Rangeley Capital Investment Report September 2012


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Rangeley Capital Partners seeks to generate superior risk-adjusted returns by investing in mispriced securities with limited fundamental downside and corporate events that unlock shareholder value. We believe our greatest investment advantage exists when companies undergo corporate events –driving prices to their true economic value. Relying on detailed primary research,we look for undervalued companies with excellent historic financial performance and demonstrated cash flow. Through our consistent investment process, we have successfully navigated the difficult environment of the last several years, and provided our investors with a cumulative return of 107.8% net of all fees since our partnership began.

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Rangeley Capital Investment Report September 2012

  1. 1. September 2012 Investment Report Strategy OverviewRangeley Capital Partners seeks to generate superior risk-adjusted returns by investing in mispriced securitieswith limited fundamental downside and corporate events that unlock shareholder value.We believe our greatest investment advantage exists when companies undergo corporate events – driving prices totheir true economic value. Relying on detailed primary research, we look for undervalued companies with excellenthistoric financial performance and demonstrated cash flow. Through our consistent investment process, we havesuccessfully navigated the difficult environment of the last several years, and provided our investors with a cumulativereturn of 107.8% net of all fees since our partnership began. Performance StatisticsPerformance Results as of September 30, 2012 Monthly Year to Date Annualized Cumulative Return Return Return ReturnName September 2012 2012 Since 1/1/08 Since 1/1/08Rangeley Capital Partners (net of fees) 2.77% 12.64% 16.65% 107.80%Event Driven Hedge Fund Index (HFRXED) 0.67% 4.90% -1.65% -7.62%S&P 500 (Total Return) 2.58% 16.43% 1.83% 9.00% Growth of an Investment (Since Jan. 2008) Historic Annual Returns $250 Rangeley Capital (net of fees) Rangeley Event S&P 500 S&P 500 Total Return Capital Hedge Fund Total $200 Event Hedge Fund Index (net) Index Return YTD 2012 12.6% 4.9% 16.4% $150 2011 0.0% -4.9% 2.1% 2010 24.7% 2.0% 15.1% $100 2009 73.6% 16.6% 26.5% 2008 -14.8% -22.1% -37.0% $50 $- De 8 09 Au 2 07 08 09 10 10 11 11 12 8 Au 9 0 1 0 r- 0 r-1 r-0 r-1 r-1 g- g- c- c- c- g- c- g- c- g- Ap Ap Ap Ap Ap De Au De Au De Au DeNote: Rangeley Capital performance is shown net of 1.5% management fee and 20% incentive fee. Past results are no guarantee of futureresults and no representation is made that an investor will or is likely to achieve results similar to those shown. Individual investor performancemay vary from the overall fund return due to timing of capital activity and other reasons. Index data sourced from Bloomberg.
  2. 2. September 2012 Investment ReportDear Partners,As of the end of September, Rangeley Capital has generated a return to our investors of 12.6% for theyear and 107.8% since our partnership began in January of 2008 (net of fees). Over that same periodof time, the S&P 500 has returned 9%, including dividends. The volatility and correlation of the portfoliocompared to the equity markets have remained low. Returns have been broadly driven by a number ofour holdings, including some we have previously discussed like Ocean Shore which is up over 30% thisyear.AmBase Corporation (ABCP) contributed to our positive performance this quarter and has a number ofinvestment merits that speak broadly to our philosophy regarding risk and the importance of findinguncorrelated opportunities in an increasingly uncertain and volatile market. ABCP is a small companywith outstanding litigation against the Federal Government dating back to the Savings and Loan Crisisof the 1980s. It was once one of the largest thrifts in the country until 1992 when the FDIC seized itsbank subsidiary.By way of brief history, in order to combat inflation in the late 1970s, the Federal Reserve increasedinterest rates substantially. This action had the unintended result of forcing over 700 Savings and Loanbanks and thrifts into insolvency. To quell the crisis, the FDIC enticed healthier financial institutions tostep in and acquire these failed S&Ls by changing the existing accounting rules and allowing the banksto count Goodwill from the transaction towards their required regulatory capital levels. Shortlythereafter, Congress enacted a new law that reversed this accounting rule, thus forcing many of thesehealthier financial institutions, ABCP included, into bankruptcy. The companies affected by these rapidpolicy reversals sued the Federal Government in United States v. Winstar, which ultimately went to theSupreme Court. The Government was found liable to pay damages for the harm caused by the lawthat explicitly contradicted the contracts between the banks and the FDIC. AmBase Corp (ABCP)ABCP was one of the last of the Winstar cases. In $3.0August 2011, the United States Court of FederalClaims awarded $205 million in damages to ABCP, butthe Government appealed the decision. Our thesis was $2.5that ABCP had a very strong position going into the Stock Priceappeals process for several reasons. 1) The relevantcase law was strongly in their favor and had already $2.0been determined through the previous cases; 2) theFederal Government had little to no benefit to gain from $1.5the precedent of dragging out this case; 3) an S&Lcase dating back 20 years has very little relevance tothe Department of Justice in the wake of the financial $1.0crisis of 2008. It was our thesis that a settlement was a 1/3/2012 3/3/2012 5/3/2012 7/3/2012 9/3/2012foregone conclusion.Rangeley Capital began purchasing shares of ABCP in May 2012 for $1.70 per share. On August 31,2012, ABCP announced a signed legal settlement agreement with the FDIC and DOJ, providing for thepayment by the United States to ABCP of roughly $4.20 per share. The share price has traded up to$2.77 as of Monday, October 15, 2012.
