Tontine Asset Management’s Bets on Small-Caps Help Offset Losses

Founded in 1997 by Jeffrey Gendell, Tontine Asset Management was once among the most revered names in the hedge fund Universe. The fund generated an average annual return of 38 percent in the period between 1997, when it was founded, and 2008. It also achieved the feat of doubling investors money within a year during that period not once, but twice – in 2003 and 2005. However, the fortunes of the Connecticut-based asset management firm has been on a downward spiral since the financial crisis of 2008, when most of its funds lost 65% to 75% of their capital. While at one point of time Tontine managed over $10 billion of  investors’ money, its latest regulatory filing shows that the fund’s AUM is now down to under $500 million. The regulatory filings it has submitted in 2016  have also revealed that the fund’s bets on large-cap companies have had disastrous outcomes this year.

Research done by Insider Monkey on Tontine’s 13F holdings in companies worth over $1 billion shows that the 12 long positions held by the fund delivered a weighted average loss of 15.8% during the second quarter of 2016 and have generated a weighted average loss of 35.9% year-to-date. Nevertheless, the funds small-cap picks (companies with market cap of under $1 billion), which constitute a major chunk of its portfolio, have done exceedingly well this year, helping it in offsetting those losses. In this post, we will take a look at Tontine’s top-five equity holdings, which in aggregate amassed 59% of the value of its equity portfolio at the end of second quarter, and will discuss how those stocks have performed this year.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points in our backtests that covered the period between 1999 and 2012 (see the details here).

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#5 Bank of America Corp (NYSE:BAC)

– Shares Owned by Tontine Asset Management (as of June 30): 1.05 Million

– Value of Holding (as of June 30): $13.95 Million

Let’s begin with Tontine Asset Management’s fifth-largest equity holding, Bank of America Corp (NYSE:BAC). During the second quarter, the fund increased its stake in the company by 49%. At the end of June, the banking behemoth announced that its Board of Directors has agreed to hike the quarterly dividend by 50% to $0.075 per share and has also authorized the repurchase of $5 billion in common stock from July 1, 2016 through June 30, 2017. This announcement has helped in driving Bank of America Corp’s stock higher during the quarter, though it still trades down 8.56% year-to-date. According to analysts, the stock can see further upside going forward as it currently trades at a price-to-book multiple of only 0.66 and the company is working hard to its operating efficiency. They also think that the possible rate hike by the Fed is another catalyst that can push the stock higher in the short-term. The number of hedge funds covered by us that were long Bank of America Corp (NYSE:BAC) declined by eight to 102 during the April-June period, while the aggregate value of their holdings in the company came down by 4.3% to $5.28 billion.

#4 LSB Industries, Inc. (NYSE:LXU)

– Shares Owned by Tontine Asset Management (as of June 30): 1.26 Million

– Value of Holding (as of June 30): $15.2 Million

Tontine Asset Management increased its position in LSB Industries, Inc. (NYSE:LXU) by 18% during the second quarter. However, other hedge funds covered by us collectively became less bullish on the company during that time as the ownership of LSB Industries, Inc. among them declined by four to nine and the aggregate value of their holdings in it fell by $5.5 million to $31.68 million. In April last year, the Oklahoma-based manufacturing company reached an agreement with activist investor Starboard Value regarding corporate governance and board composition. However, this agreement didn’t prove fruitful for Starboard Value as LSB Industries, Inc. (NYSE:LXU) reported one bad news after another in the months after it had reached this agreement, causing its stock to fall by more than 75% last year and forcing the famous activist hedge fund to liquidate its entire holdings in the company during the last quarter of 2015. Earlier this year, LSB Industries, Inc. (NYSE:LXU) completed the sale of its climate control business to Sweden’s Nibe Industrier for $364 million.