Pegasus Fund had its second most profitable year since its founding in 1997, reporting strong +63.8% performance in 2013 following lackluster low single digit performance in 2010, 2011 and 2012, according to a report to investors reviewed by ValueWalk. The fund primarily invests in UK stocks both long and short.
Pegasus Fund investor letter
“63.8% is a very big number indeed,” the investor letter said, “and we would caution against anyone extrapolating this progress into the future – we have been around long enough to know that in this game of fear and greed, any personality traits which smack of overconfidence must be squashed in their infancy.”
Pegasus Fund, operated by Clareville Capital in London, has a history of having what is known as fat right tail performance where the differential between positive and negative months can vary greatly. For instance, the Pegasus fund’s most profitable year was 1999, reporting +106.2%. However, this dazzling triple digit performance was bookmarked by negative 1998 performance of -11.9% and lackluster 2000 performance of +2.5%. While the variance in yearly performance has wide highs and lows, the monthly performance does not exhibit the same degree of peaks and valleys in reported performance. The annualized standard deviation, at 13.2, is lower than one might expect and the Sharpe Ratio, designed to measure risk relative to investment volatility, falls at a stratospheric 4.8.
10 keys to Pegasus Fund’s success
What did Pegasus fund do right in 2013? In short, portfolio weighting was the first of ten points credited in the letter. ”We gave our core conviction ideas high percentage weightings throughout 2013,” the letter said, “and this allowed us to make as much from these positions as was possible – we simply left very little on the table.”
The second key to Pegasus Fund’s 2013 success was letting their winning trades run. “We did well ‘not to take money off the table on the winners’ – ie before they then became even bigger winners.” This ‘letting their winners run’ dovetails into the third key: their bullish perspective on the UK economy. This is followed by their long position in Thomas Cook and their long position in the UK airline sector, buying a beaten down sector.
“In 2013, we developed a growing belief that the UK airline industry could be set to finally reward long suffering shareholders,” the letter said. “This belief was borne out of many factors, but the foundation came from the understanding that there are no practical alternatives to flying over 600 miles or more, that there is no threat from the cheaper labour card and that e-commerce adoption actually helps the airlines rather than threatens them. No matter how much we like to hate our British carriers, they are here to stay and perhaps also to finally prosper.”
Pegasus had no exposure to mining, oil or gas
The fifth key to success was the Pegasus fund had no exposure to mining, oil or gas. “We have written about the dangers of the resource sector for a while and tended to focus on the poor corporate governance of the more nascent companies that have used Britain as a prestigious and obliging home. I can’t think of another sector where a constituent’s Turkish Chairman could leave the board of his erstwhile FTSE 100 (INDEXFTSE:UKX) Company, operating out of Kazakhstan, to then work for a Malaysian billionaire and single-handedly sign a Norwegian to work in Cardiff as a football manager. It’s like watching a Bond movie – we have no idea where the action is going to take us next.”
In addition to long exposure, Pegasus also benefited from strategic selling of select stocks. What is interesting is that Pegasus fund’s long / short ratio was dramatically skewed to the long side in 2013. On average Peagasus fund is long 55 companies and short 21. In 2013 the average was long 23 stocks and short 3. “We have got better at shorting as we have got older and more street wise and I think 2013 proved this,” the letter said, and then critical of the relative value / spread arbitrage trading strategy the letter got aggressive. “I sometimes wonder who or what ‘pairs traders’ are paying homage to? Is it their mandate and their need to be market neutral or is it their ego that drives them to play the ultimate stock pickers game. If it is the former, I sympathize with their mandate because it seems a pretty silly one to us at this stage of the cycle, but if it is their ego, it will be a self cleansing process. If they make it work, they should have an ego – because they must be a whole load smarter than we would ever claim to be, and if they get it wrong, their ego will go, as will their assets.”
Pegasus fund’s successful sales
In regards to shorts, the Pegasus fund had success selling Man Group Plc (OTCMKTS:MNGPF), a trend following hedge fund publicly traded, as well as Ladbrokes PLC (LON:LAD) (OTCMKTS:LDBKY), Glencore Xstrata PLC (LON:GLEN), Eurasian Natural Resources Corporation (LON:ENRC) and Tullow Oil plc (LON:TLW) (OTCMKTS:TUWLF) and the fund sees additional shorting opportunities in 2014.
Peagasus fund was also long the “Amazon Cubs,” shares of UK retailers that had traits similar to Amazon.com, Inc (NASDAQ:AMZN) but not the high valuation. “The retailers we know well are all quite obsessive – it goes with the trade. They work hard and play hard. I would openly admit to liking a great number of them and I am fortunate to have the chance from time to time to tap their brain. Over a year ago, it struck me that they had a common collective obsession that I had not fully appreciated – namely a huge admiration for Jeff Bezos.”
The ninth key to success was Peagasus fund’s “relaxed” approach to the market, followed by merit of asking “why.” The “why” questions the fund asked in 2013 were:
Why is Angela Ahrendts really leaving Burberry?
Why are senior easyJet pilots now more loyal to the brand?
Why did Sir John Barton agree to be Chairman of the same airline with a noisy shareholder just as he nears 70?
Why do money managers and customers have such a negative disposition towards British Airways?
Why on earth do our children now think Dixons is a cool store?
Why is Charlie Wilson at Booker not on any head hunters’ lists?
Why are the best retail CEOs in the UK infatuated with Jeff Bezos?
Why did Sir Stuart Rose take the Ocado Chairmanship? Surely an opportunity cost?
Why is Ladbrokes now such a leaky company?
Why do investors stay with Man Group’s AHL fund?
Why did Sir Ian Wood step back at Wood Group?
Why did private equity firms have a good look at Thomas Cook?
Why does the CEO of Lancashire Insurance take his dog – Pompey – to meetings?
Why does the CEO of Lancashire Insurance regularly work from his home in rural Somerset?
Why does Mike Ashley enjoy life so much?
Why is George Osborne “in bed” with the UK’s leading house builders?
Why is Tony Pidgley so successful at