SEC - Senvest Capital

[writser]

They just released the annual report, that's why I caught your mistake :) . New BVPS is  roughly $CAD 275. Yes, the portfolio was roughly break-even in Q4 but as the USD appreciated they made a profit in CAD terms. Isn't it a bit strange that they first issue a press release excluding forex gains / losses? The -$35.39 number might be GAAP-approved but is totally useless and in fact quite confusing.

[randomep]

$232 sounds more accurate to me, but I'll post my estimate once I update for the latest filing.

 

54% of tangible book is dirt cheap IMO for a company that has averaged a ~20% ROE since the mid-1990s.  even considering the crappy liquidity

 

In my experience, great investors don't get stupid.  size can hurt their performance, but I would argue there is little evidence that increased size has had much impact here yet.

 

Well, I am not so sure they are "great" investors. Looking at their 13F I don't understand their investing style at all.  That is not to say I can criticize them like I can Sequoia or Ackman. They are very different for sure! 

 

I know they did great before, but I just can't be convinced they'll have years like 2013 again.

 

 

 

 

[misterkrusty]

they've averaged about 20% for about 20 years, with average AUM of >C$300M (and >C$100M since 2003).  and it's not like all the big gains happened when they were much smaller.  They had ~C$560M at year-end 2010 and averaged about 18% since then.

 

if that doesn't qualify as "great", what does?

[randomep]

they've averaged about 20% for about 20 years, with average AUM of >C$300M (and >C$100M since 2003).  and it's not like all the big gains happened when they were much smaller.  They had ~C$560M at year-end 2010 and averaged about 18% since then.

 

if that doesn't qualify as "great", what does?

 

yes sir, their record is amazing, but past performance does not guarantee future returns, and I am just afraid their story will be like Bruce Berkowitz, an esteemed fund manager with a great 20yr reputation, but which is now down a notch as his fund has lagged the S&P for the last 6 or 7 years.

 

I really want Senvest to be what you say, it is one of my largest positions, just call me a skeptic

 

 

[Guest Schwab711]

What were the biggest investments that led to ~20%?

[Baoxiaodao]

they've averaged about 20% for about 20 years, with average AUM of >C$300M (and >C$100M since 2003).  and it's not like all the big gains happened when they were much smaller.  They had ~C$560M at year-end 2010 and averaged about 18% since then.

 

if that doesn't qualify as "great", what does?

 

yes sir, their record is amazing, but past performance does not guarantee future returns, and I am just afraid their story will be like Bruce Berkowitz, an esteemed fund manager with a great 20yr reputation, but which is now down a notch as his fund has lagged the S&P for the last 6 or 7 years.

 

I really want Senvest to be what you say, it is one of my largest positions, just call me a skeptic

 

If you are skeptical, why you bought them in the first place?

[writser]

Cheap price? At current prices they don't exactly have to overdeliver ..

[randomep]

they've averaged about 20% for about 20 years, with average AUM of >C$300M (and >C$100M since 2003).  and it's not like all the big gains happened when they were much smaller.  They had ~C$560M at year-end 2010 and averaged about 18% since then.

 

if that doesn't qualify as "great", what does?

 

yes sir, their record is amazing, but past performance does not guarantee future returns, and I am just afraid their story will be like Bruce Berkowitz, an esteemed fund manager with a great 20yr reputation, but which is now down a notch as his fund has lagged the S&P for the last 6 or 7 years.

 

I really want Senvest to be what you say, it is one of my largest positions, just call me a skeptic

 

If you are skeptical, why you bought them in the first place?

 

Good question. My attitude is different now than last year. It's kinda like moving the goal post. Last year the portfolio hadn't taken a beating. For example they didn't have the BoC fund yet.  The biggest factor in my decision is the MOS. It trades at less than 60% of NAV.  I didn't expect then or now for them to repeat the 20% returns. But I hope they could at least beat the market after fees.  I dunno, nobody knows how they'll do....... I guess my mistake was to make them such a large position......

[muscleman]

they've averaged about 20% for about 20 years, with average AUM of >C$300M (and >C$100M since 2003).  and it's not like all the big gains happened when they were much smaller.  They had ~C$560M at year-end 2010 and averaged about 18% since then.

 

if that doesn't qualify as "great", what does?

 

yes sir, their record is amazing, but past performance does not guarantee future returns, and I am just afraid their story will be like Bruce Berkowitz, an esteemed fund manager with a great 20yr reputation, but which is now down a notch as his fund has lagged the S&P for the last 6 or 7 years.

 

I really want Senvest to be what you say, it is one of my largest positions, just call me a skeptic

 

If you are skeptical, why you bought them in the first place?

