TheChek News Flow

It’s fitting that internet television services are called “over the top.” That can mean excessive, too, and viewers will soon face a bewildering sprawl of choices.

The phrase was also once used for soldiers scrambling up trenches to attack. Now, Disney, WarnerMedia, NBC, and others are about to enter the battle for streaming subscribers.

If cord-cutting accelerates among traditional cable customers, these companies will need to win streamers quickly. If TV viewers stick with their cable bundles for longer than expected, companies could end up having overspent to go over-the-top.

Even media chiefs disagree over how the next few years will play out.

Bob Iger at Walt Disney (ticker: DIS) tells Barron’s that he expects continued erosion for big cable bundles and is intensely focused on Disney+, which starts on Nov. 12. “We’re creating a product that serves the consumer the way they want to be served, which is the best thing a company can do,” he says.

Bob Bakish, who heads Viacom (VIAB), and will also run CBS (CBS) after a pending merger, says the industry is segmenting on price, but that the traditional cable bundle still holds great appeal. “There are certainly people that have moved over the top and gone back,” he says. “What the steady-state penetration will be, time will tell.”

Brian Roberts at Comcast (CMCSA), speaking from China, where he is building Universal Studios Beijing to rival Shanghai Disneyland, says that his company, as a broadband provider, is in a good position to reaggregate what is now being taken apart. “Video over the internet is more friend than foe,” he says. “We want to get to a place of relative indifference where we can be rooting for the customer.”

How can investors pick winners or losers?

Most companies are taking hedged approaches. Some have lucrative other businesses facing less disruption, such as theme parks and wireless phone service. Others have deeply discounted shares to reflect the uncertainty. There is good money to be made in media stocks in coming years, not just despite the turmoil, but because of it.

Accompanying this article is a guide, analyzing the opportunities and risks for the biggest companies in streaming.

Comcast stacks up better than investors might expect, in part because, for it, cord-cutting is a misnomer. In Comcast’s markets, its broadband service is the top means of delivering Netflix and Amazon Prime to homes.

Disney has dominated Hollywood like no other company in recent years, making it a heavy favorite for the No. 2 spot in streaming subscribers, behind Netflix (NFLX). But the transition will slow Disney’s earnings growth, and its shares trade at a premium to the group. Warner parent AT&T (T), along with CBS and Viacom, are challenged but cheap. Don’t write them off.

Netflix has made fools of doubters for years, and no company spends more on content per customer dollar. That’s an excellent reason to subscribe, but the company’s aggressive cash burn, combined with rising competition, make the path from here risky for shareholders. Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOGL)—all can thrive with or without becoming larger TV players. As for Roku (ROKU), its shares are a long- shot bet on a specific outcome—and they have been soaring.

The main thing to know about pay TV is that subscriptions peaked in 2012, at 101 million across cable, satellite, and telecom, and that they are down to about 90 million. That includes eight million or nine million skinny-bundle customers, who pay for streamlined channel assortments delivered over broadband to save money. The declines are accelerating: Investment bank UBS predicts 6.1 million lost subscribers in 2019, compared with 1.2 million last year.

For cable, the situation is much better than these numbers suggest. Satellite and telecom TV services are falling out of favor, and AT&T, which has both, could account for two-thirds of subscriber losses this year. Growth in skinny bundles has slowed, as providers have raised prices and customers have questioned the savings. And broadband is booming. Cable broadband added nearly three million subscribers last year, including more than a million each for Comcast and Charter Communications (CHTR).

Streaming can refer to different types of services, but keep one distinction in mind. Skinny bundles—also called virtual multichannel video programming distributors, or vMVPDs—seek to mimic the cable experience, with groups of live channels. Customers who choose these generally use only one.

Netflix, Disney+, and others are examples of subscription video on demand services, or SVODs, through which viewers watch what they want when they want. Consumers may want many of these services, but surveys suggest that they’re willing to pay for only a handful. There are also AVODs, which offer generally less expensive content for free, supported by advertising.

Alexia Quadrani, a media analyst with J.P. Morgan, says that future TV viewers will buy bundles of core streaming services and niche ones, like today’s cable bundles, and that there are already too many services. “Most of them won’t survive,” she predicts. “The economics aren’t sustainable.” She likes Disney. “You’ll see pretty big numbers quickly after launch,” she says.

John Maloney, chief executive of New York—based M&R Capital Management, says that streaming’s complexity could result in cable inertia. “The low-hanging fruit of young streamers has been harvested,” he says. “There’s such a profusion of services that older viewers could freeze and say, ‘I’ll figure that out later.’ ”

Maloney likes Discovery (DISCA), which owns the Food Network and HGTV and whose stock trades below eight times earnings.

Michael Lippert, co-manager of the Baron Opportunity fund, says that with streaming, some customers will sign up for the savings, and others for the more flexible viewing experience.

He likes Netflix and Trade Desk (TTD), which allows ad buyers to shop across a mosaic of digital TV s ervices. The company is fast-growing and trades at more than 50 times next year’s estimated earnings. The stock price has multiplied more than seven times in three years.

Here are the main TV players, their strengths and vulnerabilities—and what to do with their shares:

Comcast

Buy the stock. It is up 34% this year, because investors have come around to the view that broadband gains in coming years will more than offset video losses, making cable companies low-risk tech utilities. But Comcast has lagged behind its cable peers because its television production assets at NBC and Sky add uncertainty. Its shares trade for a reasonable 14 times forward earnings estimates.

In streaming, the company’s Peacock service, which will begin next April with shows such as Parks and Recreation,Battlestar Galactica, and a rebooted Punky Brewster, isn’t an obvious threat to Netflix or Disney. But Comcast has wisely chosen a “freemium” model for it. That will help with churn, a big risk to streamers, if customers hop from service to service and binge on their favorite shows.

Sky offers English Premier League soccer, news, and scripted content. More important is its position in over-the-top TV distribution in Europe with Now TV.

