Jana Partners LLC was founded in 2001 by Barry Rosenstein (along with Gary E. Claar). Following his New Jersey-based accountant father’s footsteps, Mr. Rosenstein became a CPA, but after receiving his MBA from the Wharton School of Business in 1984, he detoured into the world of money management by first joining Plaza Securities and later working at Merrill Lynch under Ashel Edelman (the latter supposedly being the inspiration for the quintessentially ethically-challenged Gordon Gekko in the notorious movie Wall Street).
Venturing out on his own for the first time, Mr. Rosenstein founded and became Managing Partner of Reatta Partners, followed by forming and heading the Investment and Merchant Banking Groups at Genesis Merchant Group. In 1993, Mr. Rosenstein joined Sagaponack Partners as a Managing Partner where he spent seven years in the private equity world before establishing his current public equity vehicle Jana Partners. Presently, the fund has 2.5 billion dollars in assets under management across thirty positions.
The combination of a diverse investment philosophy combined with punctuated activism has resulted in a resounding 250% total return for his clients since its inception. This translates to an annualized return of 12.7% in comparison to 1.7% for the S&P 500 in the same time period. More specifically to the Great Recession era, Jana Partners overall annual returns for the years 2007, 2008 and 2009 were 7.9%, -23.9% and 23.9% respectively. In comparison to this, the S&P 500 Index corresponding annual returns for the same period of time was 3.53% in 2007, -38.49% in 2008 and 23.45% in 2009. This depicted an impressive performance of the firm in comparison to the S&P 500 Index, especially buoyed by the relative outperformance of 2008 when many a hitherto great manager collapsed under the pressures of the financial system’s cataclysm.
Jana Partners’ core investment strategy is primarily based upon a value-oriented (interestingly towards both value and growth stocks) and event-driven investment methodology with the ever-present tagline being “ignore the crowd”. Mr. Rosenstein’s present investment style and philosophy were forged, over the years, before founding Jana Partners, by freely borrowing and modifying ideas that he had come across in his endeavors at previous firms. Akin to Mr. Edelman, he is often an activist investor, using Jana Partner’s capital (sometimes combined with others’, most famously with Carl Icahn) infusion into a company to promote change against management directives that he perceives as detrimental to shareholders.
Jana Partners utilizes a risk arbitrage strategy, investing in long and short equity as well as market neutral ventures or opportunities. Before committing its funds to investment, Jana Partners conducts an in-depth in-house research, which Mr. Rosenstein perfected while at Reatta Securities where a private equity investment was long term and illiquid , to help analyze the equity markets as it plans to venture and assess the risk involved in such investments. Mr. Rosenstein believes that strategically, for Jana Partners, it is prudent to critically assess the level of risk tolerance that has to be adopted before committing their funds.
The current global economic climate has in a significant manner contributed to this refocusing on risk assessment due to the fact that the business milieu continually suffers the risk of default in repayment of loans as well as returns on investments. Jana Partners have in the recent past prominently invested in both growth and value stocks. The risk of both growth and value stocks is further gauged by the reliability of future prospects being foreseeable from thorough analysis performed in the present.
Subsequent to Jana Partners’ commitment to value stocks, it has recently built a 5.5% stake in Marathon Petroleum making it the largest and very vocal shareholder in the company. Its investment of $636 million towards the purchase of more than 19.7 million shares, including options to purchase an additional allotment of 896,000 shares, is premised upon the inducement that the shares are undervalued and hence represent an alluring investment with, given Marathon’s 28% expected EPS growth rate over the next five years, the stocks possibly doubling in value.
To elaborate more their overall investment philosophy, Jana Partners uses a number of indicators which influence their decision making process in picking prospective stocks. In particular, emphasis is laid on P/E Ratios which is analyzed to configure a stock’s price as under- or over-valued. The methodology is simple: if the P/E ratio of a company is comparatively higher than that of other companies in the same industry, then the company’s stock price is ruled as overvalued, i.e. the P/E of a company ratio is inversely related to its stock value. Jana Partners prudently, as with its investment in Marathon, prefers to invest in the undervalued stocks.
Another tool employed by Jana Partners is the High Free Cash Flow and (often corresponding) Dividend Yield measure. The former is defined as the difference between operating cash flow and the capital expenditure of a given company, and the latter simply refers to a current high yield that they believe is sustainable. This has helped Jana Partners identify and invest in firms such as El Paso that increase shareholder value (through appreciation and dividends), and are able to meet their debt obligations without imminent risk of default.
Limited Earning Risk Strategy is also a considerable factor in determining a stock’s potential investment merit. Jana Partners tendency to invest in established large cap growth companies without a dividend history, such as Google Inc., allows them to reduce the risk of default on returns from investment. Given the unpredictable and shifting economic climate, Jana Partners, has been cautious by investing in too-big-too fail technology companies such as Apple and Google (and even commodities such as the SPRD Gold trust).
Further adapting itself to the present day financial markets and its latent systemic risks, Jana Partners has added another element of risk control as a prudent step in reaction to the current global economic climate: fixed income. A case in point is investing in government treasury bonds which have a low risk level but which will yield low yet consistent returns through long term maturity and hedge against stock market volatility.
“Guess what? They [private equity firms holding 500 billion in cash] are going to find a way to spend it, not give it back to their investors.”
“There’s about $3 trillion of cash on corporate balance sheets, which represents about 12% of company assets – this is unsustainable.”