Manager Monday: Marble Arch Investments

Marble Arch is a prime example of the wildly successful lineage of Julian Robertson’s Tiger Management. Its founder, Scott McLellan, worked at Hound Partners, whose founder, Jonathan Auerbach, worked at Tiger. This “family tree” of hedge funds has produced prolific and successful long/short equity managers, and Marble Arch Investments is no exception. What is particularly interesting to study is the “family resemblance” in investment style and underlying holdings for these managers.

About our Data

Everything mentioned in this post is sourced exclusively from public 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.

Marble Arch Investments and Hound Partners

While we’ve talked extensively about the similarity in portfolio structure between Tiger lineage managers, many have noted the tremendous overlap between Hound and its sibling, Marble Arch. As of the most recent 13-F filings, 60% of Marble Arch’s portfolio is owned by Hound. While that sounds a lot, prior quarters have been nearly 70%!

Both managers take meaty positions in names such as Valeant Pharmaceuticals, Fleetcor Technologies, and Spirit Aerosystems. These are, of course, Tiger lineage favorites as most of these names hold in excess of 10 participants through our capture of all Tiger “family members.” Before you prematurely conclude that overlap is a bad thing, our data shows that Tiger Cub consensus names greatly outperform and the same can’t be said about all unique stocks. Most of these are world class managers and the securities they invest in have compounded at exceptional rates, so perhaps they are on to something.

Recent Marble Arch Outperformance

Marble Arch’s simulated long portfolio performance has been outpacing the S&P 500 by about 450bps per year, since our first public data capture in Jan 2008. A large amount of the portfolio’s outperformance began after the US debt ceiling crisis in the 3rd quarter of 2011:

Structural Changes

If we look at their portfolio since then, a few things become apparent in terms of structural changes:

• The portfolio has reduced the number of long positions from a peak of 26 (07/31/13) to 15 as of the most recent filing
• As a corollary, portfolio concentration has risen dramatically, constituting a 50% relative increase in terms of top 5 / top 10 position concentration

This has led to a greater allocation of larger positions in the portfolio, as positions greater than 10% of reported assets have gone from non-existent to nearly 50% of the book. In the last 30 months, that largest position size bucket has annualized at an astounding 40.5%, which shows why the move to a more concentrated portfolio explains the widening outperformance:

We can truly isolate position sizing value add by comparing an equal weighted portfolio to their actual return profile. This allows us to measure how additive the escalation in concentration has been for Marble Arch’s portfolio. We estimate, it has added nearly 3000 bps of outperformance since September 2011:

Finally, if we simply sort the names with the highest average weighting during this period, we can see a strong relationship between sizing and outsized return on invested capital. In fact, there has only been one notable miss (Applied Materials) amongst overweight positions.

This phenomenon is punctuated by the firm’s positioning in Valeant, which has been a huge driver of outperformance, delivering over 4000bps of simulated contribution:

With these trends, we can see the manager engaging in a higher octane investment style, with a clear escalation in the median P/E of the portfolio, as well as a widening negative beta to value:

Conclusion

Marble Arch’s reported long positions have had an extended period of outperformance, beginning in late 2011. This has coincided with a strong move towards increased concentration and is dominated by a growth-factor tilt. The manager continues to outperform the market, and has demonstrated adaptability in the past. The question is whether or not this trend of amplified concentration and growth bias will persist if the market begins to change in tenor.

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