Manager Monday: Maverick Capital
Today's Manager Monday digs through the data to understand how Maverick Capital has outperformed.
The definition of entrenched, firmly established and unlikely to change, only partially applies to Maverick Capital. It is firmly established in the hedge fund industry as one of the oldest tiger cubs and commands roughly $9 billion in AUM. Its founder, Lee Ainslie, is just as established. He founded Maverick at 29 years old, lured away from Tiger Management and funded by the Wyly family office. He spent a handful of years at Tiger, brought on as a generalist and rising to lead the fund’s technology investments. He sits on the board of the Robin Hood Foundation among other well-known hedge fund managers.
But Maverick cannot be characterized as unlikely to change. Over the last few years, the hedge fund has made significant changes to its portfolio structure: increasing concentration and narrowing its focus on particular sectors. These are the likely cause of the fund’s recent outperformance.
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. To simulate performance and determine portfolio attributes such as liquidity, we combine public holdings data with market and pricing data and make simple assumptions.
Maverick Capital’s Performance
Simulated performance has been robust since Maverick’s initial public filings in March 2001. Two periods of outperformance stand out: recovery post-crisis (mid 2009 – mid 2011) and over the last 18 months (through 10/31/2015).
Focusing on YTD performance through October month-end, the fund’s top winners added more than double the P&L detracted by losers.
These top winners and losers are familiar hedge fund trades: VRX, GOOG, BIDU, MU, and AGN.
Maverick Capital Position Change Report
In their most recent 3Q 13F filing, Maverick reported a sizeable Pfizer stake. This is in addition to an existing Allergan position. Share prices for both have suffered after Pfizer’s acquisition announcement.
On an absolute basis, 61% of securities finished the period positive and nearly 70% of capital was deployed to these winning names, resulting in substantial positive P&L.
Maverick Capital’s Alpha Generation
Shifting to a relative basis, 51% of securities outperformed their sector level benchmark, and 60% of capital was deployed to these outperformers, resulting in a Win/Loss ratio of 3x. Win/loss ratio on a relative basis is the average contribution from outperformers divided by average contribution of underperformers. This tells us the fund was able to chisel out three times as much P&L from its average outperformer than the average underperformer sacrificed.
Through the Novus Framework, we can see its top winners produced selection alpha above their S&P 1500 sector-level benchmark. With names such as Vulcan and Transdigm, the fund produced Alpha even with sector headwinds.
Using the Novus Framework from an aggregate point of view, we see that security selection through 10/31/2015 contributed more in alpha than the market or sector contribution.
Maverick Capital’s Concentration
In a Pensions & Investments article in early November, Mr. Ainslie noted the fund came to the “realization that Maverick’s portfolio was too diversified, which hurt performance”. After completing introspective portfolio analysis a few years ago, Maverick has embraced concentration. Concentration (top ten securities as a % of the total portfolio) dramatically increased from 35% in early 2013 to its current level above 50%.
Has higher concentration rewarded Maverick? Yes– annualized ROIC between January 2013 and October 2015 is higher in the larger position size buckets.
This conclusion holds true when we expand the time range to the entire public data set (March 2001 – October 2015):
Fund concentration is a significant risk factor (internal) that must be understood by portfolio managers. Novus research also stresses the importance of understanding an external risk factor called crowdedness. We assign crowdedness scores to each security based on the percent of ADV hedge funds represent and the number of funds invested in the security.
Maverick’s largest positions carry high crowdedness scores. The majority of outperformers have high crowdedness scores as well, which could amplify losses in a drawdown if crowd selling occurs.
Maverick Capital’s Sector Exposure
In addition to position concentration, the fund has focused its investments in a smaller number of sectors: IT, Discretionary, Health Care, Industrials, and Financials. It has mostly exited Telecom, Energy, and Materials.
Success in Mega and Large Cap Stocks
Since 2010, the fund has reduced its exposure to small and micro-cap companies and currently has almost zero exposure to those buckets.
This shift will likely improve performance. The fund has had much higher returns in mega and large-cap companies, in contrast to small and micro-cap names. As we move across market-cap buckets, the ROIC trend is very linear.
Concentration is the likely driver of Maverick’s recent outperformance. The fund has sized up its highest conviction trades, with over 50% of capital allocated to the portfolio’s top ten positions. It’s focused on a smaller number of sectors, and increased exposure to market cap buckets where it’s historically had success. Crowdedness is a significant risk factor for Maverick’s positions, which are frequently traded by its hedge fund peers, and must be managed going forward.