Highfields Capital Management is a Boston based value-oriented hedge fund founded in 1998 by Jonathon Jacobson and Richard Grubman, the latter retiring from the fund in August 2010. The fund primarily manages money for charitable foundations, pension funds and other private investors. The fund was launched with 1.5 billion dollars in assets and today manages roughly 10 billion dollars globally. Highfields Capital Management has consistently averaged a return of 12.5% outperforming the S&P 500 index by around 9% since its inception.
Mr. Jacobson worked as an options trader in the Philadelphia Options Exchange while a senior at the Wharton School of Business. He was captivated by Wall Street working for Merrill Lynch and Lehman Brothers before and after receiving an MBA from the Harvard School of Business.
After successfully trading options, he got his big break to manage a portfolio. In 1990, Harvard Management hired him as a senior equity portfolio manager with $100 million to boot. While there he was fascinated by the “new-cutting-edge” derivatives and the liberty to run his own portfolio. During his tenure there, he grew Harvard Management’s initial wager of 100 million dollars and an added 200 million dollars later, into 1.6 billion dollars.
Mr. Jacobson was taken by the then CEO of Harvard Management, Jack Meyer, whose influence left an indelible mark on him, shaping the core of his investment philosophy. The way Mr. Meyer ran the show was based on the simple mantra that “the interests of the organization and its people have to be perfectly aligned”. Mr. Meyer’s belief that most management problems arise from the fact that there is a disconnect between the management and the shareholders still rings true in Mr. Jacobson’s investment style even after having found his own fund: Highfields Capital Management.
Mr. Meyer had indeed taken note of Mr. Jacobson’s acumen and it came as no surprise that Harvard Management provided 500 million dollars of the initial 1.5 billion dollars raised by Messrs. Jacobson and Grubman to launch Highfields Capital Management.
Highfields Capital utilizes a diverse investment strategy while investing in public as well as private equity over a wide variety of sectors, domestically and globally. The firm prefers to hold stocks for extended periods, and take long-term advantage of price fluctuations and market volatility.
Volatility, according to Mr. Jacobson, “creates ideas” and his interest lies mainly in two events that cause volatility.
The first source of volatility occurs when the company itself goes through an M&A, restructuring, or such similar event, resulting in a stock price change relatively faster than fundamental change. Mr. Jacobson concentrates on the discrepancy between the changes, i.e. price change and factual change, and essays to figure out the reasons, hence creating an opportunity to invest accordingly.
The other source of volatility is the causal effect a macro event or a general trend has on the market. Generally, the latter are industry specific; however, they do reflect interest rate variations, currencies and the overall economic prospects. These macroeconomic factors, reflected by the market, compel companies either to buy or sell its securities, without taking into account the underlying fundamentals of the company. That’s where Mr. Jacobson steps in, analyzing the company with both perspectives and discovering an opportunity.
Over the years since its inception, Highfields Capital’s investment approach has evolved from short/long strategies towards buying meaningful ownership stakes in the company (and possibly owning them outright in the future). The firm pours over the company’s financial statements trying to configure strategies that would improve the company’s core performance and thereby generate returns and give management the capability to buy back stock. This approach needless to say makes the firm take on an activist stance, reviewing the company’s management and demanding change, at times asking for change of top management itself.
Going back to his root mantra, Mr. Jacobson tirelessly configures whether the celestial bodies’, management’s and the shareholders’ interests are in alignment or not. If he is not confident in the management in the sense that their actions are deleterious to the shareholders, then Highfields Capital forges plans to revamp the establishment in its entirety, rallying shareholders behind them and upending board members. The high-stakes playing ground often becomes a battlefield pitting one against the other.
A most recent example of this is Highfields Capital’s ongoing imbroglio with CoreLogic. In March 2012, Highfields Capital (which owns 7.65% of CoreLogic), accused the company of committing a sequence of missteps which cost the shareholders. According to Highfields Capital, CoreLogic failed in providing accurate earnings forecasts and having a “dismal record” in stock buybacks and acquisitions. The firm is calling for not only the CEO, whom they largely blame, to step down but also for new management and new directors.
““A savvy management team could create a lot of value. Stay tuned”
“The hedge fund industry is looking more like the sports industry where players have a limited time to be at the top of their game and earn a lot of money”
“We are still in this big-is-beautiful world where investors are veering toward the large hedge funds that seem safe no matter how much money they have lost”
“If the pilot program is successful we will be moving more hedge fund assets out of the fund of funds program into the direct program”
“This management team has overseen a massive destruction of shareholder value”
“Those guys have no idea of what they’re getting into … Taking a company private is very different from trading stocks”
“Hedge funds know how to pick stocks and make lots of money, but that is not the same thing as creating value through ownership of an asset over the long term in a hands-on way. They lack the right skills or experience to make a success of turning around or building private companies.”
“There are two kinds of events that create volatility. The first revolve around individual companies, such as earnings misses, unexpected news, M&A activity, restructurings and legal issues – things that can make prices and valuations change relatively quickly. In general, prices change much faster than fundamentals of businesses change, so what we want to do is understand what made the price change and then figure out whether the facts have changed as much as the price. To the extent they haven’t, that can be an opportunity.”