If you’re watching the spat over Dell Inc. (DELL) and trying to guess the best way to play the prospects that founder Michael Dell and his private equity partners will be able to push forward with their $13.65-a-share buyout of the computer company, here’s one option that you may not have considered yet.
Pzena Investment Management (PZN) is a value investment firm that has been among the leaders of the anti-LBO campaign, most recently joined by T. Rowe Price Group (TROW) and numbering several other large asset management firms. If they lose the battle, they probably won’t lose money: analysts who track public filings by asset management firms like Pzena have put the cost basis for their position in Dell at around $12.34 a share. So, even if the deal goes through, it’s unlikely to trigger a mass exodus on the part of investors in Pzena’s funds.
And if Pzena is seen as a leader in halting the transaction, that’s going to be good new in the short-term in the form of publicity for the firm’s mutual funds and Rich Pzena’s activist stance. The longer-term outlook remains uncertain, but several convincing arguments have been made that the true value of Dell’s assets and businesses probably exceeds the level ascribed to them in the buyout offer. If Pzena and the other activists succeed in extracting a significantly richer buyout offer, that’s a win on both the PR front and in terms of investment returns.
You could play this scenario directly, by buying Dell shares. But it’s hard to see why anyone who isn’t a professional trader would risk doing so as long as they are trading above the existing buyout offer price. But while Dell’s gains have been steady and significant, those at Pzena have been more volatile. True, the stock has handily outperformed the S&P 500 this year, and its percentage return so far in 2013 is nearly double that of T. Rowe Price, for instance.
But Pzena offers a purer play on what is happening in the world of asset management this year: a dramatic turnaround in sentiment with respect to actively-managed mutual funds. Last year, as chronicled by Lipper and others that monitor fund flows, it was ETFs that dominated the landscape as investors favored highly liquid and passive funds that they could exit quickly. This year, that pattern has changed, and fund flows in the first four weeks of the year hit a 12-year record.
There are myriad ways to play this trend, as the number of investment management companies that are publicly traded edges higher. But Pzena has generally managed to post higher operating margins and pretax margins than the industry as a whole, by some calculations, and it trades at a lower multiple of forward earnings than some of its larger peers, such as T. Rowe Price.