Investing in distressed companies can be very lucrative, provided the right level of expertise and enough research. Distressed companies are working against the clock to stay afloat and are highly risky and investors usually prefer distressed debt instead of equities, because of the downside protection (bonds usually have legal claims on some assets and can receive new securities or cash in a reorganization).
Distressed equities could provide returns well above 100%, but if the company files for bankruptcy or restructures, investors usually get nothing. One fund that specializes in distressed investing is Contrarian Capital, led by Jon Bauer. For over 30 years, Contrarian’s flagship strategy involved finding the best risk/reward opportunities in distressed assets in the US, Europe and Emerging Markets.
Contrarian usually seeks out equity-like returns with the protection rights of a debt holder and capitalizes on all phases of the distressed cycle. In its latest 13F filing, the fund disclosed an equity portfolio worth $1.02 billion. The fund has a lot of exposure to the energy and materials sectors, which together amass over 60% of the equity portfolio value. The focus on coal and commodities such as iron ore and steel, which saw some recovery last year, as well as geographical emphasis on Brazil, which is on a path of recovery from a economic crisis, has helped Contrarian generate pretty handsome returns lately.
At Insider Monkey, we assess a fund’s returns based on the weighted average return of its holdings in companies with a market cap worth over $1.0 billion that are disclosed in quarterly 13F filings. This measurement is not as accurate as the fund’s actual returns, but it allows us to determine, whether the fund is a good pick to imitate. We are using the data as part of our small-cap strategy, which involves determining the best small-cap stocks that best-performing hedge funds in our database are collectively bullish on. Our strategy has outperformed the S&P 500 ETF (SPY) by over 20 percentage points since it was launched in May 2014 and we share the stock picks with our premium subscribers in quarterly newsletters (see more details here). In addition, we have an activist newsletter, which focuses on one activist fund each month and looks into the best ways to imitate that fund.
Back to Contrarian Capital. As stated earlier, its bets paid off very well last year. For the third quarter of 2017, the fund’s stock picks returned 20.5%, while over the 12-month period ended September 2017, their performance stood at 86.4%, mainly due to 54% and 20% return registered during the third and fourth quarter of 2016. Throughout 2017, Contrarian’s top stock picks also registered positive returns and on the next page, we are going to take a closer look at these stocks.