John Burbank's Passport Capital Likes Natural Resources (Portfolio & Investor Letter) ~ market folly

Friday, June 18, 2010

John Burbank's Passport Capital Likes Natural Resources (Portfolio & Investor Letter)

John Burbank's hedge fund firm Passport Capital is out with their May performance update and first quarter investor letter. Per the documents, we see that Passport now manages $3 billion and their Global Strategy Fund was up 0.6% for May in a month where the market indices tumbled 8%. Overall, they fared much better than other hedge funds who were down big. Year to date for 2010, Passport is up 5.1%. Since inception, Burbank's fund has returned an impressive 23.6% annualized. Those returns, however, do come with some wild volatility. Passport Global was up 219.7% in 2007 and down 50.9% in 2008. Still though, if you can stomach the ride, the cumulative body of work is hard to argue with. Note that John Burbank will be presenting investment ideas at the upcoming Value Investing Congress and we've secured over a 40% discount for Market Folly readers here.

Turning to Passport's most recent exposure levels, we see they're overall 93% long and -44% short. This gives them 49% net long exposure and it's certainly much higher than what we've seen from other hedge funds. The vast majority of funds have had very low net long exposure. This is even more surprising when you consider that Passport had high exposure yet still managed to generate a positive return in a month where the markets were down severely. Burbank did note that this increase in exposure is not a shift in their market outlook, but rather due to appreciation of their basic materials positions.

Here are John Burbank's top 10 public longs:

1. Riversdale Mining (AU:RIV)
2. Apple Computer (AAPL)
3. Financial Technologies (IS: FTECH)
4. McKesson (MCK)
5. Teva Pharmaceutical (TEVA)
6. Labrador Iron Mines (CN:LIM)
7. CF Industries (CF)
8. Pantaloon (IS:PF)
9. TIG Holding Ltd (BZ:TARP)
10. Jordan Phosphate Mines (JR:JOPH)

As you can see, they have a lot of international exposure and also favor natural resource plays. Of their equity holdings though, two look very familiar: Teva Pharmaceutical and Apple. These two are some of the most widely held stocks amongst hedge funds. Embedded below is the May performance attribution sheet from Passport Capital:

You can download a .pdf copy here.

Additionally, in Burbank's first quarter letter to investors, he hones in on Passport's current strategy: betting on natural resources that China is structurally short. He touches on their thesis for Riversdale, their largest position and one they have owned for three years (traded in Australia). Burbank cites rising merger activity in the sector and rising coking coal prices. Passport owns around 14% of the company.

Turning to their position in Teva Pharmaceutical, Burbank cites increased opportunity in the health care sector due to reform. Passport believes the winners due to these changes will be pharmaceutical players, and diagnostics sectors. They also like pharmaceutical benefit managers (PBMs) and pharmaceutical distributors, thus reflected in their McKesson position. We've seen many other hedge funds bullish on the PBM sector as Andreas Halvorsen's Viking Global bets on Express Scripts (ESRX) and Lee Ainslie's Maverick Capital had been bullish on CVS Caremark (CVS).

Turning back to non-equity positions, keep in mind that Burbank's Passport owns physical gold as well. Embedded below is Passport Capital's first quarter letter to investors and we recommend reading it in its entirety for Burbank's in-depth explanation of some of their natural resource related bets:

You can download a .pdf copy here.

That about wraps up this comprehensive update on one of the more successful macro funds over the last decade. Keep in mind you can receive investment ideas directly from John Burbank and many other prominent hedge fund managers at the upcoming Value Investing Congress (receive a discount here).

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