In a new filing with the Securities and Exchange Commission, Jeff Ubben‘s ValueAct Capital has disclosed a letter sent to the Lead Director of the application software company Msci Inc (NYSE:MSCI) Rodolphe M. Vallee in which Mr. Ubben expressed his frustration with the board not proceeding with the fund’s request to appoint their representatives. ValueAct has been a long-term shareholder of MSCI, holding 9.31 million shares, which represent 8.3% of the company’s common stock.
ValueAct is a large hedge fund with more than $14 billion in equity portfolio. It was founded by a former Managing Partner of Richard Blum’s Blum Capital Partners Jeff Ubben, who for more than a decade has been the Chief Executive Officer and Chief Investment Officer of the company. ValueAct invests in companies that have high-quality businesses and usually pursues representation on the companies’ boards. Overall, over the last years, ValueAct has appointed his representatives on the board of 30 companies, including Microsoft Corporation (NASDAQ:MSFT) and Valeant Pharmaceuticals Intl Inc (NYSE:VRX) among others.
The fund usually manages a concentrated equity portfolio with around 15 positions and has a slight focus towards the technology sector. The average holding period for each position is approximately three years. This strategy has proved to be effective so far, as we can observe from ValueAct’s latest moves. Of late, the investor has been trimming its position in another application software company (where it also has a representative on the board), Adobe Systems Incorporated (NASDAQ:ADBE), while the stock more than doubled in value since it was added to ValueAct’s 13F portfolio. In addition, a couple of months ago, the fund sold some 3.39 million shares of Rockwell Collins, Inc. (NYSE:COL), trimming its stake to 7.80 million shares, equal to 5.8% of the company; Rockwell is another long-term investment, whose stock gained around 80% since ValueAct initiated its stake.
Msci Inc (NYSE:MSCI) has been in ValueAct’s equity portfolio for more than two years and the fund has raised its stake from 6.16 million shares it held initially, in October 2012. Meanwhile, the stock gained around 32% since then, as the $5.3 billion company reported solid revenue and profit growth in the last couple of years.
In his letter, Mr. Ubben said that ValueAct has first asked for representatives on Msci Inc (NYSE:MSCI)’s board in August 2014, on the back of several unanswered questions regarding the company’s strategy and organization. The investor mentioned that the company’s Risk Management Analytics and Portfolio Management Analytics segments have a great potential and strong competitive positions, but they have not show a significant market share growth.
“And as the index business continues to grow at a double digit rate, with its attendant high incremental margin, we cannot understand where all the money is going?” the letter added.
Mr. Ubben also pointed out that Msci Inc (NYSE:MSCI)’s track record of value creating in the last couple of years has significantly underperformed in comparison with the company’s peers. Overall, the investors’ questions have not been answered clearly neither in the publicly disclosed information, not in the discussions with the managemen, which made the investor consider seeking representation on the company’s board.
However, the manager of ValueAct expressed his frustration with how the board handled the request for a board seat, saying that “we expected more effort and a more thorough process on the part of the Nominating and Governance Committee specifically and the MSCI board generally to educate itself on the ValueAct Capital governance track record and the support we have from shareholders, directors, and executives who have seen our work firsthand over the years.”
The investor added that he is concerned about the board’s independence from the company’s management and suggested the board to engage in discussions with the shareholders directly, without management or advisors.
Overall, being one of the top companies in the application software industry, Msci Inc (NYSE:MSCI) has not been overlooked by major investors. In fact, among the funds that we track at Insider Monkey, 16 disclosed long positions in the company in the last round of 13F filings, while the aggregate value of their stakes amounts to $768.4 million. Aside from ValueAct, another large investor in MSCI is David Blood and Al Gore’s Generation Investment Management, which held 9.85 million shares as of the end of September 2014.
Msci Inc (NYSE:MSCI) has not yet issued a response to ValueAct’s letter, but we should keep an eye on this story as its develops.
Disclosure: none
