Valeant Pharmaceuticals Intl Inc (VRX), Motorola Solutions Inc (MSI): Is An Activist-Mimicking Mutual Fund A Smart Investment?

The fund managers acknowledge that there is little fundamental analysis involved in their strategy; they prefer to defer on that point and analyze the activist investor’s record directly in determining the likelihood of positive returns. To do this, they analyze both the overall track record of an activist as well as his success in a particular industry or sector; activists who have historically struggled in tech investments might be ignored if they file a 13D on a tech stock. They also evaluate the activist’s plans for creating change at the company. Different activist techniques might be judged more or less likely to succeed.

Its most recent publicly disclosed data shows that the 13D Activist Fund’s three largest holdings were Jack in the Box Inc. (NASDAQ:JACK), where Blue Harbour Group has been engaged in an activist strategy for about three years; Valeant Pharmaceuticals Intl Inc (NYSE:VRX), one of the top holdings of Jeffrey Ubben’s ValueAct Capital (check out more stocks ValueAct owns); and Canadian Pacific Railway Limited (USA) (NYSE:CP), which has more than doubled in the last two years as Ackman has succeeded in transforming the railroad.

Given the combination of the fund’s performance and the academic research supporting the concept of imitating activists, the basic concept involved seems to be a good one particularly for investors who are looking for assets with a low correlation to the overall market. The question is which of the following would be the best way for an interested investor to participate: buy into the fund and pay its fees (likely the only way for most investors to access the entire portfolio of activist opportunities), watch for its public reports and directly buy some of the stocks the managers choose (which has a considerable delay), or follow 13Ds oneself and directly research these for attractive single-stock investments.

Disclosure: I own no shares of any stocks mentioned in this article.