Manager Monday: Whale Rock Capital Management
In our latest Manager Monday, we dig through the latest public filings to learn how Whale Rock Capital Management has outperformed their competition.¬†
What does it take to make Novus’ top stock-pickers list for Technology two years in a row? In the case of Whale Rock, it takes scouring the globe for alpha-generative tech names, and sizing them to catch the upside. In this post we will discover how their process translates into quantifiable alpha that earned them some of the highest marks in our analysis of over 1,000 managers.
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.
Based on simulated returns from public holdings, Whale Rock has annualized at roughly 24.6% since Jan ’07. Returns were very much in line with the S&P 1500 Information Technology index (BM2), and in excess of the MSCI World (BM1) until Q3 of 2012, after which the firm has handily outperformed both benchmarks. This performance does come with a price however, as the firm tends to suffer more on the downside than either index, and in general seems to show a good deal of volatility.
Following a few bumpy years (reflected also in the performance chart) Whale Rock has grown assets, with a steady increase in publicly filed long market value since late 2011.
This increase has not been accompanied by a rise in the number of positions in the portfolio. In fact, the number of positions has actually been almost halved from where it was back in 2010 (when the fund was much smaller).
Interestingly, concentration has not increased – it’s possible the manager has simply pruned its number of low conviction names.
Liquidity, as measured by the percentage of the portfolio that can be sold within 30 days, has also been relatively static, hovering around the 100% mark since inception.
The fund appears to have responded to the growth in assets by rising up the market capitalization spectrum.
As we noted earlier, Whale Rock has performed impressively since inception – to the tune of 21,065bps of contribution. Diving into this number, we see a few encouraging trends:
The top level metrics of a 50% batting average (% of names that made money) and a 56% capital efficiency ratio (% of capital deployed into winning names) are impressive, but the really impressive metric here is the 2.57x Win/Loss ratio: on average a winner for Whale Rock makes 179bps, whereas a loser only detract 70bps.
Two other good signs: 1) performance is not just driven by a handful of names, but rather by a collection of big winners; and 2) there is a decent mix among the biggest winners between some older names and some newer ones, implying that the fund has consistently been able to find outperforming stocks.
Viewing the portfolio on a relative basis makes even more impressive reading. Nearly half of all contribution has come from alpha (derived by measuring each name against its relevant S&P 1500 sector benchmark).
Staying ahead of the curve
Whale Rock prides itself on riding the S-Curve: “When technologies hit the mainstream, they inflect up the curve, creating several years of rapid and predictable growth.”
While this is a characteristic of many TMT stocks, let’s dive into a few of Whale Rock’s winners to see just how adept they are capitalizing on this S-Curve. The charts below overlay stock price with the quantity of shares that the firm filed on to try and see if there is a consistent skillset at work here.
- In the case of AAPL, the fund neatly missed the 2011-2012 inflection point, but caught it in 2014.
- QIHU was a textbook case of catching the S-curve just right.
- NTES was entered a little late but Whale Rock still collected much of the upside.
- This last example doesn’t quite fit the S-Curve narrative, but still does say something about Whale Rock: they managed to reap upwards of a 1,000bps of contribution in LNKD, and exited before the dramatic collapse earlier this year.
Category Analysis: Sector
As self-professed TMT specialists, it’s unsurprising that Whale Rock’s biggest sectoral tilt has been to the tech space, with a lasting core allocation to consumer discretionary. They have been out of the telecom space since 2013.
Somewhat surprisingly, the fund was invested in a number of materials names in Q3 ’08 – they lost a substantial amount in that sector, and have refrained from investing there again.
Overall, the fund has performed terrifically (in alpha terms) in their core sectors. As a reminder, the relative contribution column below indicates the bps of return that came from sector exposure, with the selection column indicating the bps of return attributable to alpha (or security-level performance in excess of the sector).
Category Analysis: Geography
Whale Rock pitches itself as a global fund and has historically deployed an average of 20% of capital outside the US. In recent years, their non-US holdings have been focused in Emerging Asia.
Compared to geography-level benchmarks, the US has been a huge alpha generator, but so has Emerging Asia (to the tune of almost 5,500bps), driven by numerous winners (QIHU, VIPS, NTES, QUNR, GA, CYOU, etc.).
Indeed, Emerging Asia names have generated an impressive 5.07x win/loss ratio.
Category Analysis: Market Capitalization
Since 2010, Whale Rock’s small/mid-cap exposure has been replaced by mega and large cap exposure. Some of this is certainly organic (as certain names hit the S-curve inflection point, they grow from smaller market cap buckets to larger ones), but some is likely also own to conscious decisions to invest in larger names (perhaps keeping 30d liquidity at 100% is a key consideration for the fund).
On an alpha basis, this move appears to have been additive: small caps have detracted, and mega and large caps have done very well. To illustrate this, let’s look at a heatmap. The larger the size of the box, the larger the allocation to that market cap segment, with deeper blues associated with greater alpha generation, and deeper reds with alpha detraction (alpha here calculated by comparing Whale Rock’s holdings to their relevant market-cap benchmarks).
One worry however is mid-caps: previously a huge allocation (and the single greatest alpha generative sector), mid-cap exposure has now fallen to just over a fifth of total long exposure. Not that the fund has troubles generating alpha in larger cap names, but hopefully attractive mid-cap names can still be found.
Category Analysis: Position Sizing
We observed earlier that the manager may have pruned its number of low conviction names as an explanation for why total number of issuers fell without a corresponding increase in concentration.
On the whole, it does appear that positions <1.5% have come down from where they were back in 2009/2010 (when the number of issuers was at its peak). When we take a look at return on invested capital by position sizing bucket (in other words, if 100% of Whale Rock’s money was put into names in each position sizing bucket, so we can do an apples to apples comparison), we definitely see a connection between conviction and performance. With the exception of the 0-50bps bucket (skewed by a few outliers), as the firm tends to ramp up position size, performance tends to improve as well.
Some managers tell investors that they are great at picking tech stocks. Whale Rock can let the numbers do the talking and investors can see the alpha by themselves.
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