| Valeant Pharmaceuticals International Inc. headquarters in Bridgewater Township, New Jersey, U.S., on Aug. 4, 2016. (Photo credit: Ron Antonelli/Bloomberg). |
It is no secret that the shares of Valeant Pharmaceuticals International have destroyed the performance of a number of hedge funds. Just look at the double-digit losses suffered by its two biggest shareholders, Pershing Square Capital Management and Paulson & Co.
Another hedge fund firm, Hound Partners, didn’t start generating sustained gains until it finally dumped its stake in the embattled drug company back in June.
However, one major longtime Valeant investor that has been able to absorb a big hit from Valeant and still make money is San Francisco-based ValueAct Capital Management, which is widely described as an activist but is really a long-term value investor that sometimes gets heavily involved in management decisions.
It has held a major stake in Valeant for a decade, helping the company craft its strategy and recruiting former chairman and chief executive officer Michael Pearson from consulting firm McKinsey & Co. Although ValueAct remains the third-largest shareholder in Valeant, it was still able to finish 2016 with gains. The firm’s main hedge fund gained 6 percent in the fourth quarter and 4 percent for the year. It returned 6.3 percent in the third quarter.
That’s not too shabby given that Valeant’s stock, which fell about 86 percent last year, cost the firm’s hedge funds 8 percent of performance. The stock started the year as ValueAct’s second-largest U.S. long and dropped to No. 10 at the end of September, even though the hedge fund firm did not sell a single share.
Keep in mind that ValueAct’s cost basis is $5 per share.
Remember, ValueAct runs a concentrated portfolio. The firm now manages more than $16 billion. At the end of the third quarter, it had $11.5 billion in its U.S. long portfolio, spread over 13 different positions. The firm has also disclosed a big stake in London-based aircraft engine maker Rolls-Royce.
Other major positions in addition to Valeant also did not do much for the funds last year, including media giant Twenty-First Century Fox, Rolls-Royce, and consulting firm Willis Towers Watson.
Shares of Fox, however, surged more than 12 percent since mid-September, and in mid-December the company agreed to acquire European pay-TV firm Sky for $14.6 billion.
Rather, ValueAct was boosted by about four stocks.
Microsoft Corp., its largest U.S. long, was up about 12 percent for the year.
Baker Hughes, its second-largest long (which it has held for two years), surged 42 percent last year. In October the oil services giant announced plans to combine with General Electric Co.'s oil and gas business.
ValueAct also benefited heavily from two stocks it got into in 2016. Investment bank Morgan Stanley, its third-largest U.S. long since making its initial investment in the second quarter, surged about 68 percent in the second half of the year.
Private credit card marketer Alliance Data Systems, which ValueAct initially acquired in the first quarter, rose nearly 6 percent in the final nine months of the year.
Heading into 2017, ValueAct has a significant exposure to what is known as a reflation trade companies that benefit from a rise in prices.
They include Baker Hughes, real estate giant CBRE Group, Microsoft, Willis Towers Watson, Alliance Data, data storage company Seagate Technology, and industrial conglomerate Trinity Industries.
ValueAct also has no health care or consumer issues.
Except, of course, Valeant.
