How do the top stock pickers become top stock pickers? In this report we'll dig into the data to understand how managers made the list.
Portfolio construction is more than finding Hedge Funds with positive performance; stock selection skills are also important. Our recent “Top Hedge Fund Stock-Pickers Report” focuses on the managers with consistently outstanding security selection alpha generation by sector.
Here we’ll analyze the underlying skills hedge funds rely on to outperform using the Consumer Discretionary (CD) list. A deeper dive into security selection drivers illuminates important trends and potential issues—such as reliance on one outperforming name. As usual, this data is based on aggregate 13F filings required for institutions managing $100m or more. While said public data is not true performance, through our research we’ve found that it closely mirrors the performance & metrics of the long-short equity and long-only funds we cover in this article.
Top Stock-Pickers for Consumer Discretionary
Our Top Stock-Pickers report uses five-year annualized security selection alpha to rank managers within sectors. The top ten managers within Consumer Discretionary are listed below.
The differentiators between these managers and their less successful peers are their high batting averages combined with remarkable win/loss ratios. These high ratios highlight the managers’ ability to consistently choose winning names, size them up, and cut losers. Matrix Capital dominates the list with a win/loss ratio of 22x—the average winner contributed 22x more than the average loser detracted.
The similarity in success rates may be driven by shared investment ideas. To evaluate, we’ll review the underlying names in these managers’ publicly available portfolios.
Normalized Overlap for Consumer Discretionary Names
The Novus Overlap functionality displays where and how much a manager’s portolio holdings overlap with other managers. For regular overlap, position sizes are calculated as Market Value/AUM. Since we’re only focusing on Consumer Discretionary overlap, however, we’ve modified the functionality to normalize the position sizes as Market Value/Total Sector Market Value. This normalization gives a better comparison of funds of varying sizes. Here we’re using the minimum overlapping position size between two managers invested in the same name, sorted by the highest average overlap.
Below you can see that NFLX comprises a significant portion of the underlying overlap, as it’s held in six of the portfolios within our list, followed closely by JD and AMZN, which are held in four.
Main Security Selection Generators
Although these Consumer Discretionary managers have successfully generated security selection across their portfolios and minimized losses, they all posess outsized winners that propelled them to the top of the list. In this section, let’s focus on those outstanding names.
NFLX, AMZN, and CHTR were major players for many managers in our list. However, simply having the names in the portfolio wasn’t enough. Conviction—as proxied by the average position size—and the timing of the trades made a big difference.
Matrix Capital Management – Matrix Capital successfully found winning positions, sized them up, and held them long enough to maximize returns. Their top two names are NFLX and CRI, generating 4,800bps and 700bps of security selection respectively. NFLX was the second largest allocation for both the CD book and the portfolio as a whole at 12% and, as of December 2016, stands as the top allocation at 21%.
Silver Point Capital – Silver Point found winners in DLPH and CPS and sized them up considerably. They had the two highest average position sizes for both the CD book and the portfolio, generating 3,760bps and 3,600bps respectively. Silver Point sold DLPH in early 2014, but CPS is still going strong.
Altimeter Capital Management – This manager is more diversified in terms of alpha generation, as its outsized winners are the top four allocations in the CD book: RCL, CTRP, EXPE, and PCLN, generating over 1,000bps each. RCL, the top alpha generator at 1,750bps, has the second largest average position size in CD and third largest within the whole portfolio. NFLX was held over the same period as Matrix Capital, but the average position size was small and only generated 130bps.
Kenmare Capital Partners – LVNTA and NFLX are Kenmare’s outsized security selection generators, with 2,800bps and 1,100bps respectively. LVNTA was the largest allocation of the CD book and the portfolio as a whole, with an average position size of almost 20%. However, they closed the position in 2015. Though NFLX was a significant contributor, Kenmare closed the position in 2013, missing out on more recent returns. Their two biggest alpha-generators are no longer in the book.
Tybourne Capital Management (HK) – This manager went for the trifecta: Their top three alpha-generators are none other than AMZN, CHTR, and NFLX, generating 1,770bps, 1,480bps, and 740bps respectively. Additionally, AMZN and CHTR were the top two allocations for the CD book and the top first and third allocations for the whole portfolio. They’re still in all three positions.
Maple Lane Capital – AMZN is the outsized alpha generator here at 1,060bps. Because of the size of their portfolio, AMZN was the fifth largest allocation in the CD book and twenty-eighth for the whole portfolio at 4%. While NFLX was present in the portfolio, it had a negligible effect on performance.
Coatue Capital – NFLX is once again the outsized alpha generator with 1,250bps, followed by VMED and AMZN at 540bps and 480bps respectively. NFLX was one of the biggest allocations of the CD book and the whole portfolio at an average position size of 6%. The manager closed out their position in VMED in mid-2013 but held the other two names during the entire time period.
Nokota Management – AMZN played the biggest role in Nokota’s performance, followed by CTRP. They bet on Netflix in early 2016, but due to poor timing, the position worked against them, detracting 15bps.
Ratan Capital Group – CHTR generated 1,600bps for Ratan Capital, followed by FWONA at 300bps. CHTR was held since December 2012 and was one of the biggest bets in both the CD book and the portfolio with an average position size of 12%.
SRS Investment Management – NFLX strikes yet again, generating 3,200bps since SRS entered it in mid-2012. This position was the biggest allocation for the CD book and the second largest for the portfolio at an average of 24%. Second in line is CHTR at 420bps—a position entered in Q1 2016 and still present in the book.
Judging managers on performance track record isn’t enough; their ability to consistently pick winning names and generate alpha is also a priority. Our “Top Stock-Pickers Report” is a starting point to understanding the value of selecting winners and having the conviction to stick with them. Even the best managers miss out on greater gains by exiting positions too early. The fairly high idea overlap in the top stock-pickers’ portfolios could also be risky, as a downward shift in the top alpha-generators would have an outsized impact on these managers. We will continue monitoring these trends in our future reports.Published on April 12, 2017