Legendary value investing hedge fund, ValueAct made financial headlines over the past three months for all the wrong reasons. First, in late February, its chief executive Jeff Ubben told Reuters said that his firm had been taking money out of the capital markets as valuations have become overextended, leaving it with $3 billion in cash.
"I really feel that the large-cap activist plays are very treacherous with high PEs (price-to-earnings) and not a lot of growth," Ubben said, speaking at the Reuters "Future of Shareholder Activism" event in New York. He told Reuters that he was not focusing on any particular sector but instead looking for bets on idiosyncratic, mid-sized companies such as spin-offs and "weird" corporate structures.
Then, one month ago, CNBC reported that Ubben was returning $1.25 billion to investors because he believed the market to be overvalued and there were no attractive investment opportunities.
Ubben writes that "the broader market context is explicit to us. The S&P 500's median P/E ratio is 18 times. For most high quality companies we follow, it is much higher. These valuations can only be justified by assuming cyclically high corporate margins will persist, a certainty of lower corporate tax rates and a risk-free rate that stays near all-time lows. We are skeptical of all of the above."
As a result, the hedge fund will return $1.25 billion in capital to its limited partners starting on May 1. As in February, Ubben cited the higher-than-normal cash balances in the fund ranging from 10 percent to 29 percent since the end of 2015 versus the 5 percent average during the last decade.
In the third, and perhaps most notable headline yet, moments ago the FT reported that Ubben is stepping down as investment head at ValueAct, the fund which Ubben built into a $16 billion activist powerhouse, and would cede daily oversight of the fund's portfolio to his protégé, Mason Morfit.
Mr Ubben will remain as chief executive but focus on finding new investments and serving on boards, according to a letter that ValueAct sent to its investors on Monday. Mr Morfit, a partner since he was 27 and currently president of the firm, will become chief investment officer in July.
Ubben explains that he had handpicked Mr Morfit as his replacement a decade ago.
“Why is it happening now? It’s because 10 years ago I told Mason, you’re going to be the portfolio manager, and when the clock struck midnight, he looked at me and pointed to his watch,” he said. “If you keep a jump ball in place on succession, it’s not a very fun environment. It was better for investment performance because you don’t have politics.”
As such, it appears that Ubben's move is more a question of succession planning than throwing in the towel, as some of his famous peers have done in recent years.
As the hedge fund industry and its founders age, many are grappling with the question of who will succeed them. Only a handful of funds, such as Farallon Capital and Renaissance Technologies, have managed the transition successfully. Some have shut their funds to outside money and converted to a family office, while others have begun to plan for the next generation. Ray Dalio, at Bridgewater, announced in March he would relinquish his co-chief executive title, while Paul Singer, of Elliott Management, promoted Jon Pollock to co-chief executive alongside him in late 2015.
For those unfamiliar, here is some background on Ubben's replacement at the iconic activist fund:
Mr Morfit was 25 years old and working as a research analyst at Credit Suisse in New York but looking to move to San Francisco when a friend introduced him to Mr Ubben in 2000. Worried that no one would hire him without an MBA, he spent the first four months working for free before Mr Ubben hired him. "It was the perfect mix of a guy with no degree and a guy with no assets,” he jokes. Now, he likens their relationship to “more of a buddy movie”.
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Mr Morfit, ValueAct’s second employee, said he learnt on the fly from Mr Ubben, travelling around the country with him to meet different companies they were invested in or considering investing in, the two recalled. “It was this incredible apprenticeship,” Mr Morfit said. “I picked up his judgment through osmosis.” Mr Morfit served on his first corporate board for ValueAct at 29. He is currently on the board of Microsoft, where ValueAct’s pressure led to the ousting of Steve Ballmer as chief executive.
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Mason Morfit has Martha Stewart’s bad judgment to thank for his elevation to heir apparent at ValueAct.
As Jeff Ubben recalls it, the day after the firm bought a 6 per cent stake in the Ms Stewart’s eponymous home goods company, federal agents were knocking on Ms Stewart’s door to question her over suspicious trading in ImClone shares. Two years later, with Ms Stewart on her way to prison for insider trading, Mr Ubben was spending all of his time working to turnround her company as its new chairman. Mr Morfit, left behind at the office, stepped up to lead the rest of ValueAct’s portfolio. That was when it became clear that Mr Morfit was “first among equals”, Mr Ubben says.