What We're Reading ~ Analytical Links 12/3/14

The best advice in business: 40 execs reveal their secrets to success [Fortune]

How the markets tempt us into making mistakes [A Wealth of Common Sense]

When should you sell a good stock? [Clear Eyes Investing]

The value of cash [CFO]

The art of variant perception from Michael Steinhardt [FirstAdopter]

Citizens Financial Group: another interesting forced IPO? [Value and Opportunity]

Henry Schein: your dentist's biggest supplier [Fortune]

Mohnish Pabrai's advice for a 12-year old investor [Forbes]

The bull case for European equities [FT]

China's corruption crackdown pummels Macau casinos [NPR]

No longer business as usual in China [NYTimes]

Looking at possible future winners in internet TV [GlennChan]

A plumbing problem for the internet (and the stock market) [NYTimes]

The man who taught Warren Buffett to manage a company [Quartz]

The return of the US Dollar [Mauldin]

The wall of worry, illustrated [Bason]

Behavioral explanations make sense of oil's plunge [Reuters]

Why America's housing disaster is back [Salon]

A house is not a credit card [NYTimes]

Fall of the bond king: How Gross lost empire as PIMCO cracked [Bloomberg]

Regrets, I've had a few [Epicurean Dealmaker]

Shumway Capital Returns Capital to Investors, Will Manage Internal Assets

Chris Shumway's hedge fund Shumway Capital Partners sent out a letter to investors today notifying them that the fund will be returning capital to outside investors. The firm will live on, instead only managing internal capital. Shumway, who has seen 17% annual returns, is one of the widely regarded Tiger Cub hedge funds started by former members of Julian Robertson's Tiger Management.

Late last year, Chris Shumway announced that he would be stepping down from his Chief Investment Officer role. This initiated a wave of redemptions as investors in the funds became wary. Shumway writes,

"In a sense, these changes created more risk for many of you who committed to stay invested in SCP and makes short term results of the fund a primary issue for us all. As a result, it has become more difficult for us to focus on long term investing as we have for the last nine years, which I believe has been a main driver of our success."

It's obvious from the above that Shumway is not fond of Wall Street's and an investor's focus on short-term performance. We'd venture to guess that Shumway also somewhat tired of the 'corporate' nature of running a large investment firm. Catering to each investor's concerns meant less and less of his time was dedicated to investing.

Shumway isn't alone in his desire to focus on investing for the long-term. Fellow Tiger Cub manager Roberto Mignone of Bridger Management closed to new investors, effectively capping assets under management so that he could focus on investing rather than having to worry about running a large organization.

It will be interesting to see who stays behind at Shumway to manage internal capital and who leaves to start their own funds. There are already a few notable Shumway alums managing their own funds including John Thaler's JAT Capital, Anu Murgai's Suranya Capital Partners, and Matthew Crakes' Greenhart Capital. The reason we mention these established and potentially future Shum-alum funds is that some former SCP investors could potentially allocate capital there.

Shumway will return outside capital by the end of the first quarter, which undoubtedly means they'll be selling partial positions. Here are Shumway's top 10 holdings as of September 30th, 2010. We'll get an updated look at their holdings here in a few weeks, so keep in mind the below is quite dated:

1. Apple (AAPL)
2. Citigroup (C)
3. Priceline.com (PCLN)
4. Pfizer (PFE)
5. Las Vegas Sands (LVS)
6. Baidu (BIDU)
7. SPRD Gold Trust (GLD)
8. Target (TGT)
9. Air Products & Chemicals (APD)
10. BP (BP)

A screenshot of Chris Shumway's letter is posted below via ZeroHedge:

(click to enlarge)

It will be interesting to see what happens to Shumway's portfolio once outside capital has been returned and the fund is only managing internal capital.

Latest Thoughts From John Burbank & Passport Capital: 3Q Investor Letter

John Burbank's hedge fund firm Passport Capital provides a glimpse as to their overall portfolio positioning in its third quarter letter. Passport's Global Fund has returned 23.1% annualized since inception in August of 2000. At the end of the third quarter, the fund was up 7.9% year to date and the firm manages over $5 billion. Passport's largest net long exposures were in basic materials and consumer. Overall, they ended the third quarter 95% long, 39% short, leaving them with net exposure of 56%.

Top Holdings

At the end of the third quarter, Passport's top ten equity positions represented 33% of their assets under management (AUM). The top 10 holdings are sorted by percentage of net asset value (NAV):

1. Riversdale Mining (RIV): 10% of NAV
2. Microsoft (MSFT): 4%
3. Exxon Mobil (XOM): 4%
4. Las Vegas Sands (LVS): 3%
5. Financial Technologies (FTECH): 2%
6. Tarpon Investimentos (TRPN3): 2%
7. CF Industries (CF): 2%
8. Wendy's Arby's Group (WEN): 2%
9. Labrador Iron Mines (LIM): 2%
10. Jordan Phosphate Mines (JOPH): 2%

Keep in mind that we've also detailed the rest of Passport's portfolio.


Equity Update: Riversdale Mining (RIV.AU)

Given that Riversdale is Passport's largest holding, it makes sense that they singled out a portion of their letter to provide commentary. On Monday, Riversdale said it was in talks with Rio Tinto (RTP), which is offering AUD $15 per share for the company and RIV shares traded north of AUD $16 on the news (around 15% higher than where it was trading prior to the news). So, Passport has already made some nice money on this play and it will be interesting to follow the developments. Overall though, Burbank definitely advocates hard assets.


Physical Gold

Passport also mentions that 8% of the fund's NAV is in physical gold. The hedge fund firm owns 100,000 ounces of the precious metal stored in Zurich. They highlight various purchases by central banks as a bullish indicator. However, they are also partially concerned by the fact that some gold miners have been de-hedging. As a result, Passport delta hedged their entire gold position. For more hedge fund advocates of gold, head to our in-depth post on John Paulson's gold fund as well as David Einhorn's preference of physical gold.


Added Large-Cap Multinational Stocks

During the third quarter, Burbank's firm also bought high quality large cap companies. This is a prevalent theme we've seen in hedge fund portfolios as of late. Regarding this theme, Burbank writes:

"Recently, we have begun adding certain large-cap, multinational stocks to our portfolio. These are the same stocks that we largely avoided for the last ten years. What has changed? For one, many such companies have dividend yields of greater than 3% and "earnings yields" of 6-9%. Compared to "risk-free" 10-year Treasuries (yielding 2.5% at quarter end), these are quite appealing. While these companies' future earnings and dividends are uncertain, we think they are very likely to rise over time given strong franchises (predictable pricing and market share) and meaningful exposures to faster-growing emerging markets. We have sought out companies we believe are characterized by strong management teams, powerful competitive moats, healthy balance sheets, predictable cash flows, and healthy growth prospects."

Companies that they recently added include Exxon Mobil (XOM) and Microsoft (MSFT). Oaktree Capital's Howard Marks has said to buy high quality large-caps as well. And for a specific look at MSFT, T2 Partners' Whitney Tilson has put together his investment thesis on Microsoft.

Embedded below is Passport Capital's third quarter letter to investors:



You can download a .pdf copy here.

For analysis of Passport's US equity longs, head to the new issue of our Hedge Fund Wisdom newsletter. And for more thoughts directly from Passport's founder, head to his presentation from the Value Investing Congress.