Lee Ainslie & Maverick Capital's Third Quarter Letter

Lee Ainslie's hedge fund Maverick Capital is out with their third quarter investor letter and year-to-date for 2010, they're up 8.2% and have now seen 14.1% annualized returns since inception in 1995. Their Levered fund is doing even better this year, up 17.3% and has seen 22.3% annualized since inception. In total, the firm now manages over $12 billion across their various investment vehicles.

These returns are pretty solid but Q4 might be off to a bumpier start considering that one of their larger holdings has been Apollo Group (APOL), the for-profit education play that's down over 23% in the past month. But on the converse side of things, their stake in Commscope (CTV) is up almost 40% over the past month on news of potential buyout talks. At the recent Value Investing Congress, Ainslie said he believed that technology stocks are cheap. The cheapest, he argues, that they've been in 20 years.

Maverick's Exposure Levels

Given this stance, it should come as no surprise that Maverick has a large allocation of capital to technology stocks. At the end of September, Maverick was 11.7% net long technology. And at the Value Investing Congress, he revealed that Maverick has its highest technology exposure ever.

At the end of September, other notable net long exposure include financials at 13% and the consumer sector at 12.6%. In terms of notable net short positions by geography, they are net short emerging market technology, European technology, emerging market industrials, and Japanese media & telecom. Maverick seems to be betting on US companies and hedging it via shorts in foreign companies to some extent.

Maverick's Portfolio

Regarding portfolio construction, Ainslie's firm currently has 67 longs and 80 shorts. Their largest long represents a 4.7% position whereas their largest short is 2.9%. Overall, Maverick's average position size is 2.1%. As we've detailed in our profile of Maverick Capital, Lee Ainslie implements strict position sizing rules and has a solid focus on risk management. The hedge fund's top 10 investments currently represent 29% of the portfolio.

We detailed Maverick's second quarter positions in our newsletter, Hedge Fund Wisdom. The next issue (released in a few weeks) will detail Ainslie's third quarter portfolio holdings. In the mean time, we know Maverick has been long Commscope (CTV), Marvell Technology (MRVL), and Adobe (ADBE). Dell (DELL), Intel (INTC), and Microsoft (MSFT) were others he recently talked about. Be sure to subscribe to our newsletter to see what top hedge funds are investing in once our next update comes out.

Bond Market Inflows/Equity Market Outflows

Embedded below is Lee Ainslie and Maverick Capital's third quarter 2010 letter to investors. In it, Maverick's Steve Galbraith talks about the potential bond bubble where he argues that government bonds are essentially trading at a P/E equivalent to 40x. He also addresses a noticeable change in investor sentiment as they prefer bonds to stocks in a knee-jerk reactionary maneuver:

"Since 2007 over seven hundred billion dollars has flowed into fixed income funds while nearly two hundred billion dollars has left equity funds. These flows are staggering; they suggest the (potentially lethal) combination of driving 100 miles per hour while looking through the rear view mirror because the scenery just past looks so good (bonds outperformed stocks by record levels in part of this period), but also being too afraid to look forward in fear that, well, there is no there there."

Here's the letter:



You can download a .pdf copy here.

Be sure to also check out Lee Ainslie's presentation from the Value Investing Congress just a few weeks ago for some more of his recent thoughts. To see what stocks Ainslie owned in Q2 (and in Q3 in our upcoming issue), head to our Hedge Fund Wisdom publication.

Notes From the Value Investing Congress: Burbank, Ainslie, Parames, & Singhi

We're pleased to present notes from the Value Investing Congress taking place today and tomorrow. Today's notes include presentations from John Burbank (Passport Capital), Lee Ainslie (Maverick Capital), Francisco Parames (Bestinver Asset Management), and Amitabh Singhi (Surefin Investments).

Below is a quick summary of today's ideas. We'll also cover tomorrow's presentations so be sure to receive our free updates via Email or our free updates via RSS.


John Burbank ~ Passport Capital

Burbank's presentation focused on the 'math of democracy.' His talk started off quite grim as he believes the US government's current level of spending is unsustainable. Burbank feels the US is changing and must now be viewed as an emerging market. This is along the lines of what Burbank presented at the Ira Sohn West Conference recently as well. Over the longer-term, he believes we're headed either in the direction of Argentina or Germany.

The most jolting claim in Burbank's presentation was the notion that classic bottom-up stockpicking is dead. This is intriguing of course because the majority of attendees at the VIC employ such a strategy. Burbank approaches things a bit differently, utilizing a top-down approach and actually feels that the next two years in the market could be more tranquil than currently anticipated.

In terms of portfolio allocation, Burbank likes being long countries with high political/economic freedom. He likes a group he refers to as the "new CASSH" referring to Canada, Australia, Singapore, Switzerland, and Hong Kong. Conversely, he likes being short developed countries with large debt.

In terms of specific positions, Burbank mentioned Passport's largest position as Riversdale Mining (ASX: RIV). He believes gold is a 'must have' investment, but preferably via the physical asset and *not* through the exchange traded fund, GLD. David Einhorn of Greenlight Capital has also in the past mentioned that owning physical gold is cheaper than GLD (due to expenses). Passport Capital currently has an 8% position in physical gold as it is a much cheaper way to play the metal.

