Manager Monday: Glenview Capital Management
A historical analysis of Glenview Capital Management's investment process to evaluate if this period of losses is a bump or a negative trend.
After the difficult hedge fund environment of the recent months, innovation is not only necessary, but perhaps mandatory to survive. During 2013 and 2014, the Health Care sector was the source of the majority of alpha in equities. However, in 2015, the trend changed drastically and the sector experienced punishing losses, forcing Health Care-heavy managers to try to rebuild investor trust.
Among these names, one stands out in particular; Larry Robbins. After six years as a U.S. equity long/short analyst at Omega Advisors, Robbins founded Glenview Capital Management, a fund that, until 2015, could virtually do no wrong. The focus on fundamental research and individual security selection, combined with the ability to seek out novel opportunities in Health Care, positioned Glenview to place lucrative bets during the last decade. However, according to public data, the main fund’s heavy Health Care focus led to losses of about 20% through October 2015 [based on simulated performance drawn from 13f disclosures] and resulted in Robbins publicly acknowledging his mistakes. Nevertheless, he still believes in his investment strategy as well as in the long term potential of the Health Care sector.
To show he would make up for recent losses, Robbins announced he would forgo compensation in 2015 and would create a new long-only Health Care focused vehicle that would operate with no fees for existing investors, as long as the invested funds were not pulled from the main Glenview fund. In an industry where the 2 and 20 fee structure prevails, a fund with no fees is setting quite the precedent. Is this just a strategy to minimize redemptions or is this move a demonstration of true conviction?
Even though past performance does not guarantee future results, a historical analysis of Glenview’s investment process might be the best way to evaluate if this period of losses is really just a bump in the road or a negative trend here to stay. Let’s dive in.
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.
Performance and Growth
From January 2002 to now, the fund outperformed both the S&P 500 and the MSCI World benchmarks by nearly 280% and 300% respectively. However, a considerable part of that cumulative performance was lost during August and September.
The fund’s performance was accompanied by significant asset growth. Reported market value has increased six-fold since Q2 2009. Glenview used this growth to scale up the market cap spectrum and increase the number of positions in the portfolio.
Market Cap Management
The Median Market Cap has increased two-fold since mid-2009 as the portfolio moved into higher Market Cap segments – Mega Cap exposure has increased from 0% of book at the beginning of 2009 to ~23% at present.
Security selection alpha on a market cap-adjusted basis has added ~11,000 bps since Dec 2001. Large Cap has been the primary area of strength, consistent with the move up the spectrum. However, low alpha in Mid Cap is inconsistent with capital allocation as noticeable in the alpha chart below. Moreover, Mid Cap is the main group that has detracted significant alpha during the past few months.
Compensation for Illiquidity
30 Day Liquidity has been fairly stable over time, though it has slightly deteriorated in recent years. Since mid-2013, roughly 80% of the portfolio could be liquidated in less than 30 days. This still represents a healthy liquidity profile, but is something that should be monitored in the future, especially if the fund’s growth persists or the portfolio becomes more concentrated.
Glenview began drifting into the slightly more illiquid 30-60 days investments in mid-2009, though data shows they have been compensated for additional liquidity risks through higher ROIC in those same buckets. Interestingly, the most illiquid >60 days buckets produced negative returns, meaning the manager was historically better off in the more liquid buckets.
Position Sizing Management
The growth in assets since June 2009 coincided with the steady increase in the number of positions in the portfolio as well as the move up the Market Cap Spectrum.
Portfolio returns improve as the size of positions increase, showing the manager has been compensated for high conviction positions. However, in recent years, the portfolio has shifted towards smaller buckets that have historically produced lower returns for the fund.
Sector Allocations – What Went Wrong?
The manager’s sector exposure shifted meaningfully since 2001, as allocations to Health Care and Consumer Discretionary have increased. While the overweight Health Care exposure fueled a great return stream during the last decade, it has turned into the main risk factor of the portfolio.
Since December 2001, Health Care has been the primary area of strength for the fund even though, during the past few months, the sector gave back approximately half of the selection alpha previously generated. While the alpha generated in Health Care is consistent with the increased exposures, the negative alpha in Consumer Discretionary is inconsistent with capital allocation as this sector continues to be the third highest average exposure for Glenview.
Absolute Returns and Security Selection Alpha Generation
Since 2001, Glenview has a 63% Batting Average and a 68% Capital Efficiency, indicating the manager’s consistent ability to allocate the majority of assets to positions that generated positive returns.
55% of names in the portfolio outperformed their relative sector index and 58% of Glenview’s assets were allocated to outperformers. The portfolio has generated roughly 7,000 bps of alpha since Dec 2001, accounting for nearly 20% of total contribution.
Besides the direction of the markets and Robbins’s ability to shift the portfolio opportunistically, by investing with Glenview you are taking a bet on two things (at least in the short term): the general outlook for the Health Care industry and the manager’s ability to select stocks for alpha in that sector. The latter has strong evidence in data to support the manager’s stock picking ability, despite the most recent anomaly. The former is something that you will have to decide on your own.
Besides running a successful hedge fund for over 20 years, a large part of Julian Robertson’s legacy is his ability to produce other investment juggernauts through mentorship and training. His progeny, dubbed the Tiger Cubs, now control around $200B and boast some of the industry’s most successful fund managers. But his ability to select and seed talent has arguably been equally as impressive. While a few of the roughly 40 Tiger Seeds are no longer around, many are doing exceptionally well.
In this article, we’ll focus on two Tiger Seeds, managers that were put in business by Julian Robertson and have since blossomed. The article looks at both managers individually to get a feel for the specific intricacies of their investment process. While they’re different from each other, they share some similarities. After all, they caught the eye of the same legendary investor for a reason.
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