Follow TCI's Activism To The Bank

By Gregory S. Davis | August 06, 2008 AAA

The Children's Investment Fund (TCI) is a bit of an enigma. The U.K.-based hedge fund has a reputation for ruthless shareholder activism and it has returned about 40% for its individual investors since inception, yet this harsh exterior is softened by a charitable foundation - quite literally. A portion of the fees the fund collects from investors goes toward the Children's Investment Fund Foundation, a non-profit organization dedicated to fighting AIDS in Africa and various other activities designed to help the lives of children.

Activist investor Christopher Cooper-Hohn, manager of TCI, has been at work buying large shares of publicly traded companies in order to change management and drive shareholder value. Investors who believe in this give-and-take philosophy of activist investors may be able to follow TCI's lead by choosing investments on the hedge fund's hit list. (To learn more about shareholder activists, read Activist Hedge Funds and Can You Invest Like Carl Icahn?)

A select few of TCI's holdings are listed below. Let's have a look at how they have faired under the fund's watchful gaze.

CTI Holdings YTD Returns
Transalta Corp.
(NYSE:TAC)
4.6%
Union Pacific
(NYSE:UNP)
28%
CSX Corp.
(NYSE:CSX)
52%
Fund holdings as of November 14, 2007. YTD returns as of August 1, 2008.

Dynamic Energy Provider
Transalta generates and sells electricity mainly in Canada, the U.S., Mexico and Australia. Its portfolio of energy capabilities includes coal, gas, hydro, wind and geothermal. With almost 50 power plants in place, Transalta has the capacity to provide power to nearly 7.3 million homes. For the six months ended June 30, 2008, revenue increased 18% over the same period a year ago to $1.5 billion. On the heels of strong fundamentals, Transalta stock has nearly doubled over the past three years.

West Coast Rail Shipper
Union Pacific transports everything from agriculture to automobiles from West Coast ports to the Midwest and to Eastern U.S. gateways. Flooding in the Midwest this past June did affect some of its rail operations, but not enough to hurt its performance. For the six months ended June 30, 2008, revenue increased 12% to $8.8 billion over the same period a year ago. Specifically revenue from increased shipments of agricultural products, energy resources and chemicals related to fertilizer led to the increase in revenue. Union Pacific completed a 2-for-1 stock split at the end of May, and its stock has more than doubled over the past three years.

CSX's Trip to the Woodshed
Along with its partner 3G Capital partners, TCI has been in the news recently for taking CSX Corp. to task over changing its board of directors in order to improve the performance of the coast-to-coast railroad shipping company. For the six months ended June 30, 2008 CSX revenue increased 13.5% to $5.6 billion over the same period a year ago. Revenue for CSX was also driven by increases in phosphates and fertilizers, agricultural products, and chemicals with additional strength from shipments of coal and iron ore. CSX stock has risen more than 50% since the beginning of the year.

Final Thoughts
Hedge funds make the news regularly and not always for the best reasons. The Children's Investment Fund is unique because a portion of the fees the fund charges goes to support AIDS relief and education in developing countries. While investors who have been with the fund from its inception have earned returns in the neighborhood of 40%, individual investors have an opportunity to participate by following companies on hedge fund's "Needs Improvement" list.

For a related article on coattail investing, check out Build A Baby Berkshire.

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