Manager Monday: Eminence Capital
Eminence Capital has not only been able to surpass that watermark, but also two market crises and the worst year for Hedge Funds.
How often does a Hedge Fund survive two decades?
Not too often. According to some studies on manager survival, 50% of Hedge Funds fold within 5 years of inception. Eminence Capital has not only surpassed that mark, but also two market crises and the worst year for Hedge Funds.
How has PM Ricky Sandler managed one of the top activist funds (by $ market value) for the last 17 years?
Although we don’t know the secrets of his investment decisions, SEC filings allow us to analyze the results—and maybe even understand how he thinks.
In this article we’ll put three specific aspects of investing in context: the number of securities you choose to invest in (decision #1), how concentrated those securities are (decision #2), and how you size up or down those positions over time (decision #3).
About our Data
Everything mentioned in this post is sourced exclusively from public regulatory data, including the manager’s profile, simulated performance, and all other analysis and commentary. The data used here omits the short side, non-equity securities, many non-US securities and all non-public information such as actual fund performance.
What Differentiates Activists from Non-Activists?
#1: Number of Positions
Activist managers are usually invested in few securities, but they can be highly vocal about their bets. Within the Novus Activist Portfolio, which includes the most renowned activist Hedge Funds in the world, the average manager held around 40 securities in 2014. In comparison, the average manager in our Hedge Fund Universe, which includes all managers that report to the SEC (~1100), held on average 70 positions last year. Eminence Capital has owned an average of 63 positions per year since inception, still below the average Hedge Fund.
Fewer securities does not always mean increased concentration. However, for activist investors concentration is, more often than not, an investment strategy: if you want to make a public case on the companies you choose to invest in, you’ll most likely take a large stake of ownership.
Our Activist Portfolio’s top 20 securities (as % of total portfolio) was 34.28% for 2014, while for Eminence Capital it was 52.43%. This concentration is based on the publicly filed positions, and does not include private assets.
Novus Activist Portfolio:
#3: Position Sizing Skill
Since Activist investors hold fewer securities and make more concentrated bets than the average manager, one could conclude that they may not strategically size their positions. This is not necessarily true: Activist Hedge Funds, just like most managers, carefully size their positions within their portfolio. And more so considering that a small price movement of any one of their highly concentrated securities can determine performance fees for the year.
2015 is a good example of this: Valeant was ValueAct’s largest position in June; however, in only five months—and with Q3 holdings still undisclosed—Valeant has dropped down to the 5th position in ValueAct’s public portfolio.
Position Sizing Skill can in fact add alpha to a portfolio, and here at Novus we know how to quantify it. If you compare a hypothetical portfolio in which all positions are equally weighted (in this article, month-over-month) and the actual returns of the portfolio, you can identify how position sizing is adding or detracting. Over the last year, the Hedge Fund Universe added +0.07% to returns through sizing up the right positions. The Novus Activist Portfolio added +0.61%. And Eminence Capital added +0.84%.
Although 0.84% may not seem like a large number, over the last 17 years, Eminence Capital added +157.62% of value from the position sizing skill (note: most of it was generated in the 5 first years).
Novus Activist Portfolio:
Eminence stands out in the hedge fund space: it’s an activist manager that has been able to survive up and down markets for almost two decades. Although 2015 has been especially tough for activists–Eminence has fared better than the average activist fund YTD—if we look at specific portfolio skills, it’s possible to separate the alpha from the beta.
In this article we’ve specifically looked into security concentration and position sizing skills. The findings are the following: although Eminence Capital holds a bit over the average number of securities of activist managers, it’s more concentrated and has realized higher returns from its sizing decisions.
A Hedge Fund should never be solely measured by its % performance—if you’re aware of what your next potential investment managers are good at, you’ll be able to better diversify your portfolio.
Healthcare: Deerfield vs. Palo Alto
A look at two successful managers who survived the VRX crisis.
Healthcare is a favorite of hedge fund managers, with nearly 5% specializing in the sector. This is to be expected. If you’re going to pay a professional to help invest in the market, healthcare seems like the place. Healthcare stocks exhibit very wide dispersion between the best and worst performing securities, making it attractive for managers selecting long and short investments.
There’s been a lot of attention lately on the embattled pharmaceutical company Valeant and other popular hedge fund stocks hurt from contagion. With that in mind, in our latest article, we’ll profile two Healthcare specialists who’ve avoided VRX and survived the perceived downturn in the sector.
Download our latest article to learn more.