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The 13F filings kept coming right up until the Securities and Exchange Commission closed for the day on Friday afternoon. I worked my way through a bunch of them over the weekend in search of compelling ideas and conclusions. And as usual, I discovered a few.
My first observation is one I have made before and will make again this quarter. There is an enormous amount of money being paid to manage accounts in what is known as a "closet indexing" style. I cannot find any academic evidence that tweaking the index has ever worked well enough to offset the increased fees of active management.
If you are not going to do something radically different than the indexes, why pay up? Just buy the cheapest index fund and read a book or go to a ball game. Better yet, put half your money in the cheapest index fund you can find and hold the other half in cash to buy the cheapest Russell 2000 Index fund when the market inevitably hits a bad spell.
If your portfolio looks a lot like the S&P 500, then you will perform in line with the S&P 500 minus fees and mistakes. If what you won includes companies like Amazon (AMZN) - Get Report , Alphabet (GOOGL) - Get Report , Facebook (FB) - Get Report and JPMorgan (JPM) - Get Report , or other significant index components, you are probably going to earn indexlike returns over time. GOOGL and FB are holdings of Action Alerts PLUS.
Since I have little-to-no interest in owning the index, especially at current levels, I search through all the quarterly filings to find those investors that are doing something different. I am searching for those who are buying off the beaten track and use more of a private equity mindset than an index-tweaking mindset.
Over the past years, I have found one class of investor that uses a private equity mindset. That's because they are private equity companies. I have stolen some pretty good ideas from the large private equity 13F filings in recent years, and they are also an excellent source of information on segments of the market and individual stocks that might be best avoided now.
So far this quarter, only Carlyle Group (CG) - Get Report has filed. It was not really active, but paying attention when it makes any move is a good idea. Its public portfolios, as revealed in 13F filings, have been soundly beaten the market over the past several years. Its average holding period is about three years, and it doesn't own a lot of companies. Right now it has just 16 names on its 13F Filing.
They added to their largest holding in the quarter, buying more shares of USA Compression Partners (USAC) - Get Report . The partnership provides compression equipment that allows natural gas to flow through the pipeline systems. Carlyle owns 47% of the company and another private equity firm, Riverstone Holdings, owns about 42%. The shares yield about 11% now, so it might be a strong addition to an income portfolio.
Carlyle made a new purchase of 2.4 million shares of Rice Energy (RICE) . Rice has acreage in the Marcellus, Utica and Upper Devonian Shale. The company also provides water services to drillers in the region and is involved in gathering and compression of natural gas and natural gas liquids. Given that the stock is trading near the lows of the fourth quarter, those with interest in owning natural gas stocks can get involved in the stock for the same or less than Carlyle paid for its position.
The private equity firm also made a new purchase of 1.4 million shares of Centennial Resource Development (CDEV) - Get Report . The CEO is Mark Papa, who grew EOG Resources (EOG) - Get Report into the largest oil and gas producer in the continental United States. When oil prices fell, he came out of retirement, advising Riverstone where to find bargains in oil and gas. They did a SPAC deal for him, and he used the money raised to buy properties in the Permian Basin and created Centennial. It currently has 77,000 net acres and 1,950+ drilling locations in the region. Papa told Forbes recently that he sees oil demand growing faster than many think and expects strong results from his new venture. Given his previous success in oil and gas, I wouldn't bet against him. If you believe he is right about energy demand, you should probably join Carlyle and bet with him.
I have started researching the 13F filings of large private equity firms, and the initial data shows that most of them, including Carlyle, do not just beat the market. They crush it. Another conclusion from my initial data collection is that these firms achieve their success, in part, because they tend to hold their positions longer than most investors.
Private equity firms should be on your must-read list of 13F Filings every quarter.
At the time of publication, Melvin had no positions in the stocks mentioned.
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