Comcast’s cable business, however, brings in two-thirds of its earnings before interest, taxes, depreciation, and amortization, or Ebitda. Its position there is unmatched, as the largest player with the most sophisticated hardware and software interface, Xfinity X1, which some other cable carriers pay to license. Comcast’s recently launched Flex service gives a free streaming device to broadband-only customers, keeping those who step down from cable TV in the software ecosystem.

Matt Strauss, the new head of Peacock, says his vision for the future of television is a screen that is always on. “The TV is the biggest display in the home,” he says. “In the past, it’s where you watched video, but in the future, it will be for monitoring cameras, controlling the thermostat, and more.”

Barclays analyst Kannan Venkateshwar views rebundling as the future of streaming, and broadband providers as best-positioned to do it, because broadband and streaming are highly correlated services, whereas broadband and cable TV had little to do with each other. But in his view, only Comcast has made the technological investment to allow it to add high value as a bundler.

Matthew Harrigan at Benchmark, the biggest Comcast bull on the Street with a $64 price target, says that even assigning zero value to TV would leave the stock worth a price in the low $50s. The shares recently traded at $45 and change.

Other Cable Companies

They have raced ahead: Charter Communications is up 55% this year, and Altice USA (ATUS), 80%. Those two are 15% and 9% more expensive than Comcast, respectively, based on enterprise value against forward estimates of Ebitda. Investors should prefer Comcast, for its greater ability to compete against Apple and Amazon to become a major streaming bundler.

Hold off. This past week, the company missed third-quarter estimates for subscriber wins, but by only a little, which was a good-enough showing ahead of the introduction of well-funded rival services. The bull case on the stock is that Netflix’s huge and growing global customer base will allow it to hold the line on content costs and gradually raise prices, resulting in significant free cash flow. Barclay’s Venkateshwar, who sees rebundling as the future of TV, views Netflix as likely to become the equivalent of an anchor network.

Investors have lately turned skeptical on cash-burning companies, however, and Netflix, which has gone through more than $5 billion in the past three years, is expected to consume another $7 billion over this year and the following two, before generating positive free-cash flow in 2022. Estimates have been slipping. The stock peaked above $400 last year, but recently traded below $300.

Many studios, meanwhile, are pulling content from Netflix. At the very least, they are driving up the cost of shows, and new competition could make price increases more difficult. Leave the stock alone for now, and wait for free cash estimates to begin moving in the right direction.

Stick with the stock, but don’t expect rapid gains. It is up 20% this year, even though earnings per share are expected to decline by as much, because investors understand that the profit decline is temporary and because the stock was cheap to begin with. Disney+, which will tap the company’s Pixar, Marvel, and Star Wars franchises for a mix of library hits and exclusive new shows and films, requires substantial upfront spending before subscription dollars can cover the cost.

The company says the service will break even in about five years. Until then, it will look like a little Netflix inside Disney. Yet within two years, losses for Disney+ will be small enough that the overall company can return to growth on gains for theme parks, films, and other businesses.

Disney and Amazon recently clashed over ad revenue from Disney apps that appear on Amazon’s Fire TV service. That illustrates how streaming networks and streaming bundlers will vie for power, just as TV networks and cable bundlers do.

“I think that has been overblown,” says Kevin Mayer, who runs Disney’s direct-to-customer business. “It’s not war. We’re just negotiating.” Disney has been offering discounted streaming subscriptions to customers who prepay for up to three years. That could help with early growth, and churn. Mayer says the offers have been “well received.” A bundle of Disney+, Hulu, and ESPN+ comes in a few bucks lower than the top Netflix offering—a compelling pitch.

“Everyone seems to be setting this up to be an us-versus-them battle with Netflix,” Iger says. “We don’t see it that way at all. We’re well differentiated.” If he’s worried about customer turnover, it doesn’t show. “Netflix has managed to control churn brilliantly,” he says. “We think we will, too.”

Iger says that Disney eventually will harmonize the two technology platforms that will be used for its streaming services at first.

Mayer points out that Disney will continue to make good money in cable. “We have a hedged position,” he says.

Buy the stock for income, but be ready for price volatility. Time Warner, bought last year, brought a streaming-friendly mix of sports, news, films, and DC Comics superheroes, plus HBO, which has an over-the-top offering. But legacy AT&T has one of the weakest hands in TV distribution. Its DirecTV and U-verse are losing customers. So is AT&T TV Now—the new name for the DirecTV Now skinny bundle.

The fix for all of this, the company hopes, is a new OTT service with a slightly skinnier name. AT&T TV, which is currently available in a limited number of cities, comes with a streaming box running Android TV software and offers channel bundles that rival traditional cable. On Oct. 29, the company will host a WarnerMedia day in Burbank, Calif., where it will offer details on HBO Max, another streaming service coming in the spring, and will presumably explain how the services will work together.

That neither streaming service will carry the DirecTV name says something about the wisdom of the $49 billion acquisition of the satellite operator in 2015, but what’s done is done. Elliott Management, an activist investor, is pressuring AT&T to review its TV portfolio, perhaps sell the satellite business, and put cash toward stock buybacks and debt repayment. Fortunately for AT&T, the U.S. wireless phone business has rarely been stronger. An agreement this month to sell operations in Puerto Rico and the Virgin Islands to Liberty Latin America bolsters cash.

Lower debt will add confidence in the outsize dividend yield, recently 5.4%. And AT&T shares go for a modest 10 times earnings. In September, the company appointed WarnerMedia’s boss, John Stankey, to a newly created No. 2 position, setting him up to succeed CEO Randall Stephenson.

Ultimately, AT&T will need to explain why the telephone and TV businesses belong together in an over-the-top world—or it will have to do something to change that. For now, however, it just needs to stem TV declines and keep the dividends coming.

When Bob Bakish took over at Viacom three years ago, its young viewers were leaving for the internet, advertising revenues were shrinking, and its film studio, Paramount, was producing big losses. Now, ratings are better, ad revenue has returned to growth, and Paramount is profitable. That makes Bakish a good pick to oversee the stronger assets at CBS when the two companies recombine for the first time in 14 years.