  3. 3. September 2012 Investment ReportTo understand how our investment strategy differs from a more typical investment vehicle, consider thefollowing graph. Figure 1 illustrates the challenges facing investors seeking even modest real returns(after-inflation) in a hyper low yielding bond market. In order to earn an adequate return, investors areforced to accept greater risks in lower quality bonds (HY CCC) or in the equity market. Due to thevolatility and high correlation of the equity markets to macro events, there is a strong psychologicaltemptation among investors to speculate on future events and attempt to time markets. We observethis behavior in individuals, institutions and even the savviest of hedge fund managers.Figure 1. Real yields of various assets classes* %If you listen to CNBC for even a few minutes a day, you cannot help but hear investors prognosticatingon the future of Europe, the growth in China, the probability of war with Iran, and how all this will weighon the direction of the market. At Rangeley Capital, we do not believe that anyone has the predictiveability or insight to accurately and consistently time global events or the movement of the markets.Some will always get it right and some will get it wrong.We believe that safe, consistent investment returns are generated by uncovering small durableinefficiencies in the market that cause the price and value of a company to diverge. We will invest onlyat a price that offers a wide margin of safety. Further, we do not rely on the markets, sentiment,multiple expansion or earnings to drive our returns. We purchase businesses with a unique andindependent catalyst or corporate event, such as an acquisition, spin-off or litigation in the case ofABCP, which will unlock value in the business.We are in the business of finding and exploiting investment opportunities where we are able topurchase securities for an attractive price with respect to downside; where our research gives us anedge; and where there is a specific corporate event to unlock value and return our capital regardless ofthe movement of the market. In the third quarter, we found several that fit that description and we lookforward to discussing the details in future letters.
  4. 4. September 2012 Investment ReportWe thank you for your continued confidence, and are excited by the opportunities we’re finding in thisenvironment.Our next subscription window will open at the end of the month. Please contact us if you would like totake the opportunity for an additional investment with Rangeley Capital.Sincerely, Christopher C. DeMuth, Jr. Richard J. Townsend 203.801.9969 203.801.9970 ccdemuth@rangeleycapital.com rjtownsend@rangeleycapital.comTHIS LETTER SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY WHICH MAY ONLY BEMADE AT THE TIME A QUALIFIED OFFEREE RECEIVES A CONFIDENTIAL PRIVATE OFFERING MEMORANDUM DESCRIBING THEOFFERING AND RELATED SUBSCRIPTION AGREEMENT. THESE SECURITIES SHALL NOT BE OFFERED OR SOLD IN ANYJURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL UNTIL THE REQUIREMENTS OF THELAWS OF SUCH JURISDICTION HAVE BEEN SATISFIED. THIS PRESENTATION IS NOT INTENDED FOR PUBLIC USE ORDISTRIBUTION.An investment in the Partnership is speculative and involves a high degree of risk. Opportunities for withdrawal and transferability of interestsare restricted, so investors may not have access to capital when it is needed. There is no secondary market for the interests and none isexpected to develop. The portfolio, which is under the sole trading authority of the General Partner, will not be concentrated in any particularindustry or strategy, resulting in higher risk for investors. Leverage will be employed in the portfolio, which can make investment performancevolatile. An investor should not make an investment, unless it is prepared to lose all or a substantial portion of its investment. The fees andexpenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and mayoffset profits.The information contained herein (the "Information") is confidential. By accepting the Information, the recipient (which shall include itsdirectors, partners, officers, employees and representatives) acknowledges that it will use the Information only for authorized purposes. Therecipient further agrees that the Information will not be divulged to any other party without the express written consent of Rangeley Capital LLC("Rangeley Capital") provided, however, that the recipient may make any disclosure required by law or requested by a regulator havingjurisdiction over the recipient.