How are Julian Robertson's protégés faring today? Market cap, overlap, position sizing, & popular names reveal insight into Cub performance.
Earlier this year the Wall Street Journal ran “Tiger Hedge Funds Become Wall Street Prey,” an article citing the losses of some prominent funds of Tiger lineage. While Tiger Cubs aren’t immune to the challenges facing all active managers, it is much too early to call them the “prey” of Wall Street or imply that they’ve lost their touch. In this article, we’ll examine data from the markets and public filings of the Tiger Cubs to unpack what’s really going on.
It’s no secret that stock pickers, especially those using bottom-up strategies, have struggled in the recent years. Many Tiger Cubs follow in Julian Robertson’s footsteps by using that very strategy. Most hedge funds that last long enough experience rough periods, so it’s natural for a few managers using a strategy that’s under pressure to have a tough year. That doesn’t, however, mean that something has fundamentally changed.
Why are these strategies struggling? Certain market factors directly influence managers that use a stock-picking approach. One such factor is dispersion (how much the average outperformer gains over the average underperformer), and another is correlation (how much securities move in lockstep).
Last year was notoriously difficult for stock pickers due to low dispersion and high correlation. (The reverse is optimal for generating robust performance.) Other factors including market breadth, interest rates, volatility, risk-free rates, and quantitative easing all aligned in what looked like a perfect storm—the worst possible environment for a long short equity manager picking stocks.
But currently some of these factors are changing. Correlations are crashing, while dispersion is on the rise. Stock pickers—including the Tiger Cubs—will most likely take advantage of these shifting winds.
Overlap in the Tiger Cub Portfolio
To study their portfolios, we aggregated all historical public holdings reports filed by Tiger Cubs (managers that worked with Mr. Robertson), Tiger Seeds (managers seeded by Mr. Robertson), and Grand Cubs (managers that have worked at either a Cub, Seed, or another Grand Cub.) The portfolio’s market value is $143B split by pedigree as presented below:
We have been fine-tuning this Tiger Family list for years, weeding out Fund of Funds, non-equity managers, non-U.S. or Global managers, and closures. We were also mindful to include newly launched managers. Today we capture 49 managers including Tiger Management.
The first thing you might notice when comparing portfolio holdings is the high number of shared stocks. Makes sense when you consider they have matured under the same investing legend and have evolved similar processes. Our clients can quantify this through the Novus Overlap Matrix. Here are the Tiger Cub portfolios with the most overlap:
As an example, the numeral 30 at the intersection of Lone Pine and Coatue means that at least 30% of the value of these portfolios are identical. Clicking on the number reveals the securities in common and sizing behind it, as well as the calculation we used:
The force-field diagram below displays the managers as one would analyze a social network. Instead of media “likes” we use portfolio holdings. The managers in the center (Lone Pine, Viking, Tiger Global, and Blue Ridge) have more positions overlapping with their peers, while those on the periphery (Impala, Deerfield, and Bridger) are more unique. Dot size represents portfolio market value for each manager.
Constructing the Tiger Portfolio
To construct the Tiger portfolio, we merged all holdings together using reported market values. The market value weighted portfolio is housed on the Novus platform—the world’s leading analytics and research software for managers and allocators of capital. We simulated performance, risk, and other attributes of the Tiger Cubs’ portfolio using holdings and market data. Here are the results:
The Tiger Cub portfolio, above in blue, compounds well beyond the S&P 500 total return index and trumps the MSCI World since 2006. While 2016 was a tough year, the YTD 2017 portfolio of Tiger Cub longs has doubled the return of the S&P 500.
Let’s study some more data to see how their portfolios are positioned moving forward.
Above we can see four metrics our clients use when analyzing any portfolio: Assets (market value of longs), concentration, liquidity, and weighted market capitalization. These key metrics are closely linked to a manager’s performance (more on that).
While the dollars controlled by Tiger Cubs are down from their 2015 peaks, they’ve stabilized and even grown since early 2016. As we’ve mentioned, the Cubs control in aggregate $143B in long equity value. The next chart is particularly telling. Concentration of their portfolios has been increasing. This means that the Tiger cubs are expressing a lot of conviction in their top stock picks, putting more of their portfolios to work in top trades. In addition, the average Overlap has increased—they are investing more dollars in the same group of names. Currently 37% of the portfolio is invested in the top 20 stocks. That’s down from a peak of 42% in early 2016 but significantly higher than historical average.
Another trend you may notice is that the portfolio is still very liquid; even if all Tiger Cubs sell their longs at once, they can liquidate 88% of their longs in thirty consecutive days. This is because the portfolio is invested in liquid mega cap names—the market capitalization of the portfolio has skyrocketed from $37B in 2014 to $117B today.
So, what does all this mean?
Let’s take a closer look at concentration. If Tiger Cubs are getting more concentrated and deploying more capital in their top names, is that a good thing?
Position sizing is a portfolio management skill closely linked to concentration. The Novus platform captures position sizing for the Tiger cub portfolio as follows (with the assumption being that sizing is a conscious decision to add more capital to the top names or let them appreciate from price action):
This analysis compares the actual performance of the portfolio to that of an equally weighted portfolio, all else equal. Did the managers benefit from concentration? In aggregate, Tiger Cubs have consistently added value sizing (green bars). In fact, the actual weighted portfolio added almost 32pp over the last decade. This implies there is a relationship between the aggregate position size of Tiger Cubs and the returns of those positions. This can be tested.
Breaking up the portfolio by position size reveals a clear relationship—the largest positions (>5%) have the highest annualized ROICs (return on invested capital). Increased concentration, where more of the portfolio is invested in the top stocks, is historically a good thing for the Tiger Cubs.
Moving Up Market
Let’s consider the increasing market cap trend—is this a problem for the Tiger Cubs? Not according to the empirical evidence. Most of the alpha generated by the portfolio comes from large and mega cap names. Additionally, the names in those buckets have the highest win/loss ratios historically. The following three charts illustrate batting averages (the number of winners per bucket), win/loss ratios (managers earnings vs. manager losses on avg. by bucket), and attribution (how much of the contribution was driven by market and sector volatility vs. security selection in that sector—selection is indicated by the dark shading in the third chart).
Mega and large caps are winners, while the smaller capitalization names are not so great.
When identifying a trend, we should test its persistence. In the next set of charts, we broke up the attribution analysis into three separate time periods. In all three distinct periods, alpha was generated in mega caps and lost in small and micro:
In two of three periods, alpha was generated in large- and mid-cap names (less persistence than mega caps).
Thus, while Tiger Cub portfolios are evolving, most changes have historically positive indications. The increased concentration, increased overlap, and moving up market caps are all changes we expect will help rather than hurt performance.
Most Loved Tiger Cub Stocks
Facebook (FB) is currently the largest bet by dollar value and by number of Tiger Cubs holding it—twenty-six Cub managers hold roughly $6B in the name. In the chart below we observe how the quantity of shares (blue bars below the price) changed since the IPO in mid-2012.
The Cubs held a massive position in early 2014 and then again in 2017, cutting back a bit (likely profit taking) most recently.
Who were the first of the Tiger Cubs to jump on the social media giant? We mapped the position size by percent for all managers with a larger than 5% position in FB.
The first managers to invest with conviction (5% or more) were Valiant, Conatus, and Slate Path, all the way back in 2012. We estimate that FB has created $2.36B in profits for the group of Tiger Cubs that held it just this year and $5.36B since the IPO.
Here’s a quick rundown of some other Tiger-favored stocks:
Top winners this year besides FB are Alibaba, JD.com, and Charter Communications.
This portfolio is available for further analysis to clients upon request.