CBS All Access is no Netflix killer. It will gain some appeal once Viacom folds in shows from Nickelodeon, MTV, and Comedy Central, and films from Paramount, to form a new service. CBS’ Showtime, like HBO, already has an over-the-top offering. Ad-supported Pluto TV answers the question of how to keep making money from customers who churn out of paid services, while pitching them on upgrading again later. Together, these assets give Viacom/CBS a shot at becoming the third or fourth most popular streaming service, behind Netflix and Disney’s bundle, and not counting Amazon Prime Video, a giveaway for Amazon Prime customers.

More important is that Bakish has an arms dealer’s indifference to taking sides in the streaming wars. Disney is stripping Netflix of valuable children’s programming. Bakish can send in Teenage Mutant Ninja Turtles, Dora the Explorer, and PAW Patrol to fill the gap. And in traditional TV, as he likes to point out, the two companies have 22% of the audience, but only 11% of payments from distributors. For investors, the killer feature is the valuation. At five and six times earnings, Viacom and CBS are priced for disaster. Modest earnings growth seems more likely.

Shares of Roku made their trading debut at $14 apiece in September 2017. Now they go for $126. The company sells streaming boxes, but doesn’t have nearly the name recognition of Apple and Amazon. And the Roku Channel? Its website recently gave top billing to The Terminator—not the new sequel coming out Nov. 1, but the original from 1984. Roku’s limited content is part of its appeal for media partners. They can put their apps on the service without worrying about enriching a direct competitor.

Roku enjoys rapid gains in revenues and viewership, and widespread deals with TV makers that allow it to build its service into new sets.

The company could swing to profitability in a couple of years. Its stock trades now at just over 40 times the early consensus for 2023 earnings—although individual estimates are all over the place. There’s no cash-generating side business to fall back on, so the stock is for daredevils only.

Yes to all, but not for TV.

The $5-a-month Apple TV+ service looks less like a big Hollywood play than an effort to goose hardware sales and expand future bundling power. Disney is spending $120 million to make one season of a Star Wars spinoff called The Mandalorian, whereas Apple TV+ will have Oprah Winfrey talking about books once every two months.

Why doesn’t Amazon use its huge free cash flow to squash Netflix in streaming? Because it is a retailer first, and needs only so many shows to offer a perk for its buying-club members. Alphabet’s skinny bundle, YouTube TV, is mildly interesting for investors, but its original YouTube video-sharing service is an endless gold mine.

The surest bet over the coming year is that some streaming services will overspend in the grab for market share.

Couch potatoes are sitting pretty.

Brett Icahn is emerging as the likely successor to one of the most famous investors of all time. But his father is not ready to hand over the reins just yet

At 83, Carl Icahn, the billionaire financier legendary for waging guerrilla warfare with corporate targets from TWA to Dell, finally has a succession plan. It’s a little complicated.

Fed up with New York, Mr. Icahn says he’s moving his hedge fund to Miami and laying the groundwork to hand it over to his son, Brett.

Mr. Icahn says Brett is the “leading candidate” to take over the firm—on ce Mr. Icahn is ready to let go, which he doesn’t seem to be just yet. “I’m not going to give up making the real decisions,” Mr. Icahn says. “I’m still in charge, but he’d get a piece of the action.”

Brett, 40, is likely to rejoin Icahn Enterprises IEP 0.62% LP in the coming months after a more than three-year hiatus. He would run a small new investment fund. For over a year on and off, father and son have been negotiating an arrangement that has already stretched to a roughly 90-page contract. Nothing is official yet and neither appears to be in any rush, partly because Brett is bearish on the market and hasn’t seen many good investment opportunities with stocks near all-time highs.

His return would reunite two men who are opposites in many ways. Where Carl is outspoken and operates on instinct, Brett is more laid-back and fond of spreadsheets. Brett likes chess, while his father prefers poker. Carl has never been afraid to go on TV to make his views heard, while Brett has operated under the radar for much of his career. The elder Mr. Icahn has long hedged his portfolio with significant short positions—bets that stock prices will decrease that have the potential for infinite losses— while Brett generally avoids them

It’s clear the elder Mr. Icahn has no plans to slow down anytime soon. He envisions keeping up his recent rate of roughly five new activist campaigns a year and says nothing compares to the thrill of being immersed in a negotiation. By most accounts, he’s still mentally sharp, able to zero in on inconsistencies in an opponent’s reasoning or rattle off the mechanics of a complex trade.

He spent his own birthday weekend earlier this year urging Caesars Entertainment Corp. to put itself up for sale. Caesars had spurned takeover approaches Mr. Icahn wanted it to take more seriously, believing the casino company would be better managed in the hands of a rival and that shareholders, rather than the board, should have the final say. Caesars in June struck a roughly $9 billion deal to sell itself to Eldorado Resorts Inc. and its shares soared.

“I like what I do. I’ve been doing more lately,” Mr. Icahn says in one of a series of interviews over the past several months. Still, he’s making plans for the future and has also permitted his daughter, Michelle, to help a director produce a documentary on his life for a cable channel.

He says he has no plans to retire, but that when he does, Brett—long expected to be his heir apparent—is the best candidate he knows to take over the job.

“I don’t think anybody can fill his shoes the way he fills them,” Brett says. “But I look forward to continuing to make him a lot of money and continuing to develop my career.”

Brett is a more data-driven investor who centers decisions around finding stocks that appear to be undervalued and buying them at the right time in the market cycle. He has an easier time than his father spending time outside of the office and is often traveling the world with his girlfriend or honing his chess game.

Brett planned to join his father’s firm right after graduating from Princeton University but pushed back his start date to spend time in South Africa working on a movie about the collapse of its currency and later launched a videogame publishing company with a friend. After joining Icahn Enterprises he steered the firm toward profitable investments like one in Apple Inc., which Mr. Icahn admits he wouldn’t have considered because it didn’t have as strong of an activism angle as usual and was already richly priced.

