Live From the Desk 10

Catalyst Investing

The Vertex Fund and Vertex Growth Fund invest in a variety of situations that fall under the umbrella of catalyst investing. There are many types of opportunities in this category. The following are some examples:

  • Mergers and acquisitions
  • Companies that have put themselves up for sale
  • Shareholder activism
  • Refinancings
  • Shares repurchases and Dutch auctions
  • Special dividends
  • Index changes
  • Broad corporate strategic reviews

There are several common elements among this diverse list. First, they typically involve a known time frame; there is a reasonable likelihood that the value-creating event will happen over a finite and knowable time horizon.

Second, the catalyst investing process is a bottom-up strategy and typically does not include views on the general economy, capital markets, or even the sector and industry in which the company operates.

Third, the returns in catalyst situations tend to be asymmetric and not normally distributed. We find that more traditional market participants are not as accustomed to investing in these highly “non-normal” situations, which allows us to participate on attractive terms.

We are attracted to catalyst situations that we consider to be very “hedgeable”, where we can easily and cheaply eliminate our sector and market risks. Additionally, we use options and other adjacent securities (e.g. convertible bonds) to either capitalize on what we perceive as a mispricing or to more accurately reflect our view on the likelihood of a particular outcome.

An example of a catalyst situation which we are currently invested is a US-based telecom equipment manufacturer, Tellabs Inc. The company has announced that its board is unhappy with the current share price and is undergoing a strategic review process that it expects to conclude before the end of the year (i.e. a finite and known time horizon). As part of this strategic review process, the company will consider a large dividend or share buyback, either or which will serve to highlight the valuation disparity of the ongoing business. Of course, we also hope that a review process might also encourage strategic bidders for the entire company. The position is easily hedgeable as there are several highly liquid securities we can use to manage our exposure to industry risks (slowdown of carrier network spending) and general market risks.

until next time. . .

@The Vertex Team

For information on this update or the funds we offer, please contact your local sales representative:

Noel Dattrino
(Western Canada)

Michael Lindblad
(GTA and Eastern Ontario)

James Wilson
(GTA and Western Ontario, Maritime Canada)