In this Manager Monday, we look into the public filings of Blue Harbour Group to learn how they've consistently outperformed benchmarks.
Blue Harbor Group was founded in 2004 by Clifton Robbins, a Harvard College and Stanford MBA graduate and a former partner at the well-known private equity firm KKR & Co. As an activist manager, Blue Harbor takes ownership stakes in publicly traded companies and, through close collaboration, increases the company’s value. Historically, the manager’s main focus was in small and mid-cap companies, but they’ve recently moved more into mid and large cap territory as their reported market value increased. In the past, Blue Harbour Group has been the poster child for “friendly activists,” which sets them apart from the usual aggressive image associated with most activists. Let’s dive in for a deeper analysis of their historical performance and style shifts.
A Note on Our Data
As with all our Manager Mondays, everything mentioned in this post is sourced exclusively from public data, including the manager’s profile, simulated performance and all other analysis. The data used here omits the short side, non-equity securities, many non-US securities and all non-public information such as actual fund performance. Regardless, this data can be incredibly insightful if viewed with the right prism.
Performance and Asset Growth
Since January 2006, Blue Harbour’s cumulative return outperforms both the S&P 500 and the MSCI World by 113% and 156% respectively.
Since December 2005, Blue Harbour had a 65% batting average and a 72% Capital Efficiency ratio. This shows the manager’s ability to consistently allocate their capital to positions that generate positive PnL.
53% of the names in the portfolio outperformed the sector benchmark and 58% of capital was allocated to outperformers. Additionally, the 4,300 bps of security selection Alpha generated since December 2005 accounted for almost 20% of the total contribution generated.
The fund’s performance was accompanied by significant asset growth. Reported market value has increased five-fold since Q2 2012. Blue Harbour used this growth to increase the number of positions in the portfolio and scale up the market cap spectrum.
Market Cap Management
The Median Market Cap has increased almost three-fold since mid-2012 as the portfolio moved into higher Market Cap segments—Large Cap exposure increased from 0% of book at the beginning of 2013 to ~12% at present.
Security selection Alpha on a market-cap-adjusted basis has added ~6,000 bps since Dec 2005. Mid Cap and Large Cap have been the primary areas of strength, generating a total of more than 7,300 bps, consistent with the move up the spectrum. The remaining market cap buckets were all Alpha detractors.
While the move up the market cap spectrum has fueled Alpha generation, it has also resulted in a deteriorated liquidity profile. Since mid-2011, the percent of the portfolio that can be liquidated within 30 days has dropped from 96% to 49% at present. This could represent a key risk factor for the manager as the fund continues to grow.
An important trend exhibited in the manager’s sector exposure is the shift out of Energy and Consumer Discretionary and into Industrials and Information Technology.
This sector shift has paid off since IT and Industrials have generated the highest annualized returns during the time period, and were also the outsized security selection Alpha generators, while Consumer Discretionary was the outsized Alpha detractor during the same period.
In addition to the fruitful shifts in market cap and sector exposures, Blue Harbour has shown a great ability to manage position size. Historically, Blue Harbour’s cumulative return has outperformed a simulated portfolio with equally weighted positions by more than 71%.
Currently, 58% of the portfolio is invested in position sizes greater than 7.5%, which have historically produced the highest annualized returns. This shows that the manager has been compensated for high conviction positions.
Blue Harbour shows a great ability to continue generating positive returns and considerable security selection Alpha as its assets have grown. The move up the market spectrum, the shifts into IT and Industrials, and their ability to size up their best bets have resulted in consistent outperformance. However, this has come at the price of a deteriorated liquidity profile which could exacerbate losses in times of market turmoil.
What makes a successful manager? At Novus, we believe that studying performance alone does not adequately answer the question. Through looking at thousands of active manager portfolios, we peek under the hood of managers’ investment process, and recognize patterns that lead managers to consistent outperformance. These patterns can be viewed as investment skill, or managers’ ability to generate alpha through certain repeatable methods.
In this article, we use public ownership data and the Novus Alpha Platform to evaluate three distinct money managers. The three case studies aim to identify the driver of these managers’ success: investment skill.
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Published on May 2, 2016