market folly

Continuing our notes from the London Value Investor Conference 2013, the next speaker is Jeremy Hosking, an entrepreneur and fund manager.  He presented the long case on both AIG (AIG) and US Airways (LCC).


On Opportunities in Markets

The theme of Jeremy Hosking's presentation was how the money management industry can produce  opportunities for value investors. There is a limited amount of opportunity in markets and we are all  fighting over it, Hosking said. It helps to have someone making opportunity at the poker table and  that is a role often played by institutional asset managers. Institutional funds cause:

-  Agent principal damage via high fees
-  Diseconomies of scale. The bigger the pool of assets the harder to outperform
-  Product proliferation (often at the top of the market)
-  Herding by fund managers is a disservice to the client

Herding by fund managers takes many forms: short termism, inside asset classes (“better to fail  conventionally”), volatility avoidance, excessive information processing, preference for high liquidity stocks, too much investment in mega cap stocks, high fees.

And while Hosking talked about herding, it is slightly ironic that he then went on to pitch AIG.  While the bull case on the company makes sense, it is held by many prominent US hedge funds as a top long and could be considered a 'herding' pick in and of itself.  But to be fair, perhaps it's not a consensus long over in the UK.  


Idea: Long AIG (AIG: NYSE)  

Cheap at 0.6x book. Cyclical improvement in underwriting. Sale of non-core assets nearly always  helps the share price. $5bn per annum in share buybacks. 30% reduction in share count between  2011-15. Use of data mining/ analytics will improve product mix and growth rate.


Idea: Long US Airways (LCC: NYSE)  

Industrial consolidation leaves US Airways as one of the big three. Operating cost compression  reinforces oligopoly. Shares to merge into New American on 1-for-1 basis Q3 2013. Post merger  EBITDAR of $8.3bn produces EV target of $50bn (6x multiple) or $50 per share target after net  debt.


Be sure to check out other investor presentations: notes from the 2013 London Value Investor Conference.