The TCI Fund With 18% Annual Returns Is Worth Following

If you have not heard of TCI Fund Management, then I highly recommend taking a closer look at this firm.

Managed by Sir Christopher Hohn, TCI, or The -Children’s Investment Fund, has achieved outstanding returns for investors since its inception.

The $24 billion hedge fund has compounded investors’ capital at about 18% per year, net of fees, since inception at the start of 2004. According to research conducted by The Financial Times, TCI’s flagship Master Fund has produced investment gains of $17 billion since the beginning of 2010.

Even though the hedge fund lost money (7%) in December last year, along with the rest of the hedge fund industry, it still managed to post a net gain for 2018 as a whole. In 2017, the hedge fund returned 29% net of all fees and expenses.

After a rough end to 2018, Hohn and team got off to a flying start in 2019.

During the first quarter of the year, TCI produced a net return for investors of 18%. Off the back of this robust performance, the firm offered its investors the chance to redeem up to 5% of their investment. However, investors have been reluctant to reduce their exposure to this leading investment manager and, according to reports, few have taken up the offer.

TCI tends to run a relatively concentrated portfolio. The hedge fund is best known for its activist approach to investing. Hohn likes to take substantial positions in companies and then push for change.

He has run several successful campaigns at businesses around the world in recent years, including a very public battle with the London Stock Exchange in 2017.

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TCI’s top holdings

According to its latest 13-F filing, dated June 30, TCI’s favorite companies right now are Charter Communications (NASDAQ:CHTR) and Google parent company Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL).

According to filings with the Securities and Exchange Commission, at the end of the second quarter, TCI owned just under $4 billion worth of Charter and $3.8 billion worth of Alphabet, making them a 20.7% and 20.3% portfolio weight.

During the quarter, Hohn and his team of traders substantially added to the fund’s position in Alphabet, increasing the holding by 45%, or 1.1 million shares, on weakness. These are the company’s class C shares, which have no voting rights. TCI also substantially increased its position in Alphabet’s class A shares, which have the normal one-share, one-vote structure. At the end of the second quarter, TCI owned just under 550,000 class A shares and 3.5 million class C shares. The total combined position is around $4.3 billion, making it by far the firm’s most significant U.S. position.

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I should mention at this stage that 13-F reports only detail U.S. equity holdings. They do not include overseas investments or cash. The total value of investments detailed on the second-quarter filing is $18.5 billion, which indicates there are several billion dollars worth of investments and cash sitting elsewhere.

As a London-based hedge fund, TCI is active in European equity markets. In recent years, the company has launched activist campaigns against German automaker Volkswagen (XTER:VOX), French aerospace business Safran (XPAR:SAF) and the London Stock Exchange.

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Hohn also likes the Canadian railroad companies. He has around $4 billion invested in Canadian Pacific Railway Ltd. (NYSE:CP) and Canadian National Railway Co. (NYSE:CNI).

Together, these positions account for approximately 20% of the U.S. equity portfolio.

It doesn’t look as if TCI has taken an activist stance with any of its significant holdings. Instead, it appears the firm believes these high-quality businesses offer the potential for great returns. And considering the fund has produced an average annual return of 18% for investors since inception, it might be worth following its lead.

Disclosure: The author owns no stocks mentioned.

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This article first appeared on GuruFocus.

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