Despite this track record, two hedge funds have been making big bets that ITG will benefit from a comeback in mutual fund inflows. Parameter Capital Management (see full holdings here) ended the year 2011 with no position in ITG. In its June 31, 2012 filing, the fund had established a 380k-share position. As of the September reporting period, the position had grown to 530k shares. Mega-fund AQR Capital, meanwhile, had ended 2011 with 453k shares, and by September 30, 2012, the fund had increased this position to 977k.
However, like any trade, someone takes the other side. Continuing with our sports analogy, one hedge fund may be worrying that ITG will spend more time in the cellar. In this case,Third Avenue Management has spent most of 2012 reducing a sizable position in the stock; they whittled down an end-of-year 2011 position of 3.4 million shares to 1.2 million shares as of September 2012.
What could be driving Third Avenue’s actions?
These hedgies may be concerned about issues within ITG itself. One such issue is the judgment of management. For example, the company has continued to invest heavily in the face of difficult market conditions—ITG acquired Ross Smith Energy Group in 2011, Majestic Research Corp in 2010, and made a major purchase of software from ESP Technologies in Dec 2010.
The heavy investment by ITG management can be seen in ITG’s cash flow statements. Cash flows from investing activities have been strongly negative the past three years. As of yet, this investment has yielded little, and measures of return on equity and assets are strongly negative; return on equity is in the -50% range and return on assets is in the -10% range. These numbers not only easily trail the S&P 500 as a whole, but even averages of most of its peers.
Additionally, the company has produced a yearly deluge of earnings charges resulting from restructuring, employee reductions, goodwill write-downs, and acquisition-related matters. Comparing ITG to our sample of four financials—Gamco, FXCM, Jefferies, and NASDAQ OMX—none have negative ROE or ROA.
This divergent opinion by certain hedge funds is not without value to the retail investor as it focuses on the background factors driving each side of the market. In this case, investors need to weigh the efficacy of ITG management versus any sign of an uptick in mutual fund inflows. This is just one of the key values of tracking hedge fund activity that is available on Insider Monkey.
Given the recent dramatic up move in ITG, investors may want to step back, let the stock come off an overbought condition, and carefully track the issues discussed here before initiating new positions.
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