“The activism formula is a great formula for increasing shareholder value. My father has proven that,” Brett says. “But I don’t think you absolutely need to have activism for there to be a good risk-reward ratio in an investment.” That makes him more open than his father to looking at companies where he thinks the management is doing a good job.

What they do share is a cynical—and sometimes adolescent—sense of humor and a fascination with philosophy and strategy. They both cite lines from Sun Tzu’s book “The Art of War.”

Icahn Enterprises, which has inhabited the 47th floor and part of the 46th floor of the famed General Motors building in Midtown Manhattan for roughly two decades, is now in transition. In recent weeks, yellow sticky notes were affixed to select pieces of artwork that will head to Sotheby’s instead of making the trip south. (Unmarked items included two of Mr. Icahn’s favorites: One is a painting by the French artist Meissonier depicting Napoleon, whose story Mr. Icahn says “typifies the problem with hubris.” The other is a small tin sign that shows a man playing poker and reads “Bluffing: A Pair of Balls Beats Everything!) The offices’ heavy drapery and tufted leather chairs, reminiscent of a 90s-era boardroom, will soon be carted out to make way for new occupants.

Mr. Icahn, a lifelong New Yorker, captured Wall Street’s attention in the 1980s as a corporate raider clashing with companies like TWA. Over the years he refined his approach and helped usher in a new form of investing known as shareholder activism, along the way drawing accusations that he was a corporate holdup artist. Mr. Icahn in 1985 began pushing for bigger cost savings and asset sales at TWA and later that year gained control of the struggling airline. It continued to flounder, however, and spent much of the 1990s in bankruptcy court before being acquired by American Airlines in 2001.

In a court deposition, Mr. Icahn once described a confrontation with TWA’s CEO at the time, C.E. “Ed” Meyer, in a hotel bar: “[Mr. Meyer] said, ‘All you want is a fast buck.’” Mr Icahn said he then responded: “If we are psychoanalyzing each other, why don’t you admit…what you really care about is your job, and you are afraid I am going to take it away from you.”

Mr. Icahn’s ambitions today are as big as they have ever been, even though his investment fund’s returns lately have been lackluster. In the past several weeks alone, he has been busy on new campaigns and tried—unsuccessfully, so far—to wrest power from Occidental Petroleum Corp. ’s board after it oversaw what he considers a reckless $38 billion acquisition.

As he has for most of his career, Mr. Icahn eschews hands-on analysis, preferring instead to go with his gut. He boils his campaigns down to one or two alleged transgressions of chief executives such as excessive pay that he repeats -- often, loudly and on TV if necessary -- until they capitulate. Mr. Icahn has twice battled efforts by Michael Dell to rejigger ownership of his eponymous computer maker, arguing last year that Mr. Dell’s bid to take the company public through a complex transaction amounted to an $11 billion seizure of value from other shareholders. His complaints ultimately prompted the company to sweeten the deal.

Glued to his work for much of his children’s upbringing, Mr. Icahn grew close to Brett over weekend walks in Central Park or around Bedford, N.Y., in which he would lecture his son on investment theory and other topics. Brett was “like a sponge,” his father says. As Brett entered his teenage years, he and his father began playing chess. The two for years played Sunday-evening matches, but they stopped about a year ago after Brett consistently won, at times costing his father as much as $20,000 in lost wagers.

Mr. Icahn says he came to realize he couldn’t compete with Brett. When he went to Brett’s 35th birthday party at his son’s Hell’s Kitchen apartment in Manhattan, he met Brett’s Yugoslav superintendent. The man told Mr. Icahn he must be so proud of his son, because he’d never seen anybody work as hard as Brett. Mr. Icahn, caught off guard, asked what he meant. The superintendent responded that every time he went to his apartment, Brett would be studying chess games left out on tables, sometimes as many as three at a time. Brett also put in long hours with a chess teacher.

That level of study never appealed to Mr. Icahn, who likes to boast about how he paid for much of his tuition at Princeton with poker earnings. “A good poker player has to be willing to take big gambles. A good chess player rarely takes a gamble,” Mr. Icahn says. “The great investor is somewhere in between.”

Brett worked for his father for roughly 15 years, starting as a low-level analyst. He stepped away for the past few but remained involved as a consultant and currently represents his father’s interests on the board of Newell Brands Inc., the maker of Sharpies, Rubbermaid containers and Elmer’s glue. It’s a so far money-losing investment that Brett has said wasn’t his idea.

He previously had considerable success running a more than $6 billion fund at Icahn Enterprises that averaged an annualized return of around 27% over seven years ending in 2016. He and his partner, David Schechter, gained recognition on Wall Street for prompting Mr. Icahn to make a hugely profitable investment in Netflix Inc. The Netflix investment, which Mr. Icahn was initially skeptical of, ultimately made the firm a $2 billion profit and they each earned $280 million paydays at the end of their run, equal to 7.5% of their gains over an annual return hurdle of 4%.

In 2014, Brett and Mr. Schechter planned to start their own activist hedge fund with about $1 billion from the elder Mr. Icahn in a move that would have allowed them to keep even more of their own profits, but negotiations fell apart.

At the new fund, Brett will be required to put a small percentage of his own money into each investment and is contemplating buying $25 million worth of Icahn Enterprises shares. His father will likely have the final say over investments under the arrangement. (Mr. Icahn, whose personal fortune Forbes magazine pegs at nearly $18 billion, doesn’t manage outside money anymore.)

The move to Miami, where Mr. Icahn is already living and where the office will be opened in April, could help ease Brett’s way back into the firm, though Mr. Icahn says that is not what prompted it. Brett already spends a lot of time there with his girlfriend—the model and culinary student Erin Christoff— and their dog and plans to buy a place nearer to the company’s new digs. His sister, Michelle, and her husband, who works for the firm, also plan to move to Florida with their two children.

