John Paulson’s Advantage Fund, with $4.6 billion under management and the widest mandate among all its funds to invest in long or short event driven strategies, was up nearly 30% in 2013, the second best year in its ten year history, according to an investor letter reviewed by ValueWalk.
Two of the big winners in Paulson’s portfolio were companies in post reorganization and telecom, while his biggest loser was gold, attributing to nearly 15 percent inside the portfolio.
John Paulson: Expected telecom consolidation
In regards to Telecom, Paulson had identified this as a sector for consolidation. “As wireless growth slowed, and capital requirements rose, we believed the smaller competitors would have to consolidate in order to compete,” the letter noted. “The larger companies generated substantially all of the industry’s free cash flow and consequently the smaller ones would need to merge to gain scale and survive.“ Some of the fund’s biggest winners in the sector included MetroPCS, Sprint Corporation (NYSE:S) and Leap Wireless International, Inc. (NASDAQ:LEAP), all firms that could be takeover targets.
In Paulson’s other holdings, the fund manager likes Life Technologies Corp (NASDAQ:LIFE), saying the firm is “an important player in the DNA sequencing market, one of the fastest growing markets in the healthcare life science industry.” Paulson is holding Kodiak Oil & Gas Corp (NYSE:KOG), which is heavily involved in production of shale oil in the US, as well as owning the largest share, 26%, in Houghton Mifflin Harcourt Co. (NASDAQ:HMHC), a leading textbook publisher. He likes Hartford financial with its restructured balance sheet in the aftermath of the financial crisis, as well as another firm that plays the odds, Caesars Entertainment Corp (NASDAQ:CZR), the largest casino operator in the US, and has investments in MGM Resorts International (NYSE:MGM) in anticipation of a cyclical turnaround.
Although it wasn’t mentioned in the investor letter, Paulson’s fund is one of the top ten holders of Time Warner Cable Inc (NYSE:TWC), which is currently the subject of a takeover offer from Comcast Corporation (NASDAQ:CMCSA), pending regulatory review of potential monopoly of media concerns. Nonetheless, Paulson is bullish on this merger, calling the deal “a perfect fit” in one interview.
Extended Stay yields extended returns
One of the fund’s most successful investments was Extended Stay America Inc (NYSE:STAY), a play Paulson made by initially buying bonds in bankruptcy and then buying a stake in the company when they came out of bankruptcy in 2010, partnering with Centerbridge and The Blackstone Group L.P. (NYSE:BX) in purchasing the company for $3.9 billion. Paulson notes that after a successful reorganization, the company is the leader in the extended stay hotel segment.
In regards to his biggest loser, gold, a trade he had famously held onto through various market environments, Paulson is optimistic. “While we sustained significant drawdowns from the gold event portfolio, the sector now accounts for a smaller percentage of the Advantage portfolio (7.6%) and we believe offers more upside than downside at current trough valuations.”
Going forward, the fund’s major holdings include: Post reorganization stocks (20%), energy (16.2%), telecom (14.1%), healthcare (13.3%), financials (12.3%), hotels and real estate (9.7%), consumer 9.2% and the aforementioned gold event (7.6%), with the balance in distressed, credit, a small percentage for hedges, which is assumed tail risk protection, and then other event driven activities.