 

Good question. My attitude is different now than last year. It's kinda like moving the goal post. Last year the portfolio hadn't taken a beating. For example they didn't have the BoC fund yet.  The biggest factor in my decision is the MOS. It trades at less than 60% of NAV.  I didn't expect then or now for them to repeat the 20% returns. But I hope they could at least beat the market after fees.  I dunno, nobody knows how they'll do....... I guess my mistake was to make them such a large position......

 

I don't think the BoC fund will end up like Ackman's Target fund. I am probably the only one in this forum who bought BoC stocks. I think Cyprus is making solid progress. At least BoC so far has done far better than the Greek banks that a number of board members really liked here.  :)

[Jurgis]

OK, I am lazy right now to read through their docs, so repeating Schwab711's question: how did they rack up 18%/20% annualized returns? Anyone has a short summary story for last 10 years or so?  8)

 

Yeah, I'm aware that there's some apples to oranges when some people mention ROE and others mention returns (of their funds?).

 

Thanks

 

 

[Hielko]

OK, I am lazy right now to read through their docs, so repeating Schwab711's question: how did they rack up 18%/20% annualized returns? Anyone has a short summary story for last 10 years or so?  8)

 

Yeah, I'm aware that there's some apples to oranges when some people mention ROE and others mention returns (of their funds?).

 

Thanks

Leveraged risky stocks

[randomep]

Just read over the annual report.  And I am going to rehash something old.

 

So here is the recap. the shareholders lost $100M not counting currency translation. And the change in redeemable units is $116M also before currency translation, so we compare apples to apples. There is $47M of operating expenses. This is how I look at the breakdown of expenses and fees to outside hedge fund holders.  The shareholder income/loss is taxable, but outside shareholders' gains is not.  So that kind of accounts for the difference of 100 vs 116. Otherwise it looks like the losses are the same to the two parties.  The outside fundholders' stake is about $500-600M and the shareholder equity is about $700M.

 

I've looked at the past several years and it seems like outside holders and shareholders split the expense and gains half-half.  In good years, the fundholder's percentage gain is greater than the shareholder gains but the shareholders have to expense tax on the gains.  In years of losses, the shareholders percentage losses are less than the fundholders because of clawback of income tax expense.

 

So I estimate this year the shareholder paid about $25M in expenses. I hope this makes sense.

 

[Guest Schwab711]

OK, I am lazy right now to read through their docs, so repeating Schwab711's question: how did they rack up 18%/20% annualized returns? Anyone has a short summary story for last 10 years or so?  8)

 

Yeah, I'm aware that there's some apples to oranges when some people mention ROE and others mention returns (of their funds?).

 

Thanks

Leveraged risky stocks

 

Seems like the fund has a history of and is incentivized to take high-risk positions. This is less of an issue for them since they can always come up with a new fund name and raise new capital. You only get one shot with your savings. As shareholder, you pay something like 2/20 and are taxed at corporate rates on capital gains. If the company generates 10% returns then isn't the shareholder left with 4-5% after fees, expenses, and taxes? Seems like a bad situation regardless of the discount.

 

I've looked into buying discounted funds/situations like this and this fund's track record is certainly better than most, but I don't think I understand the risk/reward very well. Can someone with experience investing/watching these situations weigh in on how to view the risk and how they incorporate it into their valuation?

 

Calculating this investment's expected returns using the weighted average of the decision-tree (which includes some probability of complete or near-complete loss) doesn't seem like it would fully consider the knock-on effects of reduced capital in the future. Maybe I'm wrong or double-counting. I'd really like to hear how others think about risk in situations where the potential for large losses are non-trivial (in this situation or in general).

 

Also, can someone help me understand why my idea of mis-aligned incentives is right or wrong (consequences of HF generating large, permanent loss is nearly zero while it is huge for the shareholder)? Seems like long-term insurance liabilities are the perfect damper of risk tolerance (BRK, FFH, MKL, ect) and hedge funds lack a similar mechanism to rein them in.

[randomep]

 

Also, can someone help me understand why my idea of mis-aligned incentives is right or wrong (consequences of HF generating large, permanent loss is nearly zero while it is huge for the shareholder)? Seems like long-term insurance liabilities are the perfect damper of risk tolerance (BRK, FFH, MKL, ect) and hedge funds lack a similar mechanism to rein them in.

 

Well I find it hard to accept it is misaligned incentives when the family owns 50% of the company.  Every $2 they rob from the company they rob themselves $1.  Last year they had $55M in expenses, of which $17M was margin interest. So that leaves $38, and $12.5M was employee benefit expense.  Which is less than 2% of equity.  AND that expense isn't completely borne by the shareholders, it is partially paid by the hedge funds fees.

 

This a very old company and didn't start out as a hedge fund manager. I don't see them as risk takers who don't care if they blow up their company.

