Manager Monday: PAR Capital Management
In this Manager Monday, we take a deep dive into PAR Capital Management to explore the manager's portfolio.
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.
In a recent article we wrote on how investors can identify top hedge funds based on public data, we created a list of mangers that consistently show up in the top quartile of their peers in three different skill sets. PAR Capital Management made the top three and scored very high marks in recent years. The Boston based fund was founded by Paul Reeder in 1990 and their website states that they believe in “long term investment success through narrowly focused and rigorous fundamental research”. Their simulated performance has been exceptional and we decided to take a deeper dive in our Manager Monday series. As always, we will be using the Novus Alpha platform to analyze the manager’s public portfolio.
This hockey stick-looking chart is actually the simulated performance of PAR based on public ownership data. The orange line below that looks flat in comparison is the S&P 500 which generated 93% return in the 15 years analyzed.
Some managers rely on short bursts of massive outperformance to generate alpha, others rely on long periods of steady outperformance for their alpha. PAR is in a league of their own exhibiting multi-year periods of massive outperformance.
Great for them and their investors, interesting for us to analyze since the results are so unique. Since 2000 they have trounced their benchmarks annualizing at a dizzying 18.6% compared to 4.5% for the S&P500 with dividends. The first question should be “What were the drivers or their return?” Let’s use the Novus platform to investigate.
Attribution and Win/Loss
For the period analyzed, July 2004 – May 2015, PAR had invested in 759 securities (Box 1 below). Box two shows their batting average: 58% of them had positive P&L for the period. That translated to (Box 3) 73% of their total capital invested in winning names. The win/loss ratio can be calculated from Box 4: the average contributor made them 328 bps while the average detractor lost 79 bps. That helps explain how the manger was so successful. They allocated capital efficiently and made 4.1 times more on their winners than they lost on their detractors.
Many hedge funds have benefited from an overweight in Healthcare recently, not so with PAR. Though they have historically played in the sector, swinging exposures to and from opportunistically, they are recently underweight the sector with respect to the S&P1500 and heavily overweight Consumer Discretionary and Industrials, their two largest sectors. Below are the relative weights to the three sectors compared to the S&P 1500.
This sector tilt bodes well for the skill they have exhibited historically. We used the Novus Framework to decompose PAR’s P&L and segregate the portion of return attributable to skill from the portion attributable to market and sector volatility. The results show a lot of skill in precisely the same sectors that the manger is overweight. This indicates that PAR knows what they are good at and they tend to stick to it. Below is a chart of just the portion of returns attributable to their stock selection skill, taking out all market and sector contribution. The largest areas of stock picking skill for PAR have been Consumer Discretionary (325 Percentage points of return over 15 years due to selection), and Industrials (164 percentage points) with Healthcare also contributing well:
Many of their top winners are consumer travel companies. Further, a sizable portion of their success can be traced back to a single position in Priceline.
In fact, 19% of their long side P&L from the last 15 years can be attributed to PCLN. Let’s take a closer look at how they traded the name.
PAR made a lot more money from PCLN than many other managers since they were able to size it well in their book from the start. From the above chart of position size (bottom) vs. price (top), we can see how PAR opportunistically sized the name up for a rally capturing a lot of the upside and laying off the pedal at just the right time.
Looking at the data, one can begin to draw some inferences about PAR. Their strong returns are not simply driven by market and sector direction, skills play an important role. PAR seems to know certain areas of the markets extremely well, and they size those areas up in their book. More importantly, they seem to know certain stocks extremely well and have been able to monetize that edge by focusing on and trading those securities. They get paid a lot more when they are right than they lose when they are wrong. Taken together, those ingredients made for a very successful investment process and should continue to contribute to the manager’s success.
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