Thursday, January 31, 2019

Howard Marks' Latest Memo: Political Reality Meets Economic Reality

Oaktree Capital Chairman Howard Marks is out with his latest memo entitled Political Reality Meets Economic Reality.  In it, he spends the first part of the letter with interesting first and second order effects of the impact of tariffs, examining what's perceived as a benefit versus a risk. 

Marks then goes on to touch on something else that's worrying him even more: increasing anti-capitalist sentiment.

Rising populism is something he's watching, and he's not alone, as Ray Dalio of Bridgewater Associates has been cautioning about this as well.

Marks writes,

"A great deal of America's economic progress has resulted from people’s aspiration to make more and live better.  Take that away and what do we have?  The people at the bottom won’t have as many at the top to resent.  But without the contributions of those who aim for the top, everyone will have less to enjoy.  This is why I worry about the rise of negative sentiment toward capitalism and antipathy toward those who succeed under it."

Embedded below is Oaktree Capital's latest memo from Howard Marks:

You can download a .pdf copy here.

Don't forget that Marks also has a brand new book out: Mastering the Market Cycle that's definitely worth checking out.

Sequoia Fund Q4 Letter: New Positions in a2Milk, Electronic Arts & Melrose

Ruane, Cunniff & Goldfarb is out with its Q4 letter for 2018.  Their Sequoia Fund finished the year -2.62% compared to -4.38% for the S&P 500.

New Positions in a2Milk, Electronic Arts & Melrose

During the quarter, the fund started 3 new positions.  Here's their thesis on a2Milk, a premium milk and baby formula producer in New Zealand:

"A good analogy here is Greek yogurt, which is believed in some quarters to confer health benefits you can’t get from regular yogurt. While Greek yogurt, like A2 milk, is a commodity product, companies like Fage and Chobani have built big businesses by wrapping compelling brands around it. a2Milk is attempting to do the same thing, to great effect thus far. Riding powerful consumer trends favoring products perceived to be healthy and natural, a2 has become the leading premium milk brand in Australia while making rapid inroads into the massive and quality-obsessed infant formula market in China. An effort to penetrate the U.S. milk market is also showing early promise."

Their new stake in Electronic Arts is a bet on gaming.  Games are taking more of people's time and are becoming more expensive to produce, favoring deep-pocketed companies like EA who have scale.  Sequoia feels the trends of digital game delivery and in-game purchases will benefit them.

Sequoia's bet on Melrose, on the other hand, is a bet on the jockey.  They write,

"Melrose is essentially a publicly-traded private equity firm, but with some very unusual twists. It mostly avoids borrowed money, focuses on only a small handful of investments at any given time and eschews dedicated funds that create a compulsion to invest without regard for the quality of the opportunities on offer. As with Berkshire and Constellation Software, the combination of a differentiated approach and a talented team has enabled Melrose to compile a hugely impressive long-term record of value creation. The company has never lost money on any of its realized investments, and in aggregate, it has produced an IRR of 24% per annum. At present, the company owns a collection of manufacturing businesses in the U.S. and Europe that span the aerospace, automotive and HVAC industries. In aggregate, they’re unlikely to grow any faster than the overall economy, but we think Melrose can make them substantially more profitable, and we ultimately expect management to sell them at attractive prices, freeing up time and capital for new opportunities."

Sold Almost All Of Their TJX Stake

During the fourth quarter they also sold almost all of their TJ Maxx (TJX) position.  This is notable as they first bought shares almost 20 years ago.  While the company is still operating well, they feel the future of the stock and business is less exciting as the PE ratio roughly double what they originally paid.

The letter also touches on 3 stocks that performed poorly for them last year that they still own: Mohawk (MHK), Naspers, and Charles Schwab (SCHW).

Embedded below is Sequoia Fund's Q4 letter:

You can download a .pdf copy here.

For more fund letters, be sure to check out excerpts from Baupost Group's Q4 letter as well as Oaktree Capital's Howard Marks latest letter.

Hedge Fund Links ~ 1/31/19

Elliott Management looks beyond activism to full blown takeovers [WSJ]

Co-CEO of Bridgewater hails radical transparency [Barrons]

Top performing hedge fund is shorting Canada's banks on housing [Bloomberg]

How John Paulson is positioning his Celgene/Bristol trade [Bloomberg]

Diminishing returns: hedge funds look to keep it in the family [FT]

It was a tough year to be a hedge fund manager not named Ray Dalio [Barrons]

JANA liquidates two hedge funds, to focus only on activism [StreetInsider]

Fahmi Quadir was up 24% last year, but it came at a price [Institutional Investor]

How Bill Ackman convinced Hunter Harrison to ride the rails again [Financial Post]

The inside story how Carson Block made a killing last year [Business Insider]

Wednesday, January 30, 2019

What We're Reading ~ 1/30/19

Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant [W. Chan Kim & Renee Mauborgne]]

Latest thoughts from Ray Dalio [LinkedIn]

Morgan Housel on what other industries teach us about investing [MicroCapClub]

Dominance of tech stocks: an evolve-or-die moment for world's great investors [Fortune]

A global tipping point: half the world is now middle class or higher [Brookings]

A look at Air Lease (AL) [Woodlock House]

Pitch on InterActive Corp (IAC) [LG's Musings]

AT&T wants to be big in entertainment but it has a $49 billion problem [WSJ]

Boeing's decision of the decade: does it build the 797? ]Bloomberg]

How Juul made vaping viral [Techcrunch]

Sports betting in the US: the rise of a billion dollar business [NYTimes]

Mukesh Ambani wants to be India's first internet tycoon [Economist]

How a former Canadian spy helps Wall Street mavens think better [NYTimes]

The best investments of 2018? Art, wine, and cars [WSJ]

A look back at the life of Jack Bogle [Vanguard]

The legacy of Herb Kelleher, co-founder of Southwest Airlines [Harvard Biz Review]