A specialist and focused UK long/short equity hedge fund, its area of strength is investing in UK companies. “Right now they are operating in the fastest recovering economy within developed countries,” says David Yarrow, the fund’s Founding Partner and Fund Manager in its monthly report for January 2014, a copy of which was reviewed by ValueWalk.
Pegasus Fund performance
Since inception on 31/10/97, Pegasus Class A1 shares (GBP NAV) have delivered a compound annual return (dividends reinvested) of 12.5% versus 5.9% from the benchmark FTSE All-Share Total Return Index. The total return since inception has been 577.7% compared to 155.1% from the index. The hedge fund was one of the best performers in 2013, with a return of 63%.
Year to date, the fund is down 0.4%, mostly due to the January meltdown in global equities. Yet it weathered the storm much better than the benchmark (which was -3.5%), as shown below.
Yarrow is unperturbed. “We think Pegasus will continue to be a very good way to play rising GDP expectations within the UK this year,” he says. “If UK GDP grows by 3% this year – and we think that that is entirely possible – the fund, which right now has a very clear bias to the domestic economy, should have another good year.”
Shorting the food retailing sector
Pegasus went short on Wm. Morrison Supermarkets plc (LON:MRW) (OTCMKTS:MRWSY), J Sainsbury plc (LON:SBRY) (OTCMKTS:JSAIY) and Tesco PLC (LON:TSCO) (OTCMKTS:TSCDY), triggered by the dismal Christmas sales (comparable sales were down 5.8%) disclosed by Morrison.
“Experience shows that when things go wrong for a food retailer they tend to go very badly wrong,” says Yarrow. “The benefits of increased supplier support and better terms offered for growing sales get very quickly reversed when sales start declining. Once this negative momentum takes hold it becomes very hard to control.”
With price its only weapon, Morrison is expected to unleash a discounting war that could affect the entire sector.
On US activist hedge fund Elliott Management
U.S. hedge fund Elliott Management Corp., managed by Paul Singer, has told Wm. Morrison Supermarkets plc (LON:MRW) (OTCMKTS:MRWSY) to spin off most of its real estate, claiming that such a restructuring could boost the U.K. retailer’s stock by 45%. (Read more about activist investing trends emerging across the Atlantic here.)
Remarks Yarrow: “Our view is that it will be extremely hard to find alternative buyers for the assets at the levels they are capitalised, however we do not underestimate investors such as Elliott and so have sized the position appropriately.”
Top 10 holdings
The chart below shows the top 10 holdings of the fund as of the end of January.
Pegasus Fund on Ocado
Ocado Group PLC (LON:OCDO) was Europe’s best performing major stock in 2013. The UK’s sole online supermarket, Ocado clocked gains of 410% in 2013 after a massive short squeeze was unleashed by a bullish recommendation by Goldman Sachs Group Inc (NYSE:GS).
“The company’s transition from a play on online grocery delivery in the UK to a play on global online grocery delivery should become apparent this year,” says Pegasus. “The UK is ahead of the rest of the world in online grocery and Ocado is the most advanced company within this area.”
According to the report, the fund is still benefiting from earnings revisions and the resultant price movements in its positions.
“Earnings momentum is key to our investment process and we are finding plenty of stocks where we can see high levels of upgrade and downgrade potential. As we have been saying for a while, this is a very good environment for a long short manager; we continue to work very hard to make the most of it,” says Yarrow.