3/27/2014

The Power of Activism

I want to show you what the performance has been on an equal-weighted basket of stocks looking back through history within the portfolios of our universe of activst investors. This is a deep-dive into the real, audited histories of the best investors alive. There is one condition: For us to include the stock, they must have initiated an activist campaign against the company.

Our basket returned 31% annualized over the past 12-years. The S&P 500 returned just 6.1% in the same period.

More importantly, the stock picks of these top activists had only one losing year during the year. Of course, that was 2008. But the basket lost just 18.2%, versus a loss of 37% in the S&P 500.

So these activist investors beat the stock market by more than 4 times on an annualized basis. But they lost less than half of the broader stock market losses in a bad year (an apocalyptic year).

No mutual fund, ETF or private money manager on the entire planet has a returned anywhere close to 31% annualized over the period.

The best performing mutual fund in the world returned 14.5%. That same fund lost more than 45% in 2008!

Bottom line: As a basket, these select picks outperformed over 20,000 mutual funds, 5,000 money managers and 1,000 ETFs.

The Value of Small Stocks

Next, using the same universe of billionaire investors, I want to show you what the performance looks like when we narrow the universe of stocks by including just small capitalization stocks in the basket.

So we have scenarios here, historically, where our talented, influential investors have bought a controlling stake in a company. They have launched an activist campaign against the company. And in this case, the stocks meet these additional criteria. They have a market cap under $2 billion or they have a share price under $15 combined with a market cap of at least $500 million.

The average annualized return for the past 12-year was 52%. This compares to only a 6.1% annualized return in the S&P 500.

Takeaway: When our activist investors get involved in small caps, they get even more bang for their buck.

Biotech, Explosive Events

Now, lastly, we’ve had some great success early in the Billionaire’s Portfolio with our biotech picks. Novavax, our most recent high flyer has been a near triple for us.

As you’ve seen in our Billionaire’s Portfolio, biotech is a different animal. We follow domain experts in this area. We only want to piggy-back expert biotech investors around. Their brain is their edge.

By investing in all of the stock picks of our elite group of biotech hedge funds, you would have returned an incredible 44% annualized over the last 12-years. And guess what? They even made money in 2008!

Biotech stocks are the ultimate event-driven investment. They only move on news surrounding FDA approvals, positive trial data studies and partnerships with larger companies. These investments have little to no correlation to the overall stock market.

Billionaire’s Portfolio – The Optimal Portfolio

We’ve just walked through three historical studies on the universe of some of the best investors alive – digging through their real investments year in and year out. And we’ve seen three powerful results.

Given the numbers we’ve shown, you are probably wondering why we only returned 35% last year. Here’s why? First, remember we spent the first five months of the year building our portfolio out to full capacity (i.e. fully invested). With that, we held a lot of cash up to 25% for much of the first half of the year (certainly the first quarter).

Still, we beat the S&P 500 in a stellar year for the index.

But consider this: Believe it or not, activist investors had one of the worst year years in 2013 (compared to their history). Almost every one of the top activist investors in my study beat the S&P 500 every year since 2002. But in 2013, activist investors greatly underperformed the market, by as much as 15 percentage points.

So what does this mean? Within our universe of stocks, in our Billionaire’s Portfolio, we have shown an ability to select the high potential stocks that can become the big winners. And we do so by combining the three key approaches we outlined in our studies above. This, we believe, is the optimal portfolio.

Will Meade
President of The Billionaires Portfolio