Larry Robbins, one of the star performers in the hedge fund industry, scored brilliantly in healthcare stocks in last year. Glenview Capital has 54% of its assets invested in its top ten holdings which includes names like Thermo Fisher Scientific Inc. (NYSE:TMO), McKesson Corporation (NYSE:MCK), HCA Holdings Inc (NYSE:HCA) in healthcare sector and others like American International Group Inc (NYSE:AIG), Crown Castle International Corp. (NYSE:CCI), Flextronics International Ltd.(NASDAQ:FLEX), and Time Warner Cable Inc (NYSE:TWC).
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According to the annual shareholder letter sent to investors on March 31st and recently reviewed by ValueWalk, the flagship Glenview Capital Partners was up 42.8% in last year, ranking in the top order among its peers. Additionally Glenview Capital Opportunity was up 84% through the end of October, according to Bloomberg. Glenview Capital managed $7.4 billion in assets at the end of 2013, of which $2 billion is under Glenview Opportunity (GO) Funds. The annual letter announced that GO will be closed to new capital from April 1, however other Glenview funds remain open to new investments.
Just like other long/short equity hedge funds, Glenview also failed to score in its bearish positions in 2013. The fund’s short portfolio detracted by 5.6%. Glenview had 15% of its assets invested in shorts; the fund is betting against four healthcare companies.
Glenview’s mistake in J.C.Penney
While discussing its current positions, the fund talked about its investment in J.C. Penney Company, Inc. (NYSE:JCP). The fund categorizes investments which have a base case return and potential of increased valuations as convertible equities. Glenview initiated a position in J.C. Penney based on these observations, thinking that it would generate profits with a change in management and monetization of non-core assets, which it calls its “call options”. Robbins concedes that the position has not played out as he expected and his assessment was wrong. The fund has therefore reduced the size of its position.
The letter also elaborates on the fund’s habit of refreshing its portfolio, which helps in bringing new ideas on board. Currently nearly half of the fund’s assets are invested in positions that were built up over the last six months. Glenview Capital has sold off 20% of its top 20 winners of last year, making room for new positions. The letter noted,
“…our portfolio is “made fresh daily”, and we will aggressively recycle capital from names that have fully played out to more opportunistic situations to reduce risk and sow the seeds for future productive harvests.”
In the annual letter, Robbins discusses the scenarios that are likely to prevail this year. The missive notes that markets are likely to continue their upward march as they did in last year. The letter noted that alpha generation in the last year was driven by factors like shareholder engagement, lower borrowing costs and free cash flow. In Robbins’ view, the cost of issuing corporate debt will likely remain low even though short-term rates will rise through 2015. He thinks that the chances of drawdown are below average, and the risks are under control. He argues that even in the absence of QE, there is plenty of liquidity provided excessively risky behavior is avoided. In Robbins’ assessment, the U.S economy is on track to achieve the 2-2.5% GDP growth target.
Glenview on fruits of shareholder activism
Robbins also pointed out that activism or “the power of persuasion”, as he likes to put it, has also contributed to convergence in markets. Robbins said that the fruitful interaction between shareholders and companies which started in the last year continued smoothly in this year as well. He mentions that companies are becoming friendly to shareholders and attitudes are even changing at companies like Microsoft Corporation (NASDAQ:MSFT). Positive action on shareholder demands are also working out well – spinoffs at Hertz Global Holdings, Inc. (NYSE:HTZ), buybacks at American Express Company (NYSE:AXP) and the merger at Time Warner Cable Inc (NYSE:TWC), has heated up the markets.
Larry Robbins is a big fan of John Malone
In the letter Glenview Capital notes a lesson learned from the 2008 crisis, stating:
There are, of course, substantial winners and losers from 2008, but those are best measured over the course of the past five years. While many will point to hedge fund managers who were short mortgages, financials or the market over this period, we believe the biggest winner has been John Malone, the cable and media entrepreneur who maintained investment composure throughout the period. John Malone entered 2008 with a net worth of $1.7 billion, and now, according to Forbes, has a net worth of $7.5 billion. How did he do it? Firms that he owns and functionally controls were the only firms who consistently repurchased undervalued stock through the decline, and acted like owners while others acted like traders. We do not believe his fortune was simply the result of good fortune – he chose to invest in a highly stable and defensive industry, and he remained true to his investment principles during a confusing and difficult period.
Delivering alpha in up and down markets
Glenview Capital has remarkably managed to deliver alpha not only during the ‘up’ periods of the market but also in the ‘down’ periods. The letter notes that on average the fund generated 150bps alpha in an up quarter. In periods when the markets went down, the fund lost overall but still managed 480bps alpha compared to the S&P 500.
Glenview Capital hired four new analysts to its team in the last quarter of 2013. Kevin Berena joined Glenview from BofA, Xing Wei from Citigroup Inc (NYSE:C), Vedran Milosevic and Dan Engel-Hall from Credit Suisse Group AG (NYSE:CS).