Parus Finance has been paring back its long positions over the last half year, first taking profits after 2013’s incredible run and then reacting to the correction in February and March, though it started to redeploy capital at the end of June. The result was a peak-to-trough drawdown of 10% and a positive 0.3% return for 1H14, compared to a 5% return for the MSCI World Index and 17.8% net IRR for the fund since inception in 2003.
“March of this year was the perfect storm for the portfolio, with a drastic reversal of growth versus value, impacting negatively almost all our long book without any help from the short book,” the firm wrote in a recent letter to investors.
Parus net exposure down in 2014
Net exposure fell from 88% (93% long, 5% short) at the end of 2013 to 60% at the end of June (75% long, 15% short), and the letter says that short exposure remained at or below 5% until February and has risen to 22% as of August 10. Net exposure dipped as far as 50% in April in response to weak markets and concerns about tension in Ukraine, though the letter didn’t give corresponding data at each date (eg we don’t know short exposure in April specifically).
At the end of June the long portfolio consisted of 25% invested in high-growth companies, down from 30% at 2013YE, 16% in established companies (down from 35%), and 35% in “companies with mean-reverting characteristics,” up from 30%.
Parus major long positions in Facebook and Tesla
Facebook Inc (NASDAQ:FB), Parus’s largest position, delivered in each quarter and Parus argues that it still has a lot of upside because it hasn’t monetized its audience to the same extent as older advertising businesses like TV and print once did. Even if you don’t think that comparison holds perfectly, Parus points out that focusing on the steady number of daily active users in the US misses that the number of minutes spent on Facebook in the US increased 40% year-on-year.
Parus also sees more upside in Tesla Motors Inc (NASDAQ:TSLA), a position that it initiated at $70 and has bought for an average price of $140, because of its significantly lower cost per kWh to manufacture battery packs, putting it at the head of an important new market in electric vehicles. Tesla contributed 1.5% to Parus’s performance in 2013 and 3% in 1H14.
Parus throws out some short ideas
While it’s not completely clear from the letter whether Parus was identifying short positions or simply giving examples of the kinds of companies they look for, it mentioned that the investment team now spends 40% – 50% of its time looking at short positions, more than double the average since 2008.
“Given the current market valuation, the risk reward of shorts is better,” says the letter. “We remain constructive on the cycle, which explains the current net long exposure, but want to have a more balanced book between longs and shorts.”
Seagate Technology PLC (NASDAQ:STX) and Advanced Micro Devices, Inc. (NYSE:AMD) are mentioned as examples of ‘structural decliners’ because Parus believes their chief product, hard disk drives, are getting pushed out of the market by NAND Flash memory, and that the increased demand from cloud servers won’t be enough to make up the difference.
The fund is also shorting potential victims of Amazon.com, Inc. (NASDAQ:AMZN)’s all-in growth strategy, betting that the deflationary pressures that it is putting on some retail companies, such as smaller electronics companies, will drive at least some of them out of business. Staples, Inc. (NASDAQ:SPLS), Bed Bath & Beyond Inc. (NASDAQ:BBBY), and Best Buy Co., Inc. (NYSE:BBY) are all mentioned, though again it’s not clear if these are actual short positions the fund has taken. Parus points out that this tactic is “similar to the 2004-2008 period in which we made money on the victims of Google – shorting companies in newspapers, radios, printing machines, and yellow pages.”