New York City-based hedge fund Atlantic Investment Management Inc., founded by Alexander J. Roepers in 1998, manages $1.5 billion in assets, including $800 million in equity investments. The fund, with offices in New York and Tokyo, manages the Cambrian Fund, which is a concentrated long-only U.S. equity fund; AJR International, a traditional long/short U.S. equity hedge fund; Rodina Fund, a traditional long/short non-U.S. equity hedge fund; Cambrian Europe, a concentrated long-only European equity fund; and Cambrian Asia, a concentrated long-only Asian equity fund. Of these, the larger Cambrian Fund with $681 million has generated 15.37% compound annual return since fund inception in 1996, and the $519 million AJR Fund has generated 13.72% compound annual return since fund inception in 1993.
The Cambrian long-only fund approach is to invest in undervalued U.S. publicly-traded equity securities that are temporarily out-of-favor and candidates for an earnings turnaround, restructuring or takeover. It evaluates investment candidates using a bottom-up approach to analyzing cash flow and earning potential, and uses shareholder activism where appropriate. The AJR long/short fund selects and evaluates long investments using an approach similar to the Cambrian fund, but it also makes short investments in over-valued companies and companies with rapidly deteriorating fundamentals, and actively manages its net market exposure.
The fund holds a concentrated portfolio of only 23 positions; about 70% of holdings are in mid-caps, another 25-30% are in large-caps, and small-caps account for the remaining holdings. Portfolio turnover is around 150-200%, implying an average holding period of six to eight months. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that the portfolio is over-weight in the basic materials, consumer and industrials sectors, and is under-weight the energy, finance, utility, healthcare, services and transportation sectors.
The following summarizes new picks and pans in the latest reported 13-F filing for the March 2011 quarter, and updated based on 13-G filings since the end of the quarter:
- ITT Corp. (ITT) is a diversified conglomerate that provides wireless tactical networking, electronic defense, surveillance, pump systems and fluid handling equipment. The position was initiated in the spring of 2008 probably in the mid-$50s, and it's been on the wrong side of this position ever since as the stock has continued to be weak, dropping to the mid-$30s during the 2008-09 crisis. The stock has since recovered on the strength of recent quarterly results back to the initial buy level in the mid-$50s, so the selling of $127 million out of a $174 million position (also its largest sell in the quarter) implies a high conviction that the position may not work on the long side going forward despite the favorable quarterly results either due to macro-economic or company-specific reasons.
- Xerox Corp. (XRX) manufactures printing and publishing systems, copiers, scanners and software, and also provides maintenance services. The position was initiated in the $9 range in early 2010, and the stock has been in a trading range ever since. The selling out of its entire large $91 million position a year later at similar prices in the $9 range indicates a high level of conviction in its sell decision.
- Solutia Inc. (SOA) manufactures high-performance chemicals, poly-vinyl butyral and other engineering products sold worldwide. The position was initiated in the summer of 2010 probably in the mid-teens, so the selling of the $19 million position after more than a 50% gain in six to nine months could be just profit taking and does not seem like a conviction sell.
- Energizer Holdings Inc. (ENR) manufactures primary batteries, flashlights, and men’s and women’s wet shave products. It initiated the position in the fall of 2009 probably near $60 so the selling of only $17 million out of a $134 million position in the $70s is not a conviction sell.
- Lubrizol Corp. (LZ), a manufacturer of specialty chemicals, additives, resins and compounds for transportation, industrial and consumer products, was acquired in March 2011.
- Nalco Holdings Co. (NLC) provides water treatment, process improvement and energy services to clients located in over 150 countries. This is a small $16 million initial buy during the quarter, and we should wait to see if it adds to this position in future quarters.
- Raytheon Company (RTN) manufactures guidance systems and lasers, missile systems, integrated defense platforms, and command/ control systems. The position was initiated in late 2009 probably in the $50 range, so the selling of $15 million of its $149 million position in the $50s a year and a half letter does not constitute a conviction sell.
- Newell Rubbermaid Inc. (NWL) manufactures household hardware, cookware and office goods sold to volume retailers and wholesale distributors. This is a new $13 million position. The stock has since fallen off steeply from earlier this week due to poor earnings guidance going forward, so it is difficult to have faith in the small initial buy here. It would instead be more prudent to wait and see if it adds significantly to this position in the next quarter.
- Owens Illinois Inc. (OI) manufactures glass containers for the food, beverage and pharmaceutical markets. This is its largest holding at $184 million and constitutes almost a quarter of its portfolio, so its buying even more is a conviction buy.
- FMC Corp. (FMC) manufactures agricultural, industrial and specialty chemicals such as insecticides, herbicides and peroxygens. The position was initiated in spring of 2009 in the mid-$40s, so the selling of a minor $1 million from the large $112 million position as the stock ascended into the $80s constitutes a conviction hold.
- Oshkosh Corp. (OSK) manufactures specialty, commercial, fire, emergency and military trucks, truck bodies and crane components. The position was initiated during the fall of 2010 in the mid-$30s, so the addition of another $11 million to its already significant $70 million position is a conviction buy.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.