Supporting the New York Knicks has not been easy over the past few years, even before star player Kristaps Porziņģis tore his anterior cruciate ligament earlier in the season.
Investors in the Madison Square Garden Company, which owns the Knicks, suffered some pain of their own recently when chief executive David O’Connor abruptly quit the firm in November 2017. Madison’s share price has dropped by 9% since then, and the stock has been downgraded by several analysts.
Nevertheless, it is still backed by two of the top managers in the Liquid Alternatives – Event Driven sector: Arvind Navaratnam of the Fidelity Event Driven Opportunities fund and Mario Gabelli of the Gabelli ABC and Gabelli Enterprise Mergers & Acquisitions funds.
So what is the attraction? Gabelli has noted that Madison is more than a simple sports franchise: As well as owning the Knicks and the New York Rangers, its real-estate interests extend beyond its eponymous venue. It controls the Beacon Theatre in New York and the Forum in Los Angeles, and it is now developing property in cities such as London and Las Vegas.
Financially, the company is in good shape, with more than $1 billion in cash on its balance sheet. Gabelli values the stock at between $280 and $300 a share, compared with its current price of $210. He also highlights the fact that Madison’s executive chairman and now chief executive, James Dolan, is a deal maker, having originally spun Madison off from his former gig at Cablevision to make it an attractive name for event-driven managers.
However, as Navaratnam has observed, that does not make holding Madison simple; it was his fund’s largest detractor in the fourth quarter of 2017 following O’Connor’s exit. Even so, the Fidelity strategy is still this category’s best performer by some distance over the past three years, and it is the only one to have beaten the S&P 500 over that period.
‘Our view is that an event-driven strategy offers disciplined, patient investors an opportunity to take advantage of mispriced securities that can result from spin-offs, bankruptcy restructurings and other special situations,’ Navaratnam said. ‘These investments require a patient approach because it often takes time for the opportunities within these securities to materialize.’
As if to emphasize the patience demanded by this sector, only Gabelli and two other funds have posted above-average returns since 2015 – although that average has been skewed by Navaratnam’s exceptional performance.
The Quaker Event Arbitrage fund, managed by Thomas Kirchner and Paul Hoffmeister, ranks slightly behind Gabelli over three years but is ahead over both the one- and five-year horizons. Kirchner pointed out that the fund’s volatility has been 25% lower than that of the S&P 500 too; he also holds bonds rather than purely equities in his portfolio.
The only other above-average fund in this space over the past three years is the Guggenheim Event Driven and Distressed Strategies fund, run by Michael Byrum and Ryan Harder. Around two thirds of their portfolio is invested in other Guggenheim products, such as the Guggenheim Strategy Fund II and the Guggenheim Managed Futures Strategy, and they also have a 14% allocation to the iShares iBoxx $ High Yield Corporate Bond ETF. Only around 15% of their fund is invested directly in equities.