Burbank is quite fond of hard assets/commodities and wants to buy assets that China needs. Specifically, he likes potash for that very reason and has big stakes in Mosaic (MOS) and CF Industries (CF). Additionally, he has a position in Potash (POT), the company subject to takeover bids from BHP Billiton. Recently, Dan Loeb's hedge fund Third Point disclosed a new stake in POT. Burbank also has a major investment in coking coal in Mozambique. The fund manager also said he is long steel and short copper.

In terms of other positions, Passport also owns big blue-chips with yield including Exxon Mobil (XOM), Kraft (KFT), Dr. Pepper (DPS), and Microsoft (MSFT). Lastly, the hedge fund manager mentioned that individuals who understand capital allocation need to boost their contributions to political candidates. Passport Capital's portfolio is detailed in our newsletter, Hedge Fund Wisdom.


Lee Ainslie ~ Maverick Capital

Ainslie's presentation focused on the 'case for technology.' The Maverick Capital founder noted that the investment landscape is very different now than it was two years ago. The hedge fund manager says this is a tough market for stock pickers and that we're seeing the highest correlation among large-caps since the 1930's.

Back in 2009, low quality and small-cap stocks (higher beta) rallied furiously and led the market rebound. Interestingly enough, these low quality names have also led the market thus far in 2010 and that fundamentals haven't played an important role.

According to him, the most attractive opportunities currently reside in high quality, large-cap, lower beta stocks. In essence, he's targeting companies with solid balance sheets and high return on equity. Currently, Ainslie believes technology stocks are the cheapest they've been in 20 years. He cites their high free-cashflow yields and points out that 'growth' tech is beating out 'value' tech.

He believes the weak US dollar is helpful to technology companies. Ainslie also points out the large amount of cash on their balance sheets and opines that this cash should be deployed via acquisitions, share buybacks or dividends to benefit shareholders. Maverick's fondness for technology is an investment theme of theirs we've tracked since the first quarter of this year.

In terms of specific names, Ainslie emphasized Commscope (CTV) as a good hold through 2012. This is one of the five major tech stocks in his portfolio. The others include Marvell Technology Group (MRVL), Intel (INTC), Microsoft (MSFT), and Dell (DELL). Maverick Capital is currently 17% net long technology, their highest exposure ever.

Lastly, shifting to the heated topic of for-profit education, Ainslie was positive on the sector. But then again, we already knew that considering his sizable long of Apollo Group (APOL) disclosed in Maverick's portfolio.


Amitabh Singhi ~ Surefin Investments

Singhi has returned 29.8% annualized since inception in mid-2001. He focuses on India with his investments often buys 'cigar butts' and plays special situations. His current portfolio is comprised of 12 positions (most of which have single digit P/E ratios as he typically doesn't like to pay for growth). At the Congress, he spouted off numerous ideas.

Firstly, he mentioned Larsen & Toubro as an infrastructure play in India. This company trades as LTOUF on the pink sheets and as BOM:500510 in India. Secondly, he likes Housing Development Finance Corp as a play on housing upgrades (traded as BOM: 500010 in India). The interesting thing about some of Singhi's picks is that they are stocks trading near highs and some would argue that valuation is stretched here. Singhi does not own Larsen & Toubro because it trades at a very high multiple, 40x earnings. He is recommending superbly run and very well known companies, though.

Singhi's main idea today was Balkrishna Industries Limited (traded in India as BOM:502355), a tire maker known as BKT. The company trades at a P/E of just 7, but Q1 in FY '11 was slow. His last idea was Agrimax.


Francisco Garcia Parames ~ Bestinver Asset Management

Parames is Spain's largest money manager at $6 billion under management. He is a follower of the Austrian School of Economics. From an investment standpoint, he typically looks for good businesses with strong management trading at a solid price. Currently, he feels the Europe is still a less efficient market than the US. Obviously as a value investor, this could be seen as a welcome development as it can present opportunities. But what's interesting here is that while Parames is based in Spain, he doesn't have a single cent invested in his country.

In his talk, Parames said that, "patience is our biggest competitive advantage." He likes to buy family owned companies, something that is much more common in Europe (80% of his investments fit this criteria). In general, Bestinver focuses on strong businesses with high free cash flow yield.

At the Congress, he said that he likes BMW Preferred Shares (LSE: 0KF2.L) which currently trade at 3.1x 2012 free cash flow per share. He thinks the preferreds have over 200% upside and he owns 11 million shares (they are thinly traded at around 60,000 shares daily). Parames notes BMW's 7% margins and that this can be improved to 8-10% via better manufacturing operations.

He also mentioned CIR SpA (BIT: CIR), through Sorgenia Group, a multi-utility operator in Italy. Also, Parames mentioned Ferrovial which trades on the pink sheets as FRRVY and in Europe as ETR:UFG. He believes shares are worth around 17 euros (the company currently trades around 7 euros per share).

*** We'll also cover tomorrow's presentations so be sure to receive our free updates via Email or our free updates via RSS.

In separate posts, we've also posted up other notes from the event, including:

- Bill Ackman's Q&A session from the Congress
- Presentations from Zeke Ashton, Guy Spier, & Michael Lewitt