Let investment come to you

The growth of ETFs has created opportunities for investors because it has generated behaviour-related mispricing in the equity market and beyond. The S&P 500, for example, has more than US$2 trillion of passive investments linked to the index.

So when a stock is added to the U.S. benchmark, ETFs (and many mutual funds) are forced to buy it regardless of the intrinsic value. Similarly, when a security is removed from the S&P 500, that stock must be sold by passive capital.

This global phenomenon is one of many Arvind Navaratnam, portfolio manager at Fidelity Investments, tries to take advantage of in the Fidelity Event Driven Opportunities Fund.

The portfolio typically holds 40 to 50 names — with the Top 10 positions currently making up more than 50 per cent — and targets opportunities that arise from corporate actions such as spinoffs, bankruptcy proceedings and other special situations.

“I only shop in environments like that, where a disciplined, patient and opportunistic investor can take advantage,” Navaratnam said.

After studying business at Harvard, where he focused on this type of investing, and got to meet renowned investors like Warren Buffett and hedge fund manager Seth Klarman, Navaratnam pitched his idea to management at Fidelity. After a few years of strong performance when the strategy was run internally, it was made available to U.S. investors in 2013, and launched in Canada in 2014.

Event-driven investing has been one of the fastestgrowing strategies in the U.S., with almost all of the assets in the space concentrated at hedge funds, and assets under management growth estimated at between 15 and 20 per cent (annualized) for many years.

In the past few years, the low-growth environment for the average company has led to an increase in the number of corporate events.

“They are divesting divisions so they can be more focused, go after costs, and create more value,” Navaratnam said.

While the portfolio manager has seen more opportunities as a result, he says ‘no’ to more than 90 per cent of those that cross his path.

“There may be a lot of spinoffs or mergers and acquisitions at the top of the cycle, but there may be no distressed opportunities,” he said. “Then there are a lot of distressed opportunities at the bottom of the cycle, so they tend to average out, providing a lot of market cap opportunity.”

Fund holding

(MSG/ NYSE) was purchased after it was spun off from the company’s broadcasting assets in 2015. Navaratnam saw an opportunity, as the value of the New York Knicks NBA franchise, New York Rangers NHL team, and various real estate assets such as Radio City Music Hall and The Forum in California, appeared dramatically higher than MSG’s enterprise value. It also had approximately US$1 billion in cash.

“Sports teams have compounded in value at a very high rate over a long period of time, so to be able to get all those assets at a meaningful discount, with no debt, was very attractive,” Navaratnam said.

He highlighted the recent sale of the NBA’s Houston Rockets, noting that its high valuation is a function of the rarity of major sports franchises, and the fact that we live in a “Netflix world,” where the value of live sports is much greater than it was a decade ago.

Another fund hold, (BCO/NYSE) crossed Navaratnam’s radar when an activist investor disclosed that it owned a more than five per cent stake in the company. Starboard Value LP believed management at the cash logistics company wasn’t extracting as much value as it could, so the firm proposed changes that eventually led to a new chief executive taking over in mid-2016.

“It was an oligopolistic structure globally with few players, but margins were significantly lower than that of its best-in-class peers,” Navaratnam said. “So there was an opportunity for someone to come in, cut costs, and close that margin gap. The new CEO pushed than agenda, and the stock has done well.”