- By Robert Abbott
"The two [Abrams and Klarman] remain friends, and Mr. Klarman"s personal foundation has put money into Abrams Capital"s funds. Mr. Klarman described his protege as "smart as a whip." "He loves a good puzzle and a good treasure hunt," Mr. Klarman said." --Rob Copeland, Wall Street Journal
The intrinsic value of WU
David Abrams (Trades, Portfolio), a protege of Seth Klarman (Trades, Portfolio), follows his mentor, and their role model, Benjamin Graham, in looking for investments that are underappreciated and likely to increase in value over the next three to five years.
Abrams has made his own way since leaving Klarman and The Baupost Group. He started Abrams Capital Management in 1999, posting excellent long-term results.
Or has he? The results of his equity portfolio have not looked so bright over the past couple of years.
Who is Abrams?
Abrams, whom a Wall Street Journal writer calls "the hedge-fund world"s one-man wealth machine," was born to a stockbroker and a psychotherapist in 1961.
He graduated from the University of Pennsylvania with a degree in history and in 1988 joined Klarman"s Bauopost Group. He continues to be a friend of Klarman"s, even though he left Baupost.
In 1999, he struck out on his own by starting Abrams Capital Management. The firm employs just a handful of analysts and office staff, but handles a lot of client money: $9.3 billion as of Aug. 31, 2017.
He became a part owner of the NFL"s Oakland Raiders in 2007, but an associate says Abrams bought in not because he was a football fan, but because he thought the club was a distressed asset. As far as sports go, he prefers to play squash.
Abrams was added as a GuruFocus guru in June 2016; at that time his equity portfolio held assets valued at $1.264 billion. The most recent valuation by GuruFocus puts that same number at $2.562 billion.
What is Abrams Capital Management?
Boston-based Abrams Capital Management L.P. provides investment advisory services to "privately-offered alternative investment funds." According to the firm"s Form ADV Part 2A, its primary investment objective is to maximize long-term total returns while emphasizing the preservation of capital.
It operates through a number of private funds, and Abrams Capital makes most of its investments through Great Hollow International L.P., a Cayman Islands-based entity.
Beyond that, it has four Riva Funds, which are considered "overflow" vehicles. As the Part 2A explains, these funds are used when an opportunity is too big to be handled by the Abrams Funds. On the other hand, the Riva Funds will sometimes take up an opportunity when the Abrams Funds are approaching their investment limits.
The Riva Funds typically hold more concentrated portfolios than the Abram Funds, and may be able to take on more concentrated positions in single securities than the Abrams Funds.
In keeping with hedge fund practices, the firm has a wide variety of options for managing money, such as being able to invest through the Cayman Islands and in having multiple options for managing the placement of capital.
Abrams Capital discloses, in the Form ADV Part 2A, it uses a value strategy, buying securities that are "significantly" below its estimate of intrinsic value.
This value may be temporarily depressed by visible near-term problems, by being overlooked by the market, by uncertainty caused by complex legal or business issues or other reasons.
The firm believes this strategy has the potential to generate significant potential while simultaneously reducing risk and hedging against broad market declines or unexpected events.
The "global macro" label seems to summarize Abrams" investment horizons as it scans for opportunities across asset classes, industries and regions. At the same time, it hedges using derivatives (and structured products).
When talking about value, the firm makes it clear total return is mainly driven by purchasing at a favorable price. To find those bargain-basement stocks, it continually re-evaluates investment categories in relation to the prevailing market perception and economic conditions.
In his quest to find bargains, Abrams has made some bold moves. Rob Copeland reported in the Wall Street Journal that Abrams took on fixed-income deals that included the unwinding of Enron Corp. and a big bet on two government-controlled mortgage companies, Fannie Mae and Freddie Mac, in the wake of the financial crisis.
Copeland also noted Abrams does not borrow to invest, no leverage at all. Additionally, he is prepared to sit on cash; at the time the article was written (2015), that amounted to 40% of his portfolio.
Like other serious value investors, Abrams must go to seriously troubled companies and industries to get the great deals. Often, the biggest opportunities--and the biggest risks--are among the most downtrodden companies.
This chart shows how the 18 stocks in the portfolio, at the end of the third quarter, were diversified by sector:
This GuruFocus list shows the top 10 equity holdings:
The Western Union Co. (WU): 16.19%
Teva Pharmaceutical Industries Ltd. ADR (TEVA): 14.85%
Franklin Resources Inc. (BEN): 13.8%
Altaba Inc. (AABA): 10.12%
Wells Fargo & Co. (WFC): 7.19%
O"Reilly Automotive Inc. (ORLY): 7.18%
Willis Towers Watson PLC (WLTW): 7.12%
Amerco Inc. (UHAL): 5.77%
Quality Care Properties Inc. (QCP): 3.02%
Och-Ziff Capital Management Group LLC (OZM): 2.80%
As noted above, equities make up $2.6 billion of Abrams total assets under management of $9.3 billion, or 28%.
The top 10 list shows us companies and industries that have been unpopular in the past but now may rebound. A couple of notable holdings: a financial stock, Wells Fargo, caught up in a recent scandal; Franklin Resources, an investment management firm, saw its share price plummet during a very challenging 2015; and Western Union, which has been essentially range-bound since 2008.
In a 2015 article, Investopedia reported Abrams had an average annual return of 19% -- net. It also said his performance was better than 97% of all hedge fund managers.
However, this TipRanks chart shows performance has been less than stellar over the past five years:
Note TipRanks lists Abrams" portfolio size at $2.56 billion, which likely means the chart above shows only the performance of equities. The non-equities portion of the total portfolio is far larger, so this may account for the discrepancy between the two sets of returns reported here.
What are we to make of the "one-man wealth machine" after seeing these mixed figures? Abrams is likely a good hedge fund manager, but perhaps not as strong an equities manager. At the same time, though, we must recognize he is a contrarian, and the past few year"s performance may not reflect long-term possibilities.
In the absence of definitive figures, it is necessary to fudge our conclusions a bit. The last couple of years appear to have been weak ones, for his equity portfolio at least. As to the whole portfolio, there are no good answers. Nevertheless, it seems he has fulfilled the promise Klarman saw in him.
For value investors, there is a worthwhile question or two in regard to Abrams" work. He had an estimated 40% of his portfolio in cash in 2015--had he outperformed, as of that year, by being in cash, or had he outperformed despite having that amount in cash?
Also, he is a patient buyer and seller, willing to hold for long periods before acting. For value investors, the question is: What is the opportunity cost of waiting?
Disclosure: I do not own shares in any of the companies listed, and I do not expect to buy any in the next 72 hours.
This article first appeared on GuruFocus.
The intrinsic value of WU