Mr. Icahn told his roughly 50 employees in a note last month that he’s moving so he can enjoy “a warmer climate and a more casual pace year-round.” Mr. Icahn, who has lived in New York since he was raised in a modest home in Queens, says he has grown tired of the city’s crowds and high taxes. He insists the move wasn’t prompted by anything more than frustration with New York, a desire to play tennis more frequently and the fact that the internet has made it possible to do his work anywhere. He has no immediate plans to sell his Manhattan penthouse, mainly because of New York’s falling real-estate prices.

“New York isn’t what it was when I was young,” he says, adding that he’s given a lot to the city including a school of medicine at Mount Sinai Health System, a stadium on Randall’s Island and multiple charter schools bearing his name.

Most of Mr. Icahn’s longtime top lieutenants are expected to join him in Miami, though he says a handful of other staffers won’t. He is outfitting space in a modern office tower north of the city that he says isn’t really his style and will likely look like the set of “Billions,” the TV show about a fictional hedge fund. It’s close to his beachfront estate on the exclusive Indian Creek island where he and his second wife, Gail, and their three dogs are now spending more of their time.

His investment fund lost 8.8% through the first half of the year, the most recent period for which results are publicly available, and has had an annualized return of 5.4% since its 2004 inception. Mr. Icahn likes to point out that the fund only accounts for a portion of Icahn Enterprises and that he heavily hedges his bets, which mutes profits. The rest of the business is a collection of companies he controls in areas like energy, food-packaging and home furnishings. Taken as a whole, Icahn Enterprises, which trades publicly, has posted returns of 1757% since its 2000 inception, including dividend reinvestments, or 15.9% annually. Nine of his activist campaigns have yielded profits of more than $1 billion.

The investment fund’s largest positions include a more than $1 billion stake in Occidental, whose languishing share price Mr. Icahn has been unable to boost since it bought Anadarko Petroleum Corp. in August. He has embarked on a public campaign against Occidental CEO Vicki Hollub, who he believes pursued the deal to fend off suitors of her own.

A rarely employed maneuver by Mr. Icahn to call a special meeting of Occidental shareholders to try to replace board members has stalled after he failed to get holders of 20% of the shares outstanding to join the cause. His next major opportunity to shake things up is to launch a proxy fight ahead of next year’s annual meeting.

Mr. Icahn hasn’t managed outside money since 2011 and therefore doesn’t have to worry about investors getting impatient and possibly leaving, as most hedge funds do. He says that unlike many of his peers, he has the luxury of embarking on long slogs like at Xerox Holdings Corp., which he and a partner took control of after scuttling its planned merger with Fujifilm Holdings Corp. Xerox’s stock price has risen roughly 50% so far this year.

“The height of a deal for me, there’s nothing like it,” he says.

“I really enjoy it.”

Computer-powered Havelock is battling the market’s shrinking attention span

In a small basement office near Portman Square in London, wedged between the Grazing Goat pub and the Red Sun Chinese restaurant, a handful of eggheads are attempting to code a robotic Warren Buffett.

The small team at start-up Havelock London has an ambitious mission: to mesh computer science with the Sage of Omaha’s “value investing” principles.

Havelock was founded last year by the former chief investment officer of Winton Capital Management — one of the biggest quantitative hedge funds in the industry with $23bn in assets. But the start-up is ploughing a different furrow from most other algorithmic investors.

Instead of trading in and out of stocks at a moment’s notice, or trying to ride hot market themes like Winton, Havelock’s chief executive Matthew Beddall wants to build a system more akin to a computer-powered private equity firm, going deep into a small number of companies.

Paraphrasing Mr Buffett’s mentor, the famed value investor Benjamin Graham, he argues that quants typically try to make money out of the market’s short-term “voting machine”. Havelock, on the other hand is attempting to profit from the market’s longer-term “weighing machine”.

“Traditionally, quants are a mile wide and an inch deep. We try to be a mile deep and an inch wide,” says Mr Beddall, who spent 17 years at Winton, latterly as chief investment officer. “With the rise of quantitative investing, the market’s attention span has shortened and shortened. We want to build better models to value businesses.”

Quants have been in the ascendant over the past decade, with algo-powered hedge funds like Renaissance Technologies, DE Shaw, Two Sigma and Bridgewater enjoying inflows as much of the rest of the industry struggles. Half of last year’s top 20 hedge funds, ranked by the fees paid to managers, were primarily quantitative — and several of the remainder use at least some strategies based on algorithms.

Even traditional mutual fund groups like Fidelity, T Rowe Price and Capital Group are now spending huge sums on technology and technologists in an attempt to enhance the abilities of their portfolio managers.

The results are not always good, with the solid performance mostly concentrated in the biggest funds. Only 11 per cent of US equity quant funds have managed to beat their benchmarks this year, according to Bank of America. 

Some analysts say that with quants increasingly mining real-time feeds of alternative data — such as credit card sales, app downloads, satellite images, social media chatter and mobile phone geolocation — the entire investment industry is speeding up. The catch is that the profitability of many of these signals tends to decay rapidly, forcing funds into a never-ending hunt for new ones.

However, that may have opened up richer opportunities for investors with a longer-term horizon, according to Savita Subramanian, head of US equity and quantitative strategy at BofA in New York. She estimates that valuations explain nearly 90 per cent of the S&P 500’s returns over a 10-year horizon — better than any other factor the bank’s analysts pored over. 

There is little evidence that average turnover and holding periods are changing significantly, according to Yin Luo, a senior strategist at Wolfe Research. But he agrees that there may be rich pickings in longer-term strategies. “It’s much less crowded,” he said. And this is what Havelock wants to exploit.

Mr Beddall joined Winton immediately after graduating from the University of Southampton with a BA in mathematics and computer science, and it was Winton founder David Harding who first introduced him to the value investing principles of the Berkshire Hathaway chief.

