The JANA Master Fund returned 20.4% in 2013, according to an investor letter reviewed by ValueWalk, as first reported this morning. 

 

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JANA had a good 2013 investing in stocks which offered value due to being beaten down in many cases. Topping their list were Groupon Inc (NASDAQ:GRPN), Transfer Equity and Liberty Ventures.  The five successful activist positions they entered in 2013 included Ashland Inc. (NYSE:ASH), Oil States International, Inc. (NYSE:OIS), Safeway Inc. (NYSE:SWY), QEP Resources Inc (NYSE:QEP) and Outerwall Inc (NASDAQ:OUTR).  On the year the fund made more money on long positions, 39%, than it did on shorts, -8.1%.

JANA: Activist investing most profitable

“Gross and net exposures increased during the (4th) quarter as the portfolio hedges we put in place in the third quarter to protect against a budget and debt ceiling drawdown rolled off, and as we identified and sized up several new long opportunities late in the year,” the letter said, noting a hedging practice for potential debt crisis events. Noting that activism was the most important contributor to performance, the letter noted that the fund’s gross long positions “handily outperformed the S&P 500.”

While JANA had anticipated a positive 2013 for its portfolio strategies, “never did we expect the magnitude of this year’s bull-run.”  Looking to 2014 the letter notes with caution, “While no one can expect that 2014 will deliver the kind of overall equity market returns were seen in 2013, we are nevertheless constructive on the backdrop…”

JANA has positive macroeconomic outlook

Looking at the macroeconomic picture, JANA says, “US GDP will likely continue to expand in 2014 as the economy faces less fiscal headwinds in the coming year; the policy environment remains accommodative at the Fed; the M&A market is off to a good start and perhaps can gather momentum thought the year; managements, boards and institutional shareholders are increasingly responsive to shareholder engagement,” giving a nod to the fund’s activist approach.  “We are seeing early evidence of a potentially more attractive environment for short selling as some momentum names take a breather and over-valued stocks are reacting as we would expect to bad news.”

JANA short positions add to alpha

While the short equity positions the portfolio held detracted from JANA’s performance, it “delivered over 100 (basis points) of alpha, which was our best showing of the year on that important metric, but was not enough to tip the scales in terms of generating alpha for the year,” the letter noted.  “Short performance benefited from a sharp correction in the stock market of a women’s athletic apparel company, one of our largest short positions,” the letter noted, but did not name the stock it had shorted. Speculation is that stock could be Lululemon (LUL).

In terms of new positions, the fund has multiple positions.  These include a stake in Equinix Inc (NASDAQ:EQIX), which the fund says is undervalued due to misplaced pessimism; a stake in Juniper Networks, Inc. (NYSE:JNPR), which is attractive due to JNPR’s “undemanding valuation, tailwind of a favorable telecom spending cycle on required network upgrades, a frustrated shareholder base and potential for a change of perspective and sense of urgency from new CEO Shaygan Kheradpir; an investment in Airbus Group NV (EPA:AIR) coming off its successful investment in Boeing coming of the “market’s misunderstanding of the 787 battery issue; and JANA made an investment in Cameron International Corporation (NYSE:CAM), which JANA invested on after consistent earnings misses that the fund thinks are temporary.

In the letter, JANA joined  the group of hedge funds which are closing funds, below is an excerpt:

Two years ago, we believed JANA Partners and Nirvana were under-capitalized when compared to the value + catalyst and activist opportunity set and the capabilities of our team. We embarked on an effort to broaden and deepen our investor base and are pleased with the number of important new relationships we have developed among a diverse group of institutional partners. Taking into consideration our current capitalization and the pipeline of subscriptions we anticipate in the first quarter, we intend to close the Nirvana funds on or around April 1st of this year. We will provide more information at that time. At some point in the future, depending on the opportunity set, we may close JANA Partners as well.

The JANA Nirvana Fund (“Nirvana”) was launched in April 2007 to co-invest in select ideas of JANA Master Fund (“JANA”) in a more concentrated manner. This update is meant to be read in conjunction with the quarterly letter of JANA, since the two funds have substantial overlap. It should also be read together with the latest monthly Nirvana Risk Report, which provides quantitative data on portfolio exposures. Nirvana generally invests in select ideas of JANA in a more concentrated manner. The number of positions is kept smaller, while the average position size is typically 1.5 times or greater than that of JANA (depending upon liquidity). As always, please note that Nirvana’s more concentrated style may lead to more volatile returns. Furthermore, Nirvana at times may run at higher long and net exposure levels as compared to JANA. The Nirvana strategy begins 2014 with about $3.9 B in capital.

Commentary

Nirvana had a solid Q4 to finish out a strong year. The primary driver of the portfolio for the quarter as well as the entire year was the long book, which continued to be driven by idiosyncratic events from both our value + catalyst and activist names. On a leverage-adjusted basis, the longs generated roughly 1,321 bps of alpha during 2013. Like JANA, the bulk of this attribution came from our value + catalyst positions, which for Nirvana equated to about 105% of our capital on average during the year. Although the short side of the portfolio detracted during the quarter, it delivered over 160 bps of alpha during the period. This was the best quarter of the year with respect to this key metric; however, we fell short in our goal of generating alpha for the entire year. Similar to JANA, gross and net exposures for Nirvana increased during the quarter versus the prior quarter, primarily as a result of the roll-off of hedges that were in place to protect against the budget and debt ceiling drawdown. In accordance with its distinct mandate, we continue to work hard to ensure that Nirvana remains differentiated from JANA at all exposure levels. This is evident by our concentration and exposure metrics. Risk reports for the quarter show that the top 10 long positions averaged about 71% during the fourth quarter. This compares to an average of approximately 50% for JANA during the same period. Please see the preceding JANA letter for further details regarding the quarter, our current investment outlook and some of the key portfolio positions.

Conclusion

JANA and Nirvana together allow us to better capitalize on the current compelling opportunity set in shareholder activism, and we are proud of the Nirvana’s strong growth during 2013. Given our

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