a specific hurdle, or performance target, before the incentive fee is paid, asserting that “it is appropriate to charge incentive fees only for value added performance.”
“Many investors have expressed a desire for cheaper long term share classes but also for retaining the option for limited short term liquidity,” the letter said.
The new share classes go into effect with new subscriptions on November 1. The terms of all existing share classes are not affected.
Under the new schedule, the fund will offer investors in the new two-year and three-year share classes the ability to redeem at least 2.5 percent of their holdings per quarter and up to 10 percent per year.
Existing investors can switch into the new classes beginning January 2, 2013, as long as the investors lengthen their lock-up commitments from their current classes. The fund already has share classes with longer lock-ups. For example, one share class has a five-year lock-up.
Hohn founded the firm in 2004 with the intention of donating a portion of the fees and profits to The Children’s Investment Fund Foundation, which is managed by Hohn’s wife, Jamie Cooper-Hohn. TCI has generated a roughly 15.5 percent annualized return since its inception. Hohn set up his firm after spending seven years working for Richard Perry’s Perry Capital.
As of September 30, the fund, which is best known for its shareholder activist investments, was 122.4 percent long public equities and just 2.1 percent short equities. It was also 20.5 percent long credit, and another 5.2 percent was invested in equity options.
Hohn runs a highly concentrated portfolio. The top 10 positions account for 134.3 percent of the fund’s NAV. The fund’s largest holding is a 20.1 percent stake in Lloyds Bank bonds. Hohn points out in the letter that the bank’s second quarter earnings report showed a continuation of its strong deleveraging trend and announced some core deleveraging and strategic milestones.
The second largest position in the portfolio is an 18.8 percent stake in News Corp., Rupert Murdoch’s media giant. It is a play on News Corp’s earlier announcement that it will split into two entities: an entertainment company and a company that will contain all of News Corp’s publishing and Australian assets.
When the split is completed, Hohn thinks the entertainment company will enjoy a much higher valuation because of its “high quality, high growth, television assets without having to fear that the cash flow will be used to fund substantial and dilutive acquisitions in the publishing and education segments.”
Hohn also thinks the publishing company could enjoy a higher valuation with better disclosure of its individual businesses. Based on his analysis, Hohn thinks the stock can enjoy a one-year return of 28 percent and three-year annualized returns of 23 percent.
Japan Tobacco, which accounts for 16.8 percent of the fund’s NAV, recently reported strong quarterly results. Yet Hohn says the stock has an attractive valuation, especially given that it is planning a significant share buyback. He expects the stock to move up in price in part to trade at a similar valuation as global rivals British American Tobacco and Philip Morris International.
Rounding out his top-10 list of investments are Porsche SE (15.5 percent), QR National (13.3 percent), CESP (12.8 percent), Red Electrica (10.9 percent), Coal India (9.4 percent), Safran (8.7 percent) and Enagas (8 percent).
