The pace of 13F filings are really picking up. The deadline is Friday and the list of noted investors who have revealed their holding as of the end of the first quarter is growing longer.
The biggest risk in Wall Street is career risk and it shows in the majority of the portfolios you review in 13F filings. Apparently, keeping the job by doing a version of what everyone else is doing is more important than finding ways to earn excess returns for clients.
If you have never gone to www.sec.gov and just randomly clicked on a bunch of filings, I highly recommend that you do so. It becomes quite apparent that a large amount of money is being charged management fees, and in many cases the ubiquitous 2 and 20, for what amounts to closet indexing.
We know from Roger Ibbotson's studies on liquidity that illiquid stocks with value characteristics outperform other stocks by a huge measure. The average annual returns of these stocks over the last 40 years has been about nine times that of highly liquid growth stocks. Yet when you comb through all these filings listing stocks that managers are getting paid to buy for their clients, you find that they hold highly-liquid stocks based on their hopes for earnings growth.
Everyone wants to be the biggest kid collecting the biggest fees. Charlie Munger of Berkshire Hathaway (BRK.A, BRK.B) warned us at the Daily Journal meeting earlier this year it is not tough to make money with the big stocks which you need to own in a large portfolio.
One reason I admire the folks at EJF Capital so much is that they are not doing what everyone else is doing. Munger said that the way to make money in the future will be to find an inefficient part of the market and become one of the best in that space.
EJF has done exactly that as they concentrate on financial stocks with a special focus on smaller banks and real estate-related securities. I know some people who worked with them and for them when they were building Friedman Billings and Ramsey. They are smart, talented people.
Perhaps some of my admiration is because they share my enthusiasm for the trade of the decade in community banks. Of the 55 stocks they purchased in the first three months of 2015, about half of them were bank stocks that fit into the theme.
They are similar to other bank stock specialist I have looked at this 13F season: they were a buyer of the second step conversion offering by Beneficial Bancorp (BNCL). Other large buys of banks in the quarter include TFS Financial (TFLS), Talmer Bancorp (TLMR), Citizens Financial (CFG) and Key Corp (KEY).
I always think smaller is better, so I was interested to see that they picked up shares of Franklin Financial Network (FSB) in Franklin, Tenn. The Tennessee market has seen a lot of merger and acquisition activity in the past year and several larger banks have said that they are looking for more targets. With assets of $1.5 billion and a market cap of $218 million, Franklin could catch the eye of a larger regional bank.
Most of EJF's really interesting bank purchases and holding are the much smaller institutions. It is worth the time to read the filing and to spend some time researching EJF Capital's small bank holdings. It is a solid hunting ground for trade of the decade bank stocks.
The firm remains a big fan of Starwood's real estate offerings. They added to their stake in Starwood Property Trust (STWD), a commercial real estate finance REIT. They also have acquired more of Starpoint Waypoint Residential (SWAY), a REIT that invests in single-family homes and nonperforming mortgage loans.
EJF also bought my two of my favorite commercial real estate finance REITs during the quarter. I have owned Arbor Realty Trust (ABR) shares for years. I hope that the value keeps increasing faster than the share price because I don't ever want to have to sell my shares.
They also bought Apollo Commercial Real Estate (ARI) the REIT with connections to Apollo Global Management (APO), the giant private equity and alternative investment firm. That connection gives Apollo Commercial access to deals and information their competitors will never see and that's is a huge advantage.
EJF Capital is managed by some smart guys who have a strong expertise in financial and real estate stocks. Stealing their best ideas each quarter can help you put together a portfolio of stocks with the potential for huge long-term gains. It should be on your must read list.
