PR OFILE
Google to outpace consensus earnings estimates, partly due to its strong presence in mobile media where Facebook was doing well. Google’s earnings release saw the stock gap up 15% and Jabre ended up making 20 times his money on the call options he had bought. Jabre admits that such options often expire worthless, but he makes enough from successes to outweigh the costs.
Cheap equity options are Jabre’s main use of convertibles. While he does clip some coupons, he employs convertibles mainly to express directional views on underlying equities. Here Jabre admits that some of the “easy pickings” are now gone, but he
can still extract cheap options from convertibles. Winners last year included Macau casinos and software companies. The converts team includes Peter Hale, former MD of J.P. Morgan’s Asia-Pacific convertibles business.
Conditionally bullish Jabre made most of his 2013 returns from Japan and Europe. “They were both very over-sold markets where banks and industrials were particularly cheap,” he reflects, and “a lot of new money flowed in from a very low base.” Jabre also made money in the USA, but in this more efficient and widely owned equity market less alpha was generated.
Pyschoanalytical event investing
Event-driven PM Ziad Tabet takes some comfort in having lost less than equity indices in 2011, but admits that he was temporarily wrong-footed in 2012 by changing regulations in Canada. Both years’ limited losses served to enhance clients’ confidence in his risk management, he says. Returns of 14.32% last year were towards the top end of the peer group. In addition to running his dedicated event-driven fund, Tabet has been running a 20% sub-allocation from the multi- strategy fund. Tabet says that Jabre is is very good at giving the portfolio manager full remit over their portfolios.
Tabet’s background in private equity, including at Texas Pacific Group, taught him to “dissect companies down to the smallest division,” although he thinks bottom-up investors can sometimes ignore big-picture macro and momentum factors that are, he insists, important – especially in managing the strategy’s tail risk. Tabet is perhaps most proud of his resilience in 2008, which he reckons was the worst ever year for deal breaks, with 30% of mergers falling through. Although Tabet invested in around 100 deals he only had two or three breaks in ‘08. Tabet says “most of our ‘08 deals were strategic ones, where post-deal synergies were higher, creating potential for big fundamental re-ratings.” Consequently, Tabet’s hit ratio in ‘08 was even better than it was in either ‘07 or ‘09! The Anheuser-Busch/InBev deal was one example he recalls that was very unlikely to be derailed by markets or financing difficulties.
Tabet believes that in the current environment fundamental analysis or deal analysis alone is not enough to post consistent performance. What differentiates Tabet from some other event- driven investors is his exploration of the human dimension and the proprietary analysis of deal synergies. Tabet likes to home in on what motivates the captains of industry at various stages of their careers and what are the financial but also personal drivers of the transactions they undertake. Some of them, he finds, have become more interested in travel, trophy wives or philanthropy than in running the day to day of their operations, while others are consumed by hubris. Tabet contends that deals like ABN Amro could have and probably should have been pulled if it were not for the human element. Similarly he considers that Rupert Murdoch’s move on BSkyB was perfectly timed from a financial, operational but also personal perspective. It is also that human element that forbade Emmerson from bumping significantly their offer on Celesio. Tabet therefore values and places a big importance on the personal factors driving the decision-makers to act. He does so by understanding how they think and where they are in their professional but also personal life. He admits he cannot always get access directly to chiefs, and in fact would not always want direct access for fear of becoming wall-crossed and restricted from trading. As well as takeovers and mergers, Tabet invests in corporate events of transformational nature, such as restructurings and relative value trades, with special situations making a big contribution to 2013 returns.
Jabre remained bullish when we met in January and builds his case based on four key forces. First he says, “the momentum of money flow” is hard to stop with $300 billion going into stocks last year. Moreover, Jabre thinks that many asset allocators are still underweight of stocks. Secondly, Jabre foresees the US economy beating consensus growth forecasts, partly due to the diminishing effect of higher taxes, combined with the benign backdrop of low interest rates and low credit spreads. The third fillip for equities Jabre has identified is accommodative monetary policy. “Japan is now exporting deflation, by selling at lower prices thanks to a weaker yen,” he says.
Meanwhile Europe is “the only continent that has not printed money” – but Jabre thinks the ECB will have to do so to stimulate the economy, which might grow as fast as 1.2% rather than the consensus 0.8%. Another positive for markets could be lower oil prices, where Jabre sees new supplies coming on stream from Libya, Iraq and Iran, interacting with greater US self-sufficiency as US imports are down by four million barrels a day. Instinctively Jabre argues “the market is now clean,” as “we got rid of anything that was not safe.” He sees “no market imbalances” at bank, individual or corporate levels and expects excess cash to be put to work.
This analysis is expected to sustain some of the highest equity weightings across several funds. Jabre still thinks equities are the best way to play a strengthening global economy, although he may also begin to deploy more capital in event-driven. However, the sanguine posture is tempered with a view that companies need to grow into their current valuations. Jabre admits that the past 20 months has been “driven mainly by multiple expansion,” and thinks earnings need to catch up with current valuations, rather like 2009. But he thinks this sequence of events is normal – valuations expand first and earnings come later.
Additionally, Jabre is not buying into every equity market. He likes the US, Europe and Japan but remains wary of many emerging markets, saying they are “a very scary environment” with six countries – Indonesia, South Africa, Brazil, Turkey, Russia and India – all suffering near-zero growth with high single-digit inflation. For Jabre this is the worst scenario. Yet he is prepared to take a counter-trend view in some emerging markets. Recently he has started accumulating some Hong Kong-listed China stocks, where sentiment is very negative. Jabre sees stable growth, low inflation and encouraging reforms making a constructive picture for China.
Formative influences Jabre’s education by Jesuits in Lebanon was “an important influence, teaching me a rigorous way of
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