Upslope Capital Management, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of +2.8% was recorded by the fund for the second half of 2021, below the S&P Midcap 400 ETF and the HFRX Equity Hedge Index that delivered a +3.4% and +5.1% gains for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Upslope Capital Management, the fund mentioned Envestnet, Inc. (NYSE: ENV), and discussed its stance on the firm. Envestnet, Inc. is a Chicago, Illinois-based financial services company, that currently has a $4.02 billion market capitalization. ENV delivered a -10.18% return since the beginning of the year, while its 12-month revenues are down by -8.75%. The stock closed at $72.19 per share on July 19, 2021.
Here is what Upslope Capital Management has to say about Envestnet, Inc. in its Q2 2021 investor letter:
“Envestnet is a leading wealth management technology platform used by investment advisors, banks, and other (mostly financial) institutions. The company offers a comprehensive product suite, largely aimed at helping independent advisors manage their businesses more efficiently. Examples include technology that supports advisor marketing and communication, client onboarding, investing, trading and rebalancing, and financial planning, among many other offerings. ENV holds a top three market share in virtually all of their core products and is one of only a few that offers a comprehensive platform of scale.
Despite an attractive underlying business model (long-term growth tailwinds, incredibly sticky products) ENV has faced challenges in recent years. Most notably, its 2015 acquisition of Yodlee (a leading financial data aggregation and analytics platform) has disappointed, weighed on, and distracted the company ever since. Tragically, the Envestnet’s long-standing CEO (a co-founder) was also killed in a car crash in 2019. Today, ENV generally maintains its strong competitive position, but has seen shares underperform on 1-, 2-, and 3-year timeframes. Leadership, vision, and recent execution are arguably lacking. It’s easy to sympathize: current CEO Bill Crager was thrust into the role in late 2019 after the prior CEO’s death (a 30- year colleague and friend of Crager’s) and just prior to the COVID-19 pandemic.
In early 2020 it appeared ENV might finally be moving to offload the Yodlee distraction. But, with the onset of COVID shortly after the rumors, a transaction was never consummated. Over a year later, however, management has shown increasing openness to a sale. While noting the importance of Yodlee’s offering to ENV’s vision, management has clearly stated all options are on the table. The CEO even recently pondered aloud about how ENV would “engage and offer the ability for [Yodlee] to continue to grow in other verticals” with a potential “partner” (presumably a Yodlee buyer). In my view, a Yodlee sale – even without a blockbuster price tag – would remove the biggest distraction ENV has faced over the past 5+ years and
open a path to more consistent execution for ENV’s fundamentally attractive core business.
Aside from management commentary what else might point to a potential transaction soon? Perhaps the fact that after years of consistent, relentless insider selling (not unlike many tech-oriented businesses with heavy share-based comp, to be fair), selling has completely vanished for ~7 months and counting – the longest drought in company history. The most recent insider sales at the end of 2020 included some executed via 10b5-1 plans (automatic sales for executives based on pre-determined formulas); were some of these programs cancelled? Why? Also note that in late 2018 BlackRock made a strategic investment in
Envestnet, validating the notion that ENV is comprised of a unique collection of valuable assets.”
Based on our calculations, Envestnet, Inc. (NYSE: ENV) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. Envestnet, Inc. was in 18 hedge fund portfolios at the end of the first quarter of 2021, compared to 28 funds in the fourth quarter of 2020. ENV delivered a 2.55% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.