March 12, 2017

Form 13F: Generating Ideas From the Best Investors

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In a report on designing a rigorous investment process, I noted that investing ideas can be generated through your network of contacts. I also suggested extending your network by reviewing the 13Fs of investors you respect, looking at what they are buying and selling. In this post, I discuss common pitfalls investors face when using 13Fs and how to avoid them.

Institutional investors with at least $100 million in equity assets under management (AUM) are required to file Form 13F with the Securities and Exchange Commission (S.E.C). The 13Fs are essentially a snapshot of certain securities owned by the fund manager 45 days ago. Specifically, the managers are required to disclose their positions in U.S. exchange-traded stocks, options, and warrants. They are not, however, required to disclose positions in international stocks (other than ADRs), fixed income securities, commodities, currencies, or other asset classes. Given the time lag and limited disclosures, investors must use care when sourcing ideas from 13Fs.

A common mistake investors make is using the 13Fs of well-known investors like Ray Dalio and James Chanos without consideration of how these managers position their portfolios. Ray Dalio’s Bridgewater Capital is a global macro fund that invests based on systematic factors such interest rates, exchange rates, and political events. As a result, the vast majority of the fund’s positions are in asset classes not disclosed on a 13F (e.g., commodities, currencies, and futures). Thus, global macro funds provide limited insights for equity investors. The same holds true for credit funds, international funds, and emerging market funds since positions in fixed income securities and international stock aren’t disclosed.

James Chanos’ Kynikos is another example of a fund whose 13F filing isn’t very instructive for equity investors. As a net short fund, Kynikos’ core holdings tend to be shares that they’ve sold short, and short sales aren’t reported on Form 13F. In addition, Kynikos’ long positions are often times used to hedge their short positions. Thus, buying the fund’s long positions can be misleading and result in poor investment performance.

The best equity-focused funds to mine are typically run by either value-oriented or activist investors. Value investors like Lee Ainslie of Maverick Capital run concentrated books with long holding periods. The long holding period translates into low turnover rates, which means the 13Fs are more representative of the fund’s current holdings (i.e., the lag doesn’t matter as much). The same can be said for activist investors like ValueAct’s Jeff Ubben. Activists take an equity stake in a company and then try to unlock shareholder value over time.

Provided below is a sample of the funds that I review each quarter. These funds include both value-oriented funds and activists investors that I respect.

  • Maverick Capital (Lee Ainslie)
  • OakTree Capital (Howard Marks)
  • Yacktman Capital (Donald Yacktman)
  • Pennant Capital (Alan Fournier)
  • Highfields Capital (Jon Jacobson)
  • Lone Pine Capital (Stephen Mandel)
  • Greenlight Capital (David Einhorn)
  • Viking Capital (Andrew Halvorsen)
  • JANA Partners (Barry Rosenstein)
  • ValueAct Holdings (Jeffery Ubben)

Interested investors can track these and other funds through Bloomberg (FLNG <GO>), Insider Score, the S.E.C. , or websites such as Market Folly and Whale Wisdom. In reviewing the funds, I suggest focusing on new holdings and large positions since institutional managers allocate most of their capital to their best ideas.

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