Havelock’s six employees currently track 38 companies, and are adding just one company a month, they say, to ensure analytical rigour. The investment group builds models to value these businesses using a combination of human judgment and algorithmic analysis, and once the model is constructed Havelock trades largely on autopilot. The £14m fund was launched in August 2018 and has returned 5 per cent since then, roughly double the gain of the MSCI World index over that period.

Fees for investors are capped at 0.99 per cent of assets a year.

The fund manager is satisfied with the initial performance, but admits that Havelock’s value-oriented approach has been a headwind in a market that still prefers faster-growing but pricey companies. Value investors prefer cheaper stocks, either measured by their earnings or their assets versus their share price. “Buying expensive stocks doesn’t make much sense at this point, but it’s the most expensive things that have done the best over the past 12 months,” said Mr Beddall. 

Combining the systematic investing approach of quants with longer-term, deep-research value investing style is tricky. Quants say it is much easier to use statistical sciences to predict near-term performance of a security — whether over a day or a millisecond — than over the next year, given the vast amount of factors that influence a company’s performance.

However, Mr Beddall remains optimistic that combining these two approaches is feasible. “It’s not impossible, it’s just a little harder,” he said. “If you look at what Buffett’s done, he looks at what companies might be worth, rather than what they’re going to do in the next quarter.”

Ownership overlap increases risk of crowded trades, which can lead to large losses

The overlap in US companies owned by both hedge funds and traditional mutual funds has climbed to a fresh high in a convergence that elevates the risk of crowded trades. 

About 12 per cent of the top 50 US stocks held as overweight positions by hedge funds and traditional mutual funds are owned by both sets of managers, according to Bank of America Merrill Lynch. The overlap in ownership was zero as recently as June 2015.

Savita Subramanian, head of US equity and quantitative strategy at BofA, said strong momentum effects in the US market were one possible explanation.

US stocks that have performed well have tended to attract more buyers, helping the shares of those companies to maintain their upward momentum.

“We have seen convergence of strategies that has led to a narrower and narrower cohort of stocks outperforming the market,” said Ms Subramanian.

This has also been reflected in valuations where the gap between expensive and cheap stocks, measured on a share price multiple to earnings, stands close to an all-time high.

“Valuations for growth stocks have been creeping higher while the reverse is true for value stocks. Being a value focused investor has been the best way to lose money in recent years,” said Ms Subramanian.

Companies owned by both sets of managers which are also held as large overweight positions by hedge funds include United Airlines, Charter Communications, health insurer Humana, Las Vegas-based hotels group Wynn Resorts, aircraft components manufacturer TransDigm and restaurant chain Chipotle Mexican Grill.

The tech stocks known as the Faangs (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) have also been popular choices for hedge funds and mutual fund managers.

“Hedge funds like to focus on sectors where there is high volatility, such as the large US technology stocks which are widely held by mutual fund managers,” said Sara Rejal, a senior director at Willis Towers Watson, the adviser.

Ms Rejal added that more hedge funds were now running “long only” strategies, which may have increased their overlap with mutual funds. “Some hedge funds have become overly conservative because their clients don’t want large drawdowns but this has led to even worse performance and reduced their ability to generate returns,” she said.

If a hedge fund has already banked profits on successful trades, it can then choose to shrink the tracking error relative to the US market as a deliberate tactic.

“In that scenario, hedge funds tend to pad out their portfolios with the largest market capitalisation stocks, such as the Faangs, which will lead to more overlap with the holdings of mutual fund managers,” said Farouk Jivraj, head of quantitative investment strategies research at Barclays.

But overlapping holdings between hedge funds and mutual funds create the risk of crowded trades, which can lead to larger losses if a company misses an earning targets or issues a profit warning, and investors rush for the exit.

“The risk of crowding is high if the overweight position is held in a company with a smaller market value which has less liquidity. The risk is not as great if the overweight is in the biggest, most liquid stocks,” said Mr Jivraj.

With support from retail industry veterans including Andrew Rosen and billionaire Ron Burkle, Sam Ben-Avraham has raised $300 million for a competing bid against ABG and has his sight set on restoring Barneys to its former glory as New York’s coolest retailer.

It’s not closing time yet for Barneys.

Earlier this week, the luxury retailer agreed to a $271.4 million initial offer from Authentic Brands Group that would see the licensing company close the retailer’s remaining stores. But there is at least one other contender for the department store chain: a consortium of retail veterans led by Kith investor Sam Ben-Avraham.

In an interview, Ben-Avraham said he had raised $100 million in equity and secured another $200 million in debt from a bevy of fashion and real estate heavyweights, including his brother and real estate developer Uzi Ben-Avraham, Theory co-founder Andrew Rosen, Intermix founder Khajak Keledjian, Bergen Logistics CEO Ron Roman and billionaire investor Ron Burkle, a current investor in Barneys. Ben-Avraham said he still needs to raise more capital to complete his bid and is tapping others in his network of friends and family.

At stake is the fate of Barneys as a freestanding store. Authentic Brands Group says it will close the chain’s stores, liquidate its merchandise and license the brand name to competitor Saks Fifth Avenue. Ben-Avraham has a different plan: he said he intends to keep five stores open, including the 230,000-square-foot Madison Avenue flagship.

Their deadline for bids is October 22, with a bankruptcy judge picking the winner two days later. Authentic Brands Group did not respond to a request for comment.

“We have a plan to make this establishment relevant based on the original DNA and vision of Barney and Fred [Pressman],” said Ben-Avraham, pointing to the merchandising finesse of the luxury retailer’s founding family.

Barney Pressman opened a store selling discount suits in 1923. Under his son Fred, Barneys became a destination for refined menswear, and by the 1980s, womenswear as well. At its peak, Barneys was the epitome of elite New York cool; for emerging designers, a rack on the Barneys sales floor was a make-or-break opportunity.

