Steve Mandel is done with Apple. He’s over Baidu, Global Logistic Properties and Michael Kors, too.
His hedge fund, Lone Pine Capital, reveals in its second quarter letter to investors of its Lone Cypress fund that it is doing just fine in 2015. The fund likely had good timing on Apple as the hedge fund darling has seen a large decline over the past few weeks.
Lone Cypress returned 2.7% net in Q2 and has climbed 6.9% net year-to-date. The Lone Kauri, Lone Cascade and Lone Tamarack funds have performed well as well, up 7.6%, 6.8% and 7.9% in YTD, respectively.
Lone Pine exited a number of long-standing positions in the second quarter and instead increased existing stakes in Charter Communications, Facebook, Illumina, Microsoft and Williams Companies. It also initiated new positions in Aetna, Allergan and Charles Schwab.
Priceline is the fund’s top long equity position, followed by JD.com – the same as the first quarter.
Lone Pine Political Preoccupations
Lone Pine founder Steve Mandel and the rest of his team appear to be acutely aware of geopolitical movements and spend much of the letter addressing a number of issues.
They mention the future of the European Union, the stability of China, and the timing of Federal Reserve interest rate hikes but see an even broader issue at play.
“While these are certainly critical topics, the most important long-term determinant of the future pace of global economic growth is likely to be whether public policies can effectively adapt to the demographic and rapid technological changes occurring in the world,” the Lone Pine team writes.
So what are these changes? Lone Pine points to a number of currents.
Government promises made decades ago when lifespans were considerably shorter, it says, are “now diverting resources from the future – education, infrastructure and research – to sustaining the past – entitlements for the elderly.” The problem has not yet been addressed. Many other hedge fund managers (and policy makers) have expressed alarm over recent headlines regarding social security in particular.
Lone Pine also points to the sharing economy – companies like Airbnb and Uber – and puts the microscope on the government’s handling of such entities. “Stifling this innovation with archaic regulatory frameworks is contrary to job creation, consumer options and economic growth,” they write.
In fact, policymakers’ reaction to innovation and its impact on the workings of the economy appears to be among Lone Pine’s most significant concerns:
The internet has accelerated the fungibility of global labor, depressing real wages in the developed world. At the same time, the internet has created enormous wealth for the innovators and employees involved in internet-enabled and enabling businesses. The resulting magnification of the income disparity creates public policy changes around taxation, immigration, societal skills deficits and the social safety net. Significant populist backlash, resulting in innovation-inhibiting legislation that would depress growth, is a potential outcome.
Mandel did not mention any specific politicians but like Dan Loeb he is likely taking a swipe at nominees such as Donald Trump, Bernie Sanders, and Hillary Clinton. All three candidates have run campaigns which many observers describe as populist, albeit with differing views and methods.
Mandel and the Lone Pine team do not appear to be extremely optimistic that governments will react accordingly. “Unfortunately, given the current state of politics in the U.S. and in much of the developed world, it is hard to be optimistic that these difficult choices will be made over those more politically expedient,” they wrote.
Again, Mandel did not mention any names, but he is likely referring to politician such as Bill De Blasio, who as Mayor of New York City has had a rough relationship with Uber.
Innovation, Capital Deployment Main Sources of Value
Lone Pine perceives value creation in two veins in the equity markets: through innovation, and through capital deployment using low interest rate debt to fund capital investment, share buybacks and acquisitions.
“Our portfolio largely reflects these two value-creation methods, with the vast majority of our capital in these two broad areas,” Lone Pine writes. “We remain committed to internet-enabled and enabling businesses globally, companies that are reshaping advertising, entertainment, networking, retailing and travel, among other industries.”
Other areas Lone Pine likes are, in innovation, energy, enterprise software and networks, genomics, manufacturing and pharmaceuticals, and in capital deployment, consumer products, distribution, healthcare, media, payments and technology.