Eighteen years ago, Professor Emeritus of Finance at Yale University, Roger Ibbotson, founded its investment management firm called Zebra Capital Management. The fund is known for relying on Professor Ibbotson’ original research, which, among many other areas, includes studies on uncommon behavioral finance derived investment approach. In simple terms, behavioral finance introduces various psychology-based theories to explain stock market deviations, trying to determine what makes people more inclined to particular financial choices. The main goal is to prevent emotion-driven risks. Professor Ibbotson, who is the current Chairman and CIO of the fund, is famous for many publications, but especially for a book called Stocks, Bonds, Bills and Inflation: the Past and the Future, which he wrote together with Rex Sinquefield. The named book is now considered as a standard reference for those who seek valuable information on capital market returns.
Aside from his vast experience in financial research and publishing, professor Ibbotson also has ample operational and direct trading experience. Previously, he was Chairman of Ibbotson Associates and Ibbotson Associates Advisors up till they were acquired by Morningstar Inc (2006). Then, he has taken upon the role of an advisor at Morningstar Inc., where he served through 2016. Throughout his long and successful career, Professor Ibbotson won many accolades and recognition, such as the Harry M.Markovitz Award for the best paper in the Journal Investment Management (2015), and eight Graham and Dodd Scroll Awards. Professor Ibbotson earned his B.S. in Mathematics from Purdue University, his M.B.A. from Indiana University and his Ph.D. from the University of Chicago.
Zebra Capital Management grew big over time, and at the end of 2016, it held around $823 million in regulatory assets under management, while its affiliate, Zebra Advisors, held $1.22 billion. The fund operates through two main strategies – Beta Neutral Strategies and Long Only Strategies. Under Beta Neutral Strategies, the fund runs Zebra Global Equity Fund and Zebra Global Equity Advantage, whereas under Long Only Strategies it manages Zebra Japanese Equity All Cap, Zebra US Micro Cap Equity and Zebra US Small Cap Equity. Its investment philosophy is centered around looking for less popular stocks that possess strong essential features. Minimizing risks, not provoking extra volatility, and generating high returns – are the main traits of Zebra Capital Management’s strategy. Let’s take a look at some of the fund’s return figures to see what had this strategy brought back.
Since its inception in June 2010, through December 2016, its Zebra Global Equity Fund LP had an annualized return of 6.49%. It brought back an impressive 9.52% in 2013, and a solid 6.80% in the following year. In 2015 it returned even better 10.47%, while in 2016 it had a loss of 0.10%. The unfavorable trend continued and Zebra Global Equity Fund LP lost 2.93% in 2017, and 6.21% in 2018 (through October). It reported a total return of 37.70%, for a compound annual return of 3.91%, whereas its worst drawdown stood at 10.68. Its Zebra Global Equity Advantage Fund achieved an annualized return of 10.04% in 2015 (since its inception in June, through December), while in the following year it lost 2.65%. Since its launching in June 2010 through the end of 2016, its Zebra Small Cap Equity Fund delivered an annualized return 14.99%.
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At the end of December 2018, Zebra Capital Management’s portfolio was valued at $161.9 million, which represented a 25.89% decrease from the previous quarter when its equity portfolio carried a value of $218.45 million. Since the fund doesn’t like to invest in most attractive stocks, it comes as no surprise to see that among its top positions there wasn’t a single stock of those 30 Most Popular Stocks Among Hedge Funds. Nonetheless, its equity portfolio was quite diversified (counting more than 350 long holdings) and the fund made some interesting changes to it during the fourth quarter of 2018. You can read more about it on the next page.
The most valuable position in Zebra Capital Management’s portfolio at the end of Q4 2018 was the one in Deluxe Corporation (NYSE:DLX), a company that provides professional services and a plethora of products to small enterprises in order to help them improve their businesses. The company has a market cap of $2.02 billion, and it is trading at a price-to-earnings ratio of 14.43. At the end of the fourth quarter, Zebra Capital Management’s position in the company counted 35,619 shares, with a value of $1.37 million, occupying 0.84% of its diversified equity portfolio. In its last financial report for the fourth quarter of 2018, Deluxe Corp reported revenue of $524.7 million, compared to revenue of $494.9 million for the same quarter in 2017; it also disclosed adjusted earnings per share of $1.54, versus EPS of $1.40 in the corresponding quarter of 2017. Over the last six months, the company’s stock lost 21.9%, and on March 1st it had a closing price of $46.21. Zebra Capital Management had its second largest position at the end of December 2018 in Universal Forest Products, Inc. (NASDAQ:UFPI), an American company that produces wood and wood-alternative products across North America, Europe, Australia, and Asia. The fund’s position in the company consisted of 52,305 shares, which carried a value of $1.36 million. Universal Forest Products has a market cap of $1.89 billion, trading at a price-to-earnings ratio of 14.71. On March 1st, its stock had a closing price of $31.10.
Among 52 new positions Zebra Capital Management had attained in the fourth quarter of 2018, the largest one was in Entegris Inc (NASDAQ:ENTG), as it was worth $1.02 million, on the account of 36,572 shares. Entegris is a producer of various products and systems, which have a role of cleaning and preserving essential materials that are used in the semiconductor device manufacturing process. For the fourth quarter of 2018, Entegris disclosed revenue of $401.6 million, which represented an increase of 15% on a year to year basis, and non-GAAP diluted EPS of $0.47, versus non-GAAP diluted EPS of $0.42 in the Q4 of 2017. Year-to-date, the company’s stock gained 22.2%, and on March 1st it had a closing price of $36.22. Entegris carries a market value of $4.89 billion, trading at a price-to-earnings ratio of 21.42. Recently, Seaport Global Securities downgraded its rating of the stock to ‘Neutral’ from ‘Buy’, and a month earlier Loop Capital set a price target of $51.00 with ‘Buy’ rating on it. The second largest position Zebra Capital Management initiated during the fourth quarter of 2018 was in National General Holdings Corp (NASDAQ:NGHC). The fund obtained 36,417 shares National General Holdings’ shares, which were worth around $882,000. This is a specialty personal lines insurance holding company with a market cap of $2.94 billion. Over the last 12 months, the company’s stock gained 6.9% and on March 1st it had a closing price of $26.05. A week ago, JMP Securities restated its ‘Buy’ rating on the stock with a price target of $33.00, and Goldman Sachs Group proposed ‘Neutral’ rating with a price target of $27.00.
During the fourth quarter of 2018, Zebra Capital Management dumped 89 stocks from its diversified equity portfolio. Among those positions that were completely sold out, the biggest ones were in Maxar Technologies Inc (NYSE:MAXR), Starwood Property Trust, Inc. (NYSE:STWD), and Patterson Companies, Inc. (NASDAQ:PDCO). The fund previously held 27,499 Maxar Technologies’ shares, which carried a value of $909,000, and 39,565 Starwood Property Trust’s shares, which were worth around $851,000. In Patterson Companies, Zebra Capital Management held a stake worth $688,000, on the account of 28,159 shares outstanding.
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This article was originally published at Insider Monkey.