But shopping habits changed with the rise of e-commerce, and after what Ben-Avraham calls “decades of mismanagement,” Barneys lost much of its cultural relevance and began losing money. A 72 percent hike in rent on its flagship forced a reckoning; the retailer filed for Chapter 11 bankruptcy protection in August. Ben-Avraham said he’s negotiating with the flagship’s landlord, Ben Ashkenazy, to strike a better deal.

Ben-Avraham opened his boutique, Atrium, in 1993 during Barneys’ heyday. Atrium was at one time a New York shopping destination in its own right, mixing indie denim labels next to brands like Balmain. In 2011, he partnered with Ronnie Fieg to create Kith, which has become one of the most popular streetwear retailers in New York. As its earliest investor, he opened Kith’s first two physical outposts inside Atrium’s Soho and Brooklyn stores.

But Atrium was a victim of the same downturn in the brick-and-mortar wholesale business that went on to claim Barneys. With an onslaught of new players online, it became harder to secure exclusive partnerships with vendors, Ben-Avraham said. The boutique closed in 2016, and its Brooklyn and Soho locations became Kith. Today, Ben-Avraham owns and operates a number of trade shows, including the Cabana swimwear show in Miami and the Liberty Fairs menswear show.

He cites a key difference between Atrium and Barneys, however: Barneys’ prowess in generating high-order values at its physical locations while maintaining an online presence as well. In the first half of 2018, Barneys’ average order value at the Madison Avenue flagship was $540, according to report from a July 2018 board meeting.

"It's been hit with a number of difficult times, but Barneys is not a lost cause," said Robert Burke, of the New York-based retail consultancy Robert Burke & Associates. The task at hand is "a reconfiguring of physical spaces and how big and how many do you need, but the chain could be certainly fixed or reformatted."

Ben-Avraham also touts Barneys’ exceptional customer loyalty. “A Barneys customers would not walk into Saks,” he said.

With only a few days left, outbidding Authentic Brands is still an uphill battle. And turning Barneys into a viable business won’t be easy. The company operates in the red and has gained a reputation for late payments and broken relationships with the same emerging brands that it needs to revive its reputation with consumers.

Ben-Avraham said addressing these relationships will be his priority, with a goal of bringing fresh merchandise to the floor every week and not stocking too many brands that appeal to similar types of customers.

“We need to have a point-of-view again,” he said.

Managing Barneys’ considerable expenses, including store leases and inventory, while investing in new features and e-commerce, will be difficult, said Gary Wassner, the founder of factoring company Hilldun, which helps designers and vendors finance the production of large wholesale orders. Wassner considered putting together his own bid for Barneys but has since decided not to pursue it.

“I like his plans and I don’t doubt he can do it,” said Wassner, who met with Ben-Avraham earlier this month to hear his pitch, though he ultimately decided not to join the bid. “But there are structural issues with the current [system] that need to be fixed, [including] corporate overhead and problems with the e-commerce platform.”

While Ben-Avraham said he doesn’t intend to copy streetwear’s “drop” paradigm — the recipe behind Kith’s success — he hopes to make Barneys stores entertainment destinations with an assortment of activations to draw crowds beyond its usual customers.

“It’s going to be an experience that you want to come to every weekend, not just the die-hard fashion people but everyone else,” he said.

Support from his backers will be a crucial factor in any Barneys’ turnaround. Rosen has invested in a number of brands, including Proenza Schouler and Alice + Olivia, and is no stranger to the importance of merchandising, especially for millennial consumers. Roman’s expertise in logistics will come in handy when revamping Barneys’ e-commerce platform, which has lagged competitors’ online offerings.

ABG, which received an $875 million investment from BlackRock in August, has built a portfolio around distressed brands like Nine West and Juicy Couture, as well as the intellectual property of deceased celebrities. Its business model is based on licensing IP to vendors and manufacturers, who can take a brand and slap its name or image on everything from shoes and sportswear to CBD cream and airport souvenirs. The company doesn’t hold inventory; rather, its profits come from royalty fees.

Under ABG, Barneys’ IP would be licensed to Hudson’s Bay Company, the owner of Saks, which would reportedly open shop-in-shops at certain locations. If it prevails as the winner of the auction, ABG could begin liquidating Barneys merchandise by the end of the month.

For Ben-Avraham, the value of Barneys is not just in its name, but also the store’s legacy in New York’s retail landscape.

“Some people think I’m crazy. Some people are like, “What the f.ck are you doing? Everyone is leaving retail now,’” he said. “But I can see it. I can see Barneys three years from now.”

IMF warns fixed-income funds are vulnerable to liquidity shocks

Bond funds holding assets worth about $1.7tn could face difficulties in repaying investors promptly if volatility increases, according to the IMF, which warned that problems in fixed-income markets could potentially destabilise the global financial system.

The warning coincides with mounting fears that a dangerous pricing bubble has developed in fixed-income markets where bonds worth $15tn — about a quarter of the debt issued by governments and companies globally — are trading with negative yields.

Negative yields imply that prices have risen so high that investors will get back less than they paid, via interest and principal, if they hold the bond to maturity. Creditors, in effect, pay to hold debt.

This bizarre reversal of normal practice has triggered alarm bells because bonds are a core holding for institutional investors worldwide.

Concerns among regulators that bond funds might struggle to meet repayment requests by investors have been amplified by recent liquidity problems involving Neil Woodford, H2O and GAM.

Many bond fund managers have reduced their holdings of cash and other liquid assets that provide little or no income in an effort to improve returns. This so-called hunt for yield has driven up demand for lower quality assets that could prove more difficult to sell if market conditions deteriorate.

The IMF examined a sample of 1,760 bond funds (about 60 per cent of the $10.6tn in globally outstanding fixed-income assets) to determine if they would still be able to meet the most severe monthly outflows which they had registered since January 2000.

It concluded that almost one-sixth of all fixed-income fund assets would face a “liquidity shortfall”, implying that their managers would not have sufficient cash, liquid assets or credit immediately available to repay investors in the event of a repeat of their largest monthly redemption.