 

You must realize that the company owns several hedge funds that only charge 1.5/20 to the portion that is not owned by the company. Of course the company must cover the rest of the company's expenses above what is paid for by the outside shareholders.

 

I have looked at how the gains are split between the outside hedge fund owners and the shareholders.  It appears that the outside hedge fund owners get a higher gain in good years after fees. So in a year with 85% gains in the fund to outside shareholders, there is 70% gain in equity.  However, the gain is equity is taxed whereas the fund owners do not pay tax.  So it seems like a wash; you get the same gains either as an outside fund owner or a shareholder.

 

Note also that much of the taxes paid is deferred tax on the balance sheet and can be reversed in years with loss. One year I notice outisde fund holders lost 30% but equity was down 22%.

 

Its a complex structure but maybe that's the biggest reason why the stock is so undervalued.

 

 

[misterkrusty]

the Mashaal family ownership is even higher than 50% when you count their ownership of LP units.  incentives are pretty well aligned here.  and they do buy back stock, but its hard given the liquidity.

 

note that the company's expenses are elevated currently because they've been adding back-office staff in advance of hopefully gathering more outside assets in the HF business.  If that doesn't work out and we don't start getting more fee income, I'd expect those expenses to go away.

 

[Hielko]

Its a complex structure but maybe that's the biggest reason why the stock is so undervalued.

You fail to mention that the CEO gets 40% of the annual fees of the outside money, so owners of the company get a lot less. It's a complex structure, but from what I read it's so complex that most people actually don't really understand how bad it is (and why I don't think the stock is very undervalued, if undervalued at all)!

[misterkrusty]

yes, he gets 40% of that.  and 40% of fees is about what basically every publicly traded alternative asset manager will keep for the employees.  in any case, most of the gains for shareholders come through growth of the money that the company owns, most of which is outside their hedge funds.

 

there's nothing about the corp structure that is really all that complicated, and there isn't anything shady.  if you're going to pass judgement, at least do your own research instead of relying on a bunch of blogs (i've read them all and there's a lot of crappy, confused analysis out there).

[randomep]

the Mashaal family ownership is even higher than 50% when you count their ownership of LP units.  incentives are pretty well aligned here.  and they do buy back stock, but its hard given the liquidity.

 

note that the company's expenses are elevated currently because they've been adding back-office staff in advance of hopefully gathering more outside assets in the HF business.  If that doesn't work out and we don't start getting more fee income, I'd expect those expenses to go away.

 

What do you mean LP ownership? The Mashaal family invests directly in the 3 funds?  Why would they do that?

 

[misterkrusty]

when HF managers get paid, they're paid via LP units.  aside from that, I would imagine that Richard Mashaal invested in LP units when launching the fund, as investors like to see skin in the game.  As it happens, the company's own investments (fka Senvest International) seem to be invested in a very similar, but not exact, portfolio.

[Guest Schwab711]

 

Also, can someone help me understand why my idea of mis-aligned incentives is right or wrong (consequences of HF generating large, permanent loss is nearly zero while it is huge for the shareholder)? Seems like long-term insurance liabilities are the perfect damper of risk tolerance (BRK, FFH, MKL, ect) and hedge funds lack a similar mechanism to rein them in.

 

Well I find it hard to accept it is misaligned incentives when the family owns 50% of the company.  Every $2 they rob from the company they rob themselves $1.  Last year they had $55M in expenses, of which $17M was margin interest. So that leaves $38, and $12.5M was employee benefit expense.  Which is less than 2% of equity.  AND that expense isn't completely borne by the shareholders, it is partially paid by the hedge funds fees.

 

This a very old company and didn't start out as a hedge fund manager. I don't see them as risk takers who don't care if they blow up their company.

 

You must realize that the company owns several hedge funds that only charge 1.5/20 to the portion that is not owned by the company. Of course the company must cover the rest of the company's expenses above what is paid for by the outside shareholders.

 

I have looked at how the gains are split between the outside hedge fund owners and the shareholders.  It appears that the outside hedge fund owners get a higher gain in good years after fees. So in a year with 85% gains in the fund to outside shareholders, there is 70% gain in equity.  However, the gain is equity is taxed whereas the fund owners do not pay tax.  So it seems like a wash; you get the same gains either as an outside fund owner or a shareholder.

 

Note also that much of the taxes paid is deferred tax on the balance sheet and can be reversed in years with loss. One year I notice outisde fund holders lost 30% but equity was down 22%.

 

Its a complex structure but maybe that's the biggest reason why the stock is so undervalued.

 

Thanks for the response.

