Philippe Laffont's Coatue Management: Technology Trends Presentation ~ market folly

Wednesday, September 16, 2009

Philippe Laffont's Coatue Management: Technology Trends Presentation

Philippe Laffont’s Coatue Management is a specialist hedge fund that focuses on the sectors of Technology, Media and Telecom. The fund was established in 1999 and Laffont typically keeps a low profile, rarely doing media interviews. However, we recently found a presentation that Laffont gave to MIT Alumni in May of this year that we thought readers would enjoy. While it is a few months old, the themes are still very much relevant as they examine at the technological landscape from a top-down perspective. If you are interested in long/short equity hedge funds, technology stock picks, or both, we highly recommend you take a look at Laffont’s whole presentation by downloading the .pdf from MIT here (make sure you download it before MIT takes it down).

In particular, we wanted to highlight slide 14 from the presentation. This slide (pictured below) highlights the trend cycles in the technology sector as we progress from mainframes to personal computing to networking to the internet. They highlight possible winners in the current environment to be Google (GOOG), Apple (AAPL), Research in Motion (RIMM), Qualcomm (QCOM), and Amazon (AMZN). This would be par for the course in hedge fund land as we have highlighted numerous times in the past that GOOG, AAPL, and QCOM are some of the most widely held stocks amongst hedge funds. Additionally, Goldman Sachs' hedge fund trend monitor report highlighted the fact that the remaining technology plays RIMM and AMZN are highly favored as well.

(click to enlarge)

We also wanted to highlight slide 18 that examines current trends in TMT. They see smartphones as an obvious trend going forward as customers prefer mobility, playing right into the hands of AAPL and RIMM. They see Nokia (NOK) as a possible loser here due to their lack of growth in the smartphone arena. Instead, NOK has typically been successful in selling run-of-the-mill mobile phones. Additionally, Coatue highlights the expansion of cloud computing and virtualization and notes Citrix (CTXS) and VMWare (VMW) as key winners.

(click to enlarge)

In terms of management style, Coatue follows a classic long/short equity strategy in which big directional bets are avoided. Typically, long/short hedge funds have 100% gross long exposure and 70% short, producing a net long exposure of 30%. Very loosely speaking, long/short funds tend to underperform the market in strong rallies (like the one we have seen since March) but outperform when markets fall. And, if they are successful at stock picking, they will outperform in flat markets and generate alpha regardless of circumstances.

Laffont is one of the so-called 'Tiger Cubs,' or managers who once worked for Julian Roberson at Tiger Management that have gone on to start their own funds. (We have covered the Tiger Cub family tree before for those of you unfamiliar). Robertson will be speaking at this year's Value Investing Congress and we highly recommend attending, as we have secured a discount to the event for our readers. Laffont’s investment principles were certainly influenced by his mentor. Following Robertson’s dictum that “The market never spoke to him,” Laffont does not follow market timing or macro economic forecasts to get him in and out of the market. Instead, he favors an approach based on in-depth proprietary research of individual companies and sectors. Laffont encourages his staff to identify and research long term investment trends. The diagram we posted above (slide 14) shows some of the very long term trends in computing. These are the types of trends they look to predict, ride, and capitalize on.

One of Laffont’s stockpicking mantras is “dare to be different”. In other words, he seeks to take the road less traveled by focusing on stocks besides the ones in the spotlight. Given that Coatue is a sector specific fund, Laffont believes that specialization is important for success and he urges his staff to stay passionate about technology. Coatue staff members were reportedly amongst the first to get their hands on an iPhone when it was launched.

A final investment principle that Laffont emphasizes is the importance of capping your losses. He does not spell out exactly how losses are capped at Coatue which is a shame because it would be interesting to find out more in this regard. For example, do they use stop losses or are they prepared to sit with a losing position for a long time if they still like the story - in the way perhaps that Julian Robertson would have in years gone by?

Given all of the technology trend talk above, we now want to turn to Coatue's portfolio. In expanding our coverage of hedge fund positions in UK markets, we have this update for you. Coatue have two disclosed long holdings in the UK market at present:

symbol date No. shares % of equity Estimate of price paid Group mony 11/01/2008 18167261 3.7 na

01/06/2009 45959122 9.1 115p

Taken from Google Finance, Group PLC operates a United Kingdom price comparison Website. The Company provides customers with a free online service enabling them to compare a range of products in the insurance, money, travel and home services markets, and to find the product most suited to their needs. The Company’s Website enables customers to compare products by price, product features and service. In addition to these comparison services, the Company helps and supports customers to research the product they wish to purchase. This includes news articles, guides, video blogs, Web chats, and the ability to ask the views either directly of its employees or other customers in the Company’s forums. The Company operates two principal Websites: and

Secondly, Coatue has also disclosed another stake:

Telecity Group Plc TCY 27/12/2007 6014538 3 na

15/01/2008 8485557 4.3 276p

Taken from Google Finance, TeleCity Group Plc is a pan-European provider of network independent data centers offering a range of scalable data centre services, and value added services, which include security, storage, messaging, disaster recovery, monitoring, application, and database management services. It has 20 data centers, which act as a content and connectivity hub, facilitating the storage, sharing and distribution of data, content and media.

Overall, very interesting information and a great glimpse into how a prominent hedge fund frames and researches their strategy. In the past, we've covered Coatue's E*Trade (ETFC) stake in US markets as well. We'll be covering Coatue more in-depth going forward so be on the lookout for more updates on this fund. And on the topic of various UK positions that hedge funds hold, we've already covered Moore Capital Management's positions, Lone Pine Capital's UK holdings (and their recent movements as well), Sprott Asset Management's defensive UK portfolio, as well as Citadel's positions.

Last, but certainly not least, make sure to visit our hedge fund portfolio tracking series for following all the footsteps the big funds make in US equities.

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