The IMF also noted that the weakest one-fifth of fixed income funds could face severe liquidity shortfalls which exceeded 20 per cent of their assets. 

The average liquidity shortfall across bond funds has increased by about a third over the past two years and the total shortfall across the fixed-income sector is estimated to have reached $160bn (if all funds were to experience a simultaneous liquidity shock).

“Declines in holdings of liquid assets raise questions about fixed-income funds’ ability to absorb redemption shocks,” said Tobias Adrian, the IMF’s financial counsellor. 

The problems were even more widespread among high-yield funds that invest in lower-quality corporate debt. Almost half of all high-yield fund assets could face a liquidity shortfall if their manager was confronted with a repeat of their biggest monthly withdrawal since 2000, said the IMF.

The IMF warned that if bond funds were unable to meet redemption requests, this could spark fire sales where managers dump assets to raise cash, which would inflict losses on other investors and “increase the risk for the financial system in the extreme case”.

Ultra-low interest rates introduced by central banks after the financial crisis have encouraged a huge rise in debt issuance by governments and companies over the past decade. 

But up to 40 per cent of the $19tn of debt owed by companies is now at risk of default if there is a global economic downturn, according to the IMF’s analysis. This could lead to widespread losses for bond funds.

The IMF said policymakers should also consider introducing eligibility criteria based on credit quality and liquidity metrics for the inclusion of assets in fixed-income portfolios to reduce risks. 

It also suggested that asset managers should be required to better match the redemption period of their funds to the liquidity profile of their portfolios to mitigate the potential for fire sales.

This would require sweeping changes in current practice in Europe where the vast majority of mutual funds (Ucits) offer investors daily liquidity despite not having a formal obligation to do so.

The IMF’s analysis in its annual Global Financial Stability Report follows similar criticisms by other regulators.

Mark Carney, governor of the Bank of England, said in June that investment funds that hold illiquid assets but offer daily redemptions to investors were “built on a lie”. 

The BoE reiterated its view that liquidity vulnerabilities are a widespread problem because many funds offer daily redemptions while investing in assets that can take weeks or months to sell in an orderly way.

“Large-scale redemptions from funds could test markets’ ability to absorb asset sales, amplifying price moves, transmitting stress to other parts of the financial system, and disrupting the availability of finance in the real economy,” said the central bank. 

The UK’s Financial Conduct Authority last month set out new rules that will apply from September 2020 to funds that invest in hard-to-sell assets. They will be subject to deeper disclosure rules, enhanced depositary oversight and a requirement to produce liquidity risk contingency plans. These funds will also be required to halt trading if there is uncertainty about the value of 20 per cent of their assets. This rule will initially apply only to open-ended property funds but the FCA is considering extending this standard more widely across the fund industry.

Pascal Blanqué, group chief investment officer at Amundi, Europe’s largest asset manager, said the vast bond-buying programmes introduced by central banks in response to the global financial crisis were partly responsible for the liquidity problems in fixed income markets. “As the share of assets held by central banks rises, there is an increased scarcity of bonds available for investors to purchase, squeezing liquidity in some markets,” he said. 

His comments were echoed by Marc Ostwald, chief economist at the brokerage ADM Investor Services. “Central banks have crowded out private sector fixed-income investors from government bond markets. Zero-interest rate policies have also forced investors to move into riskier bond investments in a reach for yield,” said Mr Ostwald. 

US bank loan funds sold to retail investors present an acute example of potential liquidity problems, according to Moody's, the rating agency. “Bank loans trade as private transactions for which settlement times typically average two weeks. Bank loan mutual funds have a structural mismatch between the assets they hold and their liabilities to investors,” said Stephen Tu, senior credit officer at Moody's.

Mr Ostwald said post-crisis regulations had made the banking sector safer while also pushing risks previously held by banks into the investment funds industry. “What previously were risks within the banking system may metastasise into illiquidity risks in the investment funds sector,” he said. 

- There are indications that the Euro Zone economic improvement is on its way; orderly Brexit would assist with that

- Making ECB voting records public would help improve transparency and accountability

Investors will need to see they can endure a real downturn before giving them credit

What did we learn from the avalanche of big US bank earnings this week? That the industry can take a hard punch — from interest rates falling to historic lows — and remain up on its feet.

Bankers and bank investors can breathe out, and start to think about whether there are more punches coming.

There was considerable anxiety coming into third-quarter results season. But the diversified giants, most notably JPMorgan Chase and Bank of America, showed real resilience. Most of the banks beat analysts’ earnings estimates, and a few of them by wide margins. Goldman Sachs, whose investment banking operation stumbled, was the notable exception.

Yes, revenue growth was lower because lending margins were tighter; lower interest rates and a flattening yield curve will have that effect. And the banks’ level of excitement about the state of the US economy has cooled somewhat. A year ago, for example, JPMorgan’s finance chief said: “We don’t see it slowing down.” This quarter, the economy was just “on a solid footing”. Such tonal downgrades were audible across the industry.

But even in the thinner air of late 2019, the banks’ business models are working. The big lenders are still collecting deposits, the lifeblood of the industry, at a healthy pace. Loan demand is holding up too. BofA’s loan book is growing at about 5 per cent, up by $43bn over the past year. Even Wells Fargo, its reputation under repair following the fake accounts scandal, is increasing its loans again.

As a result the margin compression, so far, has been moderate. Indeed, net interest income is still rising at the two biggest banks by market capitalisation, JPMorgan and BofA.

As a side note, it is interesting that the growth has different sources at the two banks. Both are harvesting prodigious flows of deposits — almost $140bn worth over the past year between them. But JPMorgan has said it thinks it wiser to invest that money into long-duration debt securities, which have modest yields but do not require much capital to be held against them. BofA, on the other hand, prefers higher-yielding, more capital-intensive loans. Only in the fullness of time, when the costs of impairments are counted, will we find out which strategy was smartest.