Davis Fundhttps://www.bloomberg.com/news/2011-06-22/paulson-is-not-alone-as-sino-forest-mistake-hits-31-billion-davis-fund.html?cmpid=yhoo
Paulson Is Not Alone as Sino-Forest ‘Mistake’ Hits $31 Billion Davis Fund
ByCharles Stein-Jun 22, 2011 11:19 AM MT
John Paulson isn’t the onlyprominent fund manager who has been hurt by the plunge in Sino-Forest Corp. shares.
Christopher Davis, a value investor who researches stocksand holds them for long periods, owned 13 percent of the Chinesetree-plantation owner as of April 29 through his Tucson,Arizona-based Davis Selected Advisers LP. The value of thatstake has since dropped 92 percent, or more than $600 million,as Muddy Waters LLC, an investment firm run by Carson Block,said Sino-Forest overstated its timber holdings.
“Davis generally has a good long-term record but thatdoesn’t mean they are immune to mistakes,” Russel Kinnel,director of mutual fund research at Chicago-based MorningstarInc. (MORN), said in a telephone interview. “This may be another oftheir mistakes.”
Davis New York Venture Fund, the firm’s flagship mutualfund with assets of $30.8 billion, struggled in the past fiveyears as bets on financial companies including insurer AmericanInternational Group Inc. (AIG) backfired, while beating the majorityof its peers over the longer term. Davis’s firm, with $71billion in assets, held 30.9 million Sino-Forest shares as ofApril 29, making it the second-biggest owner before Paulson &Co. dumped its stake, according to data compiled by Bloomberg.
Laura Berger, a spokeswoman for Davis, said the firmdoesn’t comment on individual holdings.
Allen Chan, chief executive officer at Hong Kong-basedSino-Forest, has denied the allegations from Muddy Waters, whichhad bet against the stock. Chan established an independentcommittee to investigate and appointed PricewaterhouseCoopersLLP to assist.
Stock Blow-Ups
Sino-Forest dropped 74 cents, or 27 percent, to C$1.99,yesterday on the Toronto Stock Exchange. The stock closed atC$18.21 on June 1, the day before Muddy Waters published itsreport.
“When you run a diversified portfolio there are going tobe individual stocks that blow up from time to time,” Ronald Sugameli, chief investment officer at Weston Financial GroupInc. in Wellesley, Massachusetts, said in a telephone interview.Sugameli said his firm, which manages $1.7 billion, doesn’t planto dump its shares in Davis New York Venture, which is co-managed by Christopher Davis and Kenneth Feinberg.
Paulson, best known for his lucrative bet against subprimemortgages during the global credit crisis, held 34.7 millionshares of Sino-Forest as of April 29, according to a companyfiling that cited information available on public records.Paulson & Co., based in New York, had disposed of the entirestake as of June 17, according to a filing this week.
Paulson’s Losses
Paulson’s stake would have been worth C$815.8 million($838.6 million) at the end of April. The value declined toC$110.7 million ($113.8 million) by the end of last week, thoughPaulson probably reduced losses by selling some shares earlier,according to a letter sent to clients June 3. Paulson’s largestfund lost about 13 percent in the first half of June, bringingdeclines this year to about 20 percent, as bets on Sino-Forestand U.S. bank stocks soured, two investors said last week.
Paulson declined to comment, said Chris Gillick, aspokesman for the firm, in an e-mail.
Davis’s Sino-Forest shares were valued at C$726 million($746.3 million) at the end of April, the latest date for whichhis holdings were reported. Yesterday they traded at aboutC$61.5 million ($63.2 million).
Most of the shares were owned by Davis New York VentureFund, according to data compiled by Bloomberg. Sino-Forest wasthe fund’s 25th-largest holding as of Jan. 31, when it held 21million shares.
Generational Hand-Off
Davis Selected Advisers was founded in 1969 by Shelby M.C.Davis, whose father, Shelby Cullom Davis, turned an investmentof $100,000 in the late 1940s into more than $800 million by theend of his career in the early 1990s, according to the firm’swebsite.
Christopher Davis, 45, who followed his father andgrandfather into the money-management business, joined the firmin 1989. He is currently chairman.
Davis and Feinberg serve as portfolio managers on the $7.1billion Selected American Shares Fund and the $1.2 billionClipper Fund. Selected American Shares trailed 74 percent ofrivals over the past five years, according to Morningstar data,while Clipper underperformed 94 percent of peers.
‘Durable Businesses’
“We seek to purchase durable businesses at value pricesand hold them for the long term,” the firm said on its website.Davis New York Venture Fund has a turnover ratio, the frequencywith which the portfolio changes, of 13 percent, compared withan average of 90 percent for all U.S. equity funds, MorningstarInc. data show.
The fund beat 79 percent of rivals that own a blend oflarge-company growth and value stocks over the past 10 years and88 percent over 15 years, Morningstar data show. Davis New YorkVenture lagged behind 77 percent of rivals over the past fiveyears.
Davis and Feinberg, in a 2010 annual review of the fundposted online, said the slump was caused by 2008 investments ina handful of financial stocks, such as New York-based AIG.
“Our loss in AIG was substantial and permanent,” theywrote. AIG was the world’s biggest insurer before it had to berescued by the U.S. government in September 2008 after credit-default swaps soured.
Davis New York Venture Fund held $1.6 billion of AIG sharesas of Jan. 31, 2008, according to regulatory filings. A yearlater the stake was worth about $41.3 million.
Financial Slump
“A lot of bright people saw the financial collapse comingand a lot of bright minds didn’t,” Steven Roge, a portfoliomanager with Bohemia, New York-based R.W. Roge & Co. Inc., saidin a telephone interview.
Roge, whose firm manages $225 million for clients, saidDavis’s managers generally do a good job of evaluatingcompanies.
“They own a lot of the best of breed,” he said.
New York Venture Fund’s top holdings as of Jan. 31 includedSan Francisco-based Wells Fargo & Co. (WFC) and New York-basedAmerican Express Co. (AXP) The fund had 26 percent of its equities infinancial companies, Morningstar data show. Financials are theworst performer out of 10 industry group in the Standard &Poor’s 500 Index this year with a decline of 4.9 percent,Bloomberg data show.
Davis New York Venture lost 0.7 percent through June 20,worse than 86 percent of its peers, according to Bloomberg.
Morningstar’s Kinnel said Davis avoided investing in EnronCorp. even as other fund managers plunged in before the Houston-based energy trader collapsed. Enron filed for bankruptcyprotection in 2001 after revelations of widespread accountingfraud.
“How much could an investor have known in advance?”Kinnel said of the Sino-Forest troubles. “Some things are verydifficult to catch.”