 

Assuming we both mean excessive exec compensation by robbing, then the owners get an extra $1 for every $2 of excessive pay. They still accumulate more money then otherwise. Just because they own a lot doesn't always mean they want to share their prosperity with everyone else. It's also easier to control their tax bill with direct compensation than with unpredictable stock appreciation. If the family owns a combined stake > 50% then what prevents nepotism throughout the fund (including non-exec jobs to family members)? Obviously these types of things can occur anywhere and there's not much shareholders can do even if family held < 50%, but it seems to be more common at these publicly traded hedge funds (or alternative funds). In 2014, exec compensation was >30% of total costs and >50% of employee compensation. I'd be interested to know how many folks that actually represents since they only have 24 employees, which receive average comp of >$1m. They also give out interest-free loans to employees on an on-going basis. This all seems to fit the idea that the business model creates or supports mis-aligned incentives.

 

Their portfolio (as of 3Q 2015):

* Long positions: US Dollar (size is ~10% investments), Tower Semiconductors, NorthStar Realty Finance, Ceva, Mellanox Technologies, Radware, Depomed and NorthStar Asset Management.

>>> They are an asset manager that invests in other asset managers (fees on fees on fees...)

* They are also long Senomyx ("SNMX") and Aegean Marine Petroleum Network ("ANW")

* An unlisted equity holding of $14m is classified as level 3 asset and valued at 92.1x revenue.

* They are also short ~$500m worth of securities. That is ~60% of their shareholder equity. They are levered, have debt, take high-risk positions, and compensation is excessive!

 

Would you buy into the above holdings if you received a 25% or 50% discount, but had zero liquidity for an indefinite period of time? If all of the above securities went "dark" on the OTC then I would guess they would decline by more than 50% on average.

 

The Senvest Partners fund is focused primarily on small and mid-cap companies. The fund recorded a

loss 15.6% net of fees for the nine months of 2015 and it had a loss of over 18% for the third quarter

 

So I don't think it's too far off-base to say that comp and risk-taking could be considered excessive. Senvest appears to be better in these aspects than most small, publicly-listed hedge funds, which is why, in general, I think the whole sub-industry is too dangerous to invest in. Anyways, just trying to present the bear case. I don't think investors will experience any multiple expansion in the long-run due to complexity and industry incentives, but I think we already agree on that point.

[Hielko]

yes, he gets 40% of that.  and 40% of fees is about what basically every publicly traded alternative asset manager will keep for the employees.  in any case, most of the gains for shareholders come through growth of the money that the company owns, most of which is outside their hedge funds.

 

there's nothing about the corp structure that is really all that complicated, and there isn't anything shady.  if you're going to pass judgement, at least do your own research instead of relying on a bunch of blogs (i've read them all and there's a lot of crappy, confused analysis out there).

I wrote one of those blogs, so I think I have doing my own research covered here...

[misterkrusty]

ok Hielko- 

 

if you want to cite specific examples of excessive comp and explain clearly why it's excessive, I'll gladly listen and respond.  Otherwise I've got better things to do.

[misterkrusty]

Schwab711-

 

first off, they don't have any debt.  yes, they have leverage via the short book.

 

second, you can't just pick a few names out of the long book and reliably conclude that they take excessive risk.  we don't know anything about the short book.  we don't know anything about foreign holdings.  there's a lot that doesn't have to be reported on a 13H.  for all we know, they could have equal offsetting shorts on every long you cited.

 

third, the fact that some asset is valued at 92 times revenue doesn't mean much unless we know more about the asset.  it could be a piece of unused land for all we know.

 

fourth, while it's in theory possible that Richard Mashaal hires his incompetent brother-in-law (or whoever), this risk isn't different from any other family controlled company.  and there's no evidence that suggest nepotism is likely here

[Guest Schwab711]

Schwab711-

 

first off, they don't have any debt.  yes, they have leverage via the short book.

 

second, you can't just pick a few names out of the long book and reliably conclude that they take excessive risk.  we don't know anything about the short book.  we don't know anything about foreign holdings.  there's a lot that doesn't have to be reported on a 13H.  for all we know, they could have equal offsetting shorts on every long you cited.

 

third, the fact that some asset is valued at 92 times revenue doesn't mean much unless we know more about the asset.  it could be a piece of unused land for all we know.

 

fourth, while it's in theory possible that Richard Mashaal hires his incompetent brother-in-law (or whoever), this risk isn't different from any other family controlled company.  and there's no evidence that suggest nepotism is likely here

 

Those are their largest positions taken directly from their investment portfolio disclosure...

[Hielko]

ok Hielko- 

 

if you want to cite specific examples of excessive comp and explain clearly why it's excessive, I'll gladly listen and respond.  Otherwise I've got better things to do.

How hard is it to understand that if you pay 5%+ of NAV annually in fees, salary, etc that you are paying an excessive amount?!?! I rather pay 2+20, and that is actually a fee structure that is excessive for almost every hedge fund manager except for the very best...