A look inside the huge hedge fund that just went big on Morgan Stanley

Jeff ubben valueactKellogg School of Management/YoutubeValueAct CEO Jeff Ubben motions during a speech at Northwestern University’s Kellogg School of Management in January 2015

Activist hedge fund ValueAct Capital has taken a big stake in Morgan Stanley.

While ValueAct’s intentions aren’t completely clear, a private investor document sheds light on how the activist fund invests, and how even as an investor, you might not always know where your money is going, unless you sign on to certain conditions.

Hedge funds often fill out private Q&As about their business, called due diligence questionnaires, for their investors. Business Insider obtained a copy of one of ValueAct’s from last year.

Here are some of the most interesting points:

  • Even as an investor in ValueAct, you might not know where your money is invested unless you sign a confidentiality agreement.
  • ValueAct doesn’t really think there’s any index to benchmark its performance.
  • ValueAct focuses on public companies with more than a $3 billion market cap.
  • ValueAct takes a “bottoms up” approach to choosing its stocks.

Here are the relevant passages (emphasis is ours). ValueAct spokeswoman Amber Marchand at external public relations firm Hamilton Place Strategies didn’t respond to a request for comment.

ValueAct doesn’t think there is any useful index to benchmark its performance, even though it mostly goes long in stock investments

“Given our significant portfolio concentration (15-20 investments at any given time), it is hard to argue that any broad market index is useful as an adequate comparison or benchmark. Our returns are generally driven by portfolio company-specific events. In addition, given our meaningful personal investment in the fund, our goal has always been to compound our investors’ capital, as well as our own, at a 15-20% return per year over a multi-year period. As such, we believe the appropriate benchmark for an investment with ValueAct Capital is an absolute return target. However, we are currently utilising the S&P 500 Index and the MSCI World Index in our reporting to investors for their use as further relative evaluative/comparative tools.”

ValueAct’s own investors can’t necessarily see what they’re invested in

“If the investor is willing to execute a confidentiality agreement with VAC, full portfolio transparency is available. If the investor is unwilling to execute a confidentiality agreement, then VAC may choose to withhold the names of certain farm team positions. It has been our overwhelming experience that most of our investor base opts to execute the confidentiality agreement. At a minimum, a position summary disclosing VAC’s core holdings is made available to all investors following month-end.”

ValueAct focuses on 10 to 18 core investments at a time, primarily on public companies with more than a $3 billion market cap

“Generally, at any given time, we have 10-18 core investments and 2-6 farm team investments. The farm team investments are considered investments “in process”, and managed under an “up (grow into a core investment) or out” philosophy. A core investment at VAC generally ranges from approximately $500 million to $2 billion of invested capital. Each ValueAct Capital investment partner tends to lead two to three investments at any given time and is responsible for sourcing, leading and, if and when necessary, serving on a portfolio company board. Our target core investment holding period is roughly three to five years. Therefore, we “only” need to find approximately four great new businesses to invest in each year.

…[The firm focuses on] public companies, primarily with a market cap above $3 billion.”

ValueAct takes a “bottom-up” approach in choosing stocks

“First, security selection is determined on a bottom-up, case-by-case basis, considering the risk and return characteristics of each particular investment. Second, sector and other portfolio risk characteristics are weighed against the risks and potential returns of a particular security. For example, the portfolio is managed for concentration risk, such as one position exceeding a given percentage of the overall portfolio or an industry sector constituting an excessive weight of the overall portfolio. Third, market and other factors are considered in determining the appropriate risk and potential return characteristics of the Fund. While Jeff Ubben is both CIO and the portfolio manager, all nine investment partners are responsible for sourcing, leading and, if and when necessary, serving on a portfolio company board. One or two investment partners tend to lead a portfolio investment and in a “first-line approach” direct the overall size, price and risk of each respective investment, with oversight and management by Jeff Ubben. There is a weekly investment meeting where all of the investment partners and other executives of VAC review the portfolio and discuss the overall composition of the portfolio.”

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