Simon Denison-Smith's Presentation at London Value Conference: Long Cisco Systems & J. Smart

Continuing our notes from the London Value Investor Conference 2013, the next speaker is Simon Denison-Smith of Metropolis Value Fund.  He talked about his investment strategy and presented the long ideas of Cisco Systems (CSCO) and J. Smart.


Metropolis' Strategy

Denison-Smith’s investment strategy draws extensively on his experience of building and running  businesses. He has extensive experience of private company buyouts. Since inception in 2008  Metropolis Valuefund has returned 12% per annum.

He likes to buy unloved companies but he noted it was difficult to execute the strategy consistently  for a number of reasons. You need to be able hold your conviction when the market is selling off  hard. You need to be able to treat volatility as risk. It helps to think of investments as a fractional  stakes in a business. Avoid anchoring to an investment thesis as the facts change. Avoid over-  diversifying, 10-20 stocks are enough. You have to be able to cope with periods of inactivity.

Metropolis apply an entrepreneurial and private equity approach to long only investing. They screen  for cheap businesses and rule out most candidates using criteria such as sector, pension liability,  clarity of business and unfavourable ownership structure. They spend most of their time assessing  the quality of businesses carrying out analysis of multiple years of accounts, broker reports, web  based research, modelling cashflow and identifying risks. The favour the sum of discounted future  cashflows as a measure of value.

Denison-smith said that trying to fully understanding the bear case is an important part of their  process. As Chalie Munger says, always invert.


Idea: Long Cisco (CSCO)  

Since 1999 EPS has grown 13% pa. PE has fallen from a peak of 300x to 11-12x. EBITA margins  have remained within the range of 26-34%. It consistently generates positive operating cashflow  after interest and tax. Cashflow is consistently higher than reported profits. Today Cisco’s post tax  cashflow is only costs 7x. Free cashflow yield is 14%. Cisco has a moat in terms of scale, brands  and high switching costs. Denison-Smith noted that Cisco’s reputation for producing routers and  switches that are the safe and reliable option was particularly important. The most significant  threat to Cisco is that disruptive technology (SDN) and increased competition, particularly from  Huawei, will impact their high gross margins.


Idea: Long J. Smart (SMJ: LON)  

Denison-Smith billed J. Smart as an idea for personal accounts. J. Smart develop residential and  commercial property in Edinburgh. They also provide a range of construction services for external  and internal use. It is a family management team with 50% ownership and it is not covered by any  analysts. They are buying back shares and there is a dividend of 4%. The shares are illiquid. It’s  cheap in balance sheet and cashflow terms. The discount of enterprise value to net tangible book  value less cash is 65-70%. EV: post tax FCF of 7-8x. FCF yield of 12-14%.


Be sure to check out other investor presentations: notes from the 2013 London Value Investor Conference.

Strategist Jeff Saut on Efficient Markets

Market strategist Jeff Saut's latest commentary focuses on sideways markets and how you can still make money in them. He pulls a quote from Vitaliy Katsenelson, author of The Little Book of Sideways Markets (and e-book version here), who notes that, "one of the core reasons why markets are and will remain inefficient: because human beings are efficient."

In this regard, Vitaliy uses Cisco Systems (CSCO) as an example. The stock has fallen 80% from its highs and now investors who originally bought in 1999 have made no money. The company has guided below Wall Street expectations in recent quarters. Saut adds that, "to be sure, at downside and upside inflection points, stocks are anything but efficient."

Some hedge funds have dabbled in this name and you can see the value thesis rationale in a free sample of our newsletter. And as noted in the just-released new issue of Hedge Fund Wisdom, famed mutual fund manager Bruce Berkowitz started a position in CSCO last quarter.

While the stock market often churns sideways for years digesting large secular bull market moves, Saut points out that the trick to outperform during these periods is to "be more proactive (or tactical) in your investment approach, be sector and stock specific, and cut your losses quickly."

Embedded below is Saut's recent commentary:



You can download a .pdf copy here.

Free Sample of Our Hedge Fund Wisdom Newsletter

Here's your chance to see a full past issue of MarketFolly's premium newsletter, Hedge Fund Wisdom. Hopefully this gives you an idea as to the high quality research and in-depth nature of the newsletter.

The free sample issue includes quick investment thesis pitches on Sirius XM Radio (SIRI), Express Scripts (ESRX), Alcon (has since been bought out), and Cisco Systems (CSCO).

It also features in-depth analysis of Aon (AON) and CareFusion (CFN). And of course, it highlights the portfolios of 25 top hedge funds.


Click here to download a free .pdf sample of Hedge Fund Wisdom.


The sample is also embedded on the website below:




The above download is a past issue. Our brand new 91-page issue was just released! If you like what you see, make sure to take advantage of our low introductory pricing before prices go up on June 30th. Save 33% instantly by clicking here.

East Coast Asset Management on Competitive Advantage: Quarterly Letter

East Coast Asset Management's quarterly letters have become one of our favorites for insight and timeless advice on the topic of compounding as well as variant perception. This time around, Christopher Begg focuses on competitive advantage and the ability of businesses to first become 'local champions'.

Begg writes that, "high quality businesses that can raise prices and whose products have localized advantages with a growing emerging market consumer will thrive." This point is exemplified by Warren Buffett & Berkshire Hathaway, whose latest purchase of Lubrizol was seemingly based on pricing power.

The main gist of the letter is that solid investments are found in businesses with