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Summary: The Children’s Fund Investment Management LLP, a U.K.-based hedge fund headed by Chris Hohn, manages $7 billion in assets, including $1.6 billion in U.S. equity assets and an additional $3 billion in non-U.S. equity assets. Three attractive buys from its portfolio include global TV, radio and motion picture production company CBS Corp (CBS), United Parcel Service Inc. (UPS) and managed healthcare services provider Wellpoint Inc. (WLP). Furthermore, beer manufacturer Molson Coors Brewing (TAP) is a top sell by Children’s Fund.
The firm was founded in 2003, and from 2004 through 2007, the fund returned 42% compound annual returns. It then suffered a 43% cut in 2008 and is just now clearing the high water-mark it set prior to the 2008/09 crisis. This calculates to in excess of a phenomenal 20% compound return since 2004. A portion of TCI’s profits, between .5% to 1% of assets, goes to the Children’s Investment Fund Foundation, a non-profit organization focused on improving the lives of children living in poverty in developing countries. Last year TCI donated $69.8 million for charity, taking its total donations to almost $1.6 billion in just five years.
The fund holds a concentrated portfolio of 16 positions, with more than 95% in large-caps and the remaining 5% in mid-caps. Its portfolio turnover is 60% implying an average holding period of almost two years. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that almost three-quarters of its portfolio is in the service sector and another 10% each are in the financial and consumer non-cyclical sectors.
The following summarizes its largest new buys and sells in the latest reported 13-F filing for the March 2011 quarter, and updated based on any 13-G filings since the end of the quarter. As you will see, three of TCI’s holdings are attractive buys, and one is a conviction sell:
  • Service sector: Buy CBS Corp. TCI added $525 million to its prior $1.1 billion position in the service sector, including adding $630 million to its $50 million position in global TV, radio and motion picture production company CBS, selling $88 million of its prior quarter $570 million position in cable TV and filmed entertainment production company Viacom Inc. (VIA.B) and selling $41 million of its prior $525 million position in global theme park, resort and diversified media company Walt Disney Company (DIS). The $50 million position in CBS was opened in the prior December 2010 quarter, so the addition of $630 million to that, making it the largest position in TCI’s Fund and holding 4.35% of CBS outstanding shares, is significant and conveys strong bullish conviction. This is particularly significant given that CBS has been in an uptrend since bottoming at under $4 in early 2009. Although it trades at a fair forward 15 price-to-earnings (P/E) ratio based on fiscal year December 2011 projections, there may be additional upside to analyst estimates as there are strong tailwinds that can propel CBS to even higher revenue and earnings based on the expected recovery in the U.S. advertising market driven by both the macro-economic recovery as well as the 2012 presidential election cycle. Based on the conviction in TCI’s Fund buying of CBS, its mid-range valuation and a host of favorable factors going forward, we would rate CBS a Buy. The position in VIA.B was opened in the low-$30s in early 2010, so the selling of a small portion of the prior quarter position is profit-taking.
  • Finance sector: TCI’s fund cut $430 million of its prior quarter $455 million position in the finance sector, including selling off a $343 million position in global credit card provider Visa Inc. (V) and selling off a $86 million position in futures exchange CME Group Inc. (CME). The position in V was opened in the mid-$60s in the summer of 2008, so the selling out of the entire position after almost three years in the mid-$70s is illustrative of its bearishness in this position. V currently trades at a forward P/E of 16 based on fiscal year September 2011 projections, which is in the lower-range of the historical P/E range. Specifically, earnings have gone up almost two-fold since 2008, which the stock is trading in the same range. Furthermore, the stock is leveraging on the secular trend of consumer spending moving from cash and checks to credit and debit cards. And so we - even though there is some regulation overhang that could negatively impact the stock - would rate it at a hold and not a sell. The position in CME was opened in the low-$300s in the summer of 2010, so the selling out of that entire position in the low-$300s is a conviction sell. The stock has since dropped down to the $270s and is trading at a forward P/E of 15 based on December 2011 projections, which is near the low-end of its historical P/E range.
