Maverick Capital likes the second half of 2016 – and the firm’s leveraged fund benefited most during the period. The Maverick Levered fund was up 5.4% in the second quarter, according to a letter to investors viewed by ValueWalk. The Long Enhanced and Long programs also benefited during otherwise back and forth stock market period while the Select program was down slightly.
Maverick up second quarter, generally near flat for the year
The brain-power behind Maverick’s long / short approach is Lee Ainslie III, the former “Tiger Cub” and University of Virgina alumni who cut his teeth under value den master Julian Robertson. Ainslie’s genius is taking Robertson’s benchmark value investing concept and fine tuning the most difficult of all formula components to manage: short exposure.
During the second quarter the Dallas, Texas-based Maverick was up 2.9%, 2.8% and 1.5% in the LDC, Long Enhance and Long funds respectively. The Maverick Select fund was down -0.6% on the quarter, and is off by -5.7% on the year. The Long Enhanced fund is up 0.3% on the year, with losses of -0.2%, -0.8% and -1.8% coming from the Long, LDC and Levered funds respectively, according to the letter.
In 2015 the Maverick Levered fund was up 28.7% in 2015, the top performer in a very difficult year for most long-only investors. The LDC fund was reported up 16.4% during that period as well. The Maverick Long and Enhanced funds gained 3.7% and 6.6% respectively last year.
From several respects, Maverick’s performance profile fits that of the noncorrelated manager, with the exception being that human discretionary value investing is much more difficult to model than systematic strategies, which are more dependent on discernible technical beta market environments.
Anslie uses disciplined cash flow math on both sides of the long / short exposure ratio
The value investing concepts Anslie prefers typically cut both ways. For both the long and short exposure portfolio components he is said to use valuation metrics that are identifiable and point to repeatability.
At a high level questions are asked about sensible capital allocation with a focus on shareholder returns over “empire building,” a point of discretionary analysis.
At a more micro, quantifiable level Anslie conducts ratio analysis. Analysts at the firm focus on free cash flow relative to enterprise value but in a discretionary twist, the metrics are not similar for each company and industry. The firm tends to operate over a three-year time horizon with a goal of 20% average annualized returns over the lifetime of the investment. Such high potential metrics are often required to be considered as a percentage of win percentage: a certain amount of stock picks both long and short are likely to fail. The win size needs to be significantly high enough to cover the loss percentage / failure rate.
From a long / short portfolio management standpoint he is reported typically 150% long and 100% short, a relatively more noncorrelated ratio spread than most hedge funds in the long short category, which are often much higher on long rather than short exposure.
Finally, the famous Tiger Cub manager is warning about valuations. Specifically, Lee notes (our brief informal summary):
Cut stock loan fees by 2%, citing many hedge funds giving up on single stock shorting
Short alpha is cyclical, entering one of these cycles now
Past cycles characterized by tightening monetary policy, widening credit spreads, and high valuations
Conditions match today, effect of monetary stimulus lesseningNongaap to gaap earnings difference now 24%, only reached previously in Mar 2001 and Dec 2007
Concerned about valuation, Forward PE now higher than in 98-99
EV/sales at 2.8x 15% higher than prior peak of 2.4x
Running with half of met exposure of their LT avg Net*