Paulson Not Alone as ‘Mistake’ on Sino-Forest Hurts Davis Funds
John Paulson isn’t the only prominent fund manager who has been hurt by the plunge in Sino- Forest Corp. shares.
Christopher Davis, a value investor who researches stocks and holds them for long periods, owned 13 percent of the Chinese tree-plantation owner as of April 29 through his Tucson, Arizona-based Davis Selected Advisers LP. The value of that stake has since dropped 92 percent, or more than $600 million, as Muddy Waters LLC, an investment firm run by Carson Block, said Sino-Forest overstated its timber holdings.
“Davis generally has a good long-term record but that doesn’t mean they are immune to mistakes,” Russel Kinnel, director of mutual fund research at Chicago-based Morningstar Inc. (MORN), said in a telephone interview. “This may be another of their mistakes.”
Davis New York Venture Fund, the firm’s flagship mutual fund with assets of $30.8 billion, struggled in the past five years as bets on financial companies including insurer American International Group Inc. (AIG) backfired, while beating the majority of its peers over the longer term. Davis’s firm, with $71 billion in assets, held 30.9 million Sino-Forest shares as of April 29, making it the second-biggest owner before Paulson & Co. dumped its stake, according to data compiled by Bloomberg.
Laura Berger, a spokeswoman for Davis, said the firm doesn’t comment on individual holdings.
Allen Chan, chief executive officer at Hong Kong-based Sino-Forest, has denied the allegations from Muddy Waters, which had bet against the stock. Chan established an independent committee to investigate and appointed PricewaterhouseCoopers LLP to assist.
Sino-Forest dropped 74 cents, or 27 percent, to C$1.99, yesterday on the Toronto Stock Exchange. The stock closed at C$18.21 on June 1, the day before Muddy Waters published its report.
“When you run a diversified portfolio there are going to be individual stocks that blow up from time to time,” Ronald Sugameli, chief investment officer at Weston Financial Group Inc. in Wellesley, Massachusetts, said in a telephone interview. Sugameli said his firm, which manages $1.7 billion, doesn’t plan to dump its shares in Davis New York Venture, which is co- managed by Christopher Davis and Kenneth Feinberg.
Paulson, best known for his lucrative bet against subprime mortgages during the global credit crisis, held 34.7 million shares of Sino-Forest as of April 29, according to a company filing that cited information available on public records. Paulson & Co., based in New York, had disposed of the entire stake as of June 17, according to a filing this week.
Paulson’s stake would have been worth C$815.8 million ($838.6 million) at the end of April. The value declined to C$110.7 million ($113.8 million) by the end of last week, though Paulson probably reduced losses by selling some shares earlier, according to a letter sent to clients June 3. Paulson’s largest fund lost about 13 percent in the first half of June, bringing declines this year to about 20 percent, as bets on Sino-Forest and U.S. bank stocks soured, two investors said last week.
Paulson declined to comment, said Chris Gillick, a spokesman for the firm, in an e-mail.
Davis’s Sino-Forest shares were valued at C$726 million ($746.3 million) at the end of April, the latest date for which his holdings were reported. Yesterday they traded at about C$61.5 million ($63.2 million).
Most of the shares were owned by Davis New York Venture Fund, according to data compiled by Bloomberg. Sino-Forest was the fund’s 25th-largest holding as of Jan. 31, when it held 21 million shares.
Davis Selected Advisers was founded in 1969 by Shelby M.C. Davis, whose father, Shelby Cullom Davis, turned an investment of $100,000 in the late 1940s into more than $800 million by the end of his career in the early 1990s, according to the firm’s website.
Christopher Davis, 45, who followed his father and grandfather into the money-management business, joined the firm in 1989. He is currently chairman.
Davis and Feinberg serve as portfolio managers on the $7.1 billion Selected American Shares Fund and the $1.2 billion Clipper Fund. Selected American Shares trailed 74 percent of rivals over the past five years, according to Morningstar data, while Clipper underperformed 94 percent of peers.
“We seek to purchase durable businesses at value prices and hold them for the long term,” the firm said on its website. Davis New York Venture Fund has a turnover ratio, the frequency with which the portfolio changes, of 13 percent, compared with an average of 90 percent for all U.S. equity funds, Morningstar Inc. data show.
The fund beat 79 percent of rivals that own a blend of large-company growth and value stocks over the past 10 years and 88 percent over 15 years, Morningstar data show. Davis New York Venture lagged behind 77 percent of rivals over the past five years.
Davis and Feinberg, in a 2010 annual review of the fund posted online, said the slump was caused by 2008 investments in a handful of financial stocks, such as New York-based AIG.
“Our loss in AIG was substantial and permanent,” they wrote. AIG was the world’s biggest insurer before it had to be rescued by the U.S. government in September 2008 after credit- default swaps soured.
Davis New York Venture Fund held $1.6 billion of AIG shares as of Jan. 31, 2008, according to regulatory filings. A year later the stake was worth about $41.3 million.
“A lot of bright people saw the financial collapse coming and a lot of bright minds didn’t,” Steven Roge, a portfolio manager with Bohemia, New York-based R.W. Roge & Co. Inc., said in a telephone interview.
Roge, whose firm manages $225 million for clients, said Davis’s managers generally do a good job of evaluating companies.
“They own a lot of the best of breed,” he said.
New York Venture Fund’s top holdings as of Jan. 31 included San Francisco-based Wells Fargo & Co. (WFC) and New York-based American Express Co. (AXP) The fund had 26 percent of its equities in financial companies, Morningstar data show. Financials are the worst performer out of 10 industry group in the Standard & Poor’s 500 Index this year with a decline of 4.9 percent, Bloomberg data show.
Davis New York Venture lost 0.7 percent through June 20, worse than 86 percent of its peers, according to Bloomberg.
Morningstar’s Kinnel said Davis avoided investing in Enron Corp. even as other fund managers plunged in before the Houston- based energy trader collapsed. Enron filed for bankruptcy protection in 2001 after revelations of widespread accounting fraud.
“How much could an investor have known in advance?” Kinnel said of the Sino-Forest troubles. “Some things are very difficult to catch.”
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