  • Consumer non-cyclical sector: Sell Molson Coors Brewing. TCI’s Fund sold $370 million of its $600 million position from the prior quarter, including selling $150 million of its $287 million position from the prior quarter in beer manufacturer Molson Coors Brewing and selling $232 million of its $330 million position from the prior quarter in Coca Cola Inc. The position in KO was opened in the mid-$40s in the mid-2009, so the selling off of most of this position in the mid-$60s less than two years later is profit-taking. KO currently trades at a forward 18 P/E based on December 2011 projections, near the low end of its historical P/E range. The position in TAP was opened in the mid-$40s in mid-2009, so the selling in the mid-$40s almost two years later indicates conviction in the sell decision. Furthermore, TAP currently trades in the mid-$40s at a forward P/E of 13 based on December 2011 projections, which is near the low end of TAP’s historical P/E trading range. But there are significant headwinds working against the company in terms of the sluggish economies in its core markets and higher commodity prices. Furthermore, the stock has recently been downgraded by analysts with targets reduced to the $50 range, so this should be considered a sell.
  • Transportation sector: Buy United Parcel Service. TCI’s Fund sold $115 million of its $200 million position, including selling out of its $199 million position in rail transportation company Union Pacific Corp. (UNP). Furthermore, the company opened a new position of $94 million in United Parcel Service Inc. The position in UNP was opened in the low-$60s at the end of 2009, so the selling off a portion in the $100 range in a little over a year is profit-taking. UPS currently trades at a forward 16 P/E at mid-range valuation. In the most recent quarter, it beat estimates and raised guidance, and a slew of analysts including Deutsche Bank, HSBC, Barclays and RBC have recently raised their target price on the stock in the mid-$90s. This is a buy based on the conviction of TCI’s Fund as well as the positive fundamentals.
  • Healthcare sector: Buy Wellpoint Inc. The only holding in the sector is managed healthcare services provider Wellpoint Inc. (WLP). The fund added $52 million to its $165 million position from the prior quarter. The position was opened in the mid-$50s at the end of 2009, so the addition of more in the mid-$70s instead of taking a partial profit is a high conviction buy. The stock trades at forward 11 P/E based on December 2011 projections, near the low-end of its historical PE range.
Table
Company
Ticker
Action
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
Percent of Portfolio
Percent Shares Owned
Top Buys and Sells
CBS Corp.
Add
$ 680 million
$630 million
30.24%
4.35%
Visa Inc.
Drop
$ 0 million
($343) million
0.00%
0.00%
Coca Cola Co.
Cut
$ 98 million
($232) million
4.36%
0.06%
Union Pacific Corp.
Drop
$ 0 million
($199) million
0.00%
0.00%
Molson Coors Brewing Co.
Cut
$ 137 million
($150) million
6.09%
1.80%
Top Holdings
Viacom Inc.
VIA.B
Cut
$ 487 million
($88) million
21.63%
1.95%
Disney Walt Co.
Cut
$ 484 million
($41) million
21.52%
0.59%
Wellpoint Inc.
Add
$ 217 million
$52 million
9.63%
0.85%
United Parcel Service Inc.
New
$ 94 million
$94 million
4.18%
0.17%
Other Holdings
Companhia Energetica De Minas
New
$ 23 million
$23 million
1.02%
0.31%
Oracle Corp.
Same
$ 6 million
$0 million
0.26%
0.00%
Royal Bank Scotland Group
Add
$ 4 million
$2 million
1.07%
3.37%
CME Group Inc.
Drop
$ 0 million
($86) million
0.00%
0.00%
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.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are my ‘opinions’ and I may be wrong. I may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to my thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: 3 Buys, 1 Sell for U.K. Hedge Fund Children's Investment Fund Management