Kahn Brothers Advisors LLC, is a New York-based money manager and Registered Investment Advisor. Following the passing of the fund’s co-founder and erstwhile chairman, Irving Kahn (pictured), in February this year the fund is now led by his sons Alan Kahn and Thomas Kahn. Irving Kahn was a disciple of legendary value investor Benjamin Graham, prior to his death at age 105 he was the oldest active money manager on Wall Street. Kahn Brothers mainly invests in undervalued stocks, which are trading relatively at a discount compared to their peers and for stock selection they employ a bottom-up approach. The fund recently filed its 13F for the April-June quarter, revealing that its equity portfolio was worth $593.04 million at the end of the period. Finance and healthcare led the pack among sectors in Kahn Brothers’ equity portfolio, with 31% and 30% of the capital tied up in stocks from these two sectors respectively. According to the filing, Kahn Brothers reduced its holdings in 24 stocks, sold out its entire stakes in two companies and increased its exposure in eight stocks during the second-quarter and at the end of that period the top 10 holdings of the fund accounted for 77.11% of its equity portfolio. The largest bullish moves that Kahn Brothers made during the second quarter were in BlackBerry Ltd (NASDAQ:BBRY) and MBIA Inc. (NYSE:MBI), while in Old Republic International Corporation (NYSE:ORI) the fund reduced its holding the most. To generate returns similar to hedge funds like Kahn Brothers, one not only needs to identify their biggest moves, but also analyze them and that’s what we are going to do in this article.
But why do we follow the moves that hedge funds disclose in their 13F filings? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years. However, that doesn’t mean that we should completely neglect the hedge funds’ activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. Moreover, in our back-tests covering the 1999-2012 period, hedge funds’ top small cap stocks edged the S&P 500 index by double digits per year. The 15 most popular small cap stock picks among hedge funds returned around 123% in the last three years (since August 2012) and managed to beat the S&P 500 ETF (SPY) by around 65 percentage points (read more details here).
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At the end of the second-quarter, Kahn Brothers increased their stake in finance insurance company MBIA Inc. (NYSE:MBI) by 76%, or almost 1.5 million shares during the second quarter. At the end of June, the fund held 3.46 million shares of the company worth $20.8 million. After remaining relatively flat during the quarter, the stock of MBIA Inc. (NYSE:MBI) nosedived at the end of June and ended the quarter 35.4% in red. The main reason for such a massive decline was the company’s exposure to Puerto Rico, whose bonds the company has insured, and which is one the verge of bankruptcy. Analysts feared the outcome if Puerto Rico defaults on the $10 billion worth of bonds that National Public Finance Guarantee Corp., a subsidiary of MBIA Inc. (NYSE:MBI), has insured. While several analysts downgraded the stock on the back of the Puerto Rico news, on July 23, BTIG upgraded MBIA Inc. (NYSE:MBI) to ‘Buy’ from ‘Neutral’ with a price target of $10 arguing that “[…] at less than 23% of the company’s [adjusted book value], MBI’s share price already reflects a severely dire outcome in Puerto Rico such that it has positive optionality to a somewhat more favorable result.’ On July 29, the company announced that its Board of Directors has authorized the company and its subsidiaries to repurchase up to $100 million worth of stock after terminating the prior share repurchase program earlier. During the first-quarter of 2015, Chuck Royce’s Royce & Associates increased its stake in the company by 7%, owning over 5 million shares at the end of March.
