Company sees value in Hess and Juniper while it plays hardball with Vodafone
When former U.S. Federal Reserve Chairman Ben Bernanke shocked the general public with news he could not refinance his mortgage, it seems he might not be alone. Numerous borrowers who appear to be strong loan underwriting risks are still unable to obtain mortgages, an investor letter from Elliott Management observed, and this in turn is causing the housing market to slow. Broader commercial real estate fundamentals, however, remain “constructive.”
Elliott Associates LP up 2.9% in 3Q
Elliott Associates LP experienced a strong third quarter, up 2.9 percent and positive by 7.6 percent as of September 30, according to an investor letter reviewed by ValueWalk. The fund reported that profitable sectors were distressed securities, performing debt, equity trading, securities arbitrage and commodities. Unprofitable sectors were fixed income arbitrage and certain portfolio protection trades related to interest rates, equities and volatility.
When reviewing the hedge fund performing debt portfolio, Elliott noticed that “pockets of value” can still be found despite a significant increase in real estate prices. “Our focus is on picking the right individual credits and using hedges creatively to give our portfolio a positively convex profile across a broad range of potential future outcomes for commercial real estate,” the letter said.
Also see Elliott Tells Investors – Fund Preparing To Hunt For Argentine Assets
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Elliott: ECB’s asset backed security purchase program
European structured products trading has been dominated by fund managers playing a game of “guess the details of the ECB’s asset backed security purchase program.” This resulted in a tightening of credit spreads, particularly in peripheral countries where credit risk had been more a concern. The activity in the EU has benefited one of Elliott’s plays in a mortgage origination company that benefits from securitization of its loans. In regards to performing debt the fund’s largest positions are in U.K. residential mortgages, CMBS tranches, a private U.K. real estate situation, a European power plant, and agency mortgages, the investor letter said.
Elliott’s highlighted equity plays appear to favor retail energy, technology and real estate.
The company continues to remain positive on Hess, which has outperformed its peers and continues to trade at a discount based on intrinsic value and relative value relative to peers. Elliott anticipates the value gap to close, particularly as Hess management takes restricting steps.
The hedge fund’s position in Juniper Networks, Inc. (NYSE:JNPR) suffered during the third quarter, as doubt was cast on the firm’s ability to execute on cost cutting plans and the overall outlook for sales in the sector. Elliott thinks the stock is undervalued and is working with management and the board behind the scenes to take “actions that would further drive shareholder value.” The letter did not elaborate on the type of actions being taken.
Other stocks the fund likes include Game Digital PLC (LON:GMD), where it recently participated in an IPO and still believes the stock is undervalued; Oracle Financial Services Software is a company headquartered in India that specializes in banking software, which could be a takeover target from its parent, Oracle Corporation (NYSE:ORCL).
Elliott’s activist campaigns
In some event arbitrage action, Elliott appears to be playing hardball with Vodafone Group Plc (ADR) (NASDAQ:VOD) (LON:VOD), which acquired Kabel Deutschland Holding AG (ETR:KD8) (OTCMKTS:KBDHF) but Elliott refused to sell its shares, believing the stock should fetch a higher price. Another event driven action the fund highlighted was its involvement in EMC Corporation (NYSE:EMC), where it has a 2.2 percent stake. Elliott said it is in “constructive dialogue” with the company and continues to press for a divestiture of VMware, Inc. (NYSE:VMW) subsidiary. Other tech companies the fund highlighted included Compuware Corporation (NASDAQ:CPWR), where Elliott had engaged in a successful activist campaign to replace the board, cut costs and initiate a dividend; with Attachmate, another activist campaign that started in 2011 with a campaign directed at Novell, looks to head to a positive outcome with the sale of the company to Micro Focus International plc (LON:MCRO); the fund’s position in Riverbed Technology, Inc. (NASDAQ:RVBD) is hoping to be sold at $21 per share.
Elliott also engaged in volatility protection measures, an “insurance” that created a cost when volatility didn’t materialize. The fund noted the apparent success of the U.S. Federal delicate maneuvers:
The Federal Reserve has apparently successfully persuaded bond investors not only that its policy of quantitative easing will conclude, but also that official rates will rise at some point in 2015. To date, the Fed has achieved this shift in policy without substantially disturbing rates at longer maturities or disrupting risk asset valuations. This situation contrasts starkly with the one in Europe. The ECB faces renewed severe concerns about both economic growth and deflation, and it has attempted to craft policy to address these problems. Falling interest rates combined with a decline in inflation expectations reflect low confidence among market participants in the ECB’s success.
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