When Eli Weinberg looks back on his life, it’s going to be the “known unknowns” that he might most lament. The co-managing partner as SPO Partners and former Goldman Sachs analyst recognizes that it is what couldn’t be predicted that was part causation for his value-based hedge fund closing Thursday.
Nearly 50 years after the hedge fund known for a concentrated portfolio was founded, one of the early Warren Buffett disciple hedge funds realized that “known and unknown risks” were issues with some of his stock picks. In a challenging market environment for stock pickers, Weinberg told investors that “it is exceedingly difficult to deploy capital with an acceptable margin of safety.”
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In a letter to investors reviewed by ValueWalk, Weinberg pointed to a core Buffett principle, finding great companies and believing in them over the long term, as not being a working thesis in today’s environment. “Businesses we admire, in well-positioned sectors with attractive growth prospects, are priced to perfection,” he stated in the October 25 letter.
With interest rates at historic lows a global reach for any sort of yield comes at a time of a stock market environment without much widespread idiosyncratic zeal. Barring major individual news, stocks in the middle of the market have largely risen and fallen with strong relative correlations to their peers.
“Many investors are suspending valuation disciplines, paying high entry multiples and hoping for the best, often anticipating even higher exit multiples,” he wrote, pointing to a strong beta market for stocks. “Indisputably, this strategy has worked in recent years, and its influences on indexes” has driven corporate managers to keep pace with the general market.
It was only “after substantial internal deliberation about the investing environment” relative to SPOs focus on individual name exposure that they decided “the ability to execute effectively in this market” was challenged. Finding stocks with “free options” that are not priced in is virtually impossible. “Today, this exercise often demands that we pay unprecedented multiples for growth that may not materialize” amid an increasing bid for yield amid “persistently low interest rates, and muted cycles.”
Will a positive market environment for value investing return or will the fog of quantitative easing keep markets buoyant indefinitely?
“We do not know when this dynamic will end, but we suspect business and lending cycles are not extinct, and the end will not be pretty,” he wrote Thursday, watching as the S&P 500 fell a whopping 224 points from last Tuesday to Wednesday’s close.
The Mill Valley, California fund was founded in 1969 by Stanford alumni John Scully, William Patterson and William Oberndorf. With a 23% average annualized return, much of that coming from big idiosyncratic stock selection, the fund somewhat famously managed money for the Robert Bass family from 1971 to 1991, a heyday for stock picking.
Longtime value investors have been struggling in the era of quantitative easing. The investment concentration that benchmarks Buffett’s incarnation of the strategy is perhaps most evident in today’s headlines of Sears Holdings Corp. bankruptcy. That single investment made by hedge fund manager Eddie Lampert filed for bankruptcy last week. Value investor David Einhorn is down nearly 35% in the last three years, Bloomberg reported, with 26% of that drop coming in 2018.
The closing of the fund doors might not be the end of the SPO Partners legacy, Weinberg noted wistfully. “I look forward to many successful chapters that SPO Partners alums will write in the future.”
This article originally appeared on ValueWalk Premium