Manager Monday: H Partners Management
Each Monday we dive into the public holdings of a manager who has outperformed. This week we look at H Partners Management.
Earlier in October, we wrote about Dan Loeb’s activist hedge fund Third Point, and highlighted sources of alpha in its portfolio. This week, we examine H Partners, an even more concentrated activist fund founded by Third Point alum Rehan Jaffer.
H Partners was founded only a year after Jaffer parted with Third Point. In control of his own fund, Jaffer has outperformed the market by a wide margin, focusing on distressed companies over the past 10 years. He developed an appetite for these types of investments as an investment banker early in his career. That same appetite has won H Partners board seats and driven leadership changes at its handful of target companies, with impressive results.
Everything mentioned in this post is sourced exclusively from public data, including the manager’s profile, simulated performance and all other analysis and commentary. 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. To simulate performance and determine portfolio attributes such as liquidity, we combine public holdings data with market and pricing data and make simple assumptions.
H Partners Style Shift
After underperforming the S&P 500 during the financial crisis and into the first half of 2010, the fund initiated a dramatic shift in the composition of the book. Concentration increased, liquidity decreased, and most sectors were abandoned in favor of consumer discretionary. The changes have led to impressive outperformance, which has accelerated since late-2014. H Partners has not only outperformed the S&P 500 (BM2), but also the S&P 1500 Consumer Discretionary (BM1), the sector the majority of its companies fall under.
To achieve this performance, the fund has accepted higher risk levels, and as a result, drawdowns have been more severe than the overall market, a function of illiquidity and little diversification.
H Partners Asset Growth Framework
H Partners grew their assets 8x since 2009 to a most recent value of $1.6B (in public filings)
Novus thinks about the implications of a manager’s AUM growth through its effect on three mechanisms: liquidity, position count, and market capitalization. H Partners has clearly chosen to preserve their high concentration (position count), which is expected given their activist strategy. In fact, the fund reduced its number of securities held from 20 in its early years to only 8 in 2015.
They have also moved up the market cap spectrum, but it hasn’t been enough to maintain their early liquidity levels. The fund has sacrificed substantial liquidity; only around 8% of the portfolio can now be liquidated within 30 days. Novus assumes 20% of the 90-day volume can be sold each day.
Although the portfolio is illiquid, just that fact is rarely a reason to be concerned when talking about an activist manager. But investors should be aware that the trend is a sharp decline in liquidity and the manager now operates under different liquidity constraints compared to 2009.
H Partners Holdings
90% of the portfolio is invested in three positions. As mentioned above, low diversity is characteristic of the portfolio; it is predominantly SMID US equities in the consumer discretionary sector.
Its top two holdings, investments in Six Flags and Tempur Sealy, are also its most public campaigns. When Six Flags emerged from bankruptcy in mid-2010, Usman Nabi (senior partner at H Partners), was named Chairman of the board. Earlier this year, the fund won a vote at Tempur Sealy’s annual shareholder meeting, causing three directors including the CEO to resign from the board. These two investments are not only H Partners’ largest, but its most successful.
H Partners’ filed positions have generated impressive selection alpha versus their S&P 1500 sector benchmark. Selection is calculated as the spread between the securities return and the return of its sector benchmark.
Their largest miss was with Leap Wireless, finally exiting the trade at the end of 2011.
H Partners Position Sizing
The chart below compares the portfolio’s simulated performance against the hypothetical return if the positions were equal weighted. The simulated return of the public positions clearly outperforms the equal weighted return, demonstrating consistent sizing skill by the manager since 2012.
Final Thoughts on H Partners
In contrast to its fund size, H Partners has exerted considerable influence over its target companies. It is more concentrated than its founder’s previous firm, Third Point, and other high profile activist funds. Operating a highly concentrated portfolio produced significant outperformance for H Partners and bolsters proponents of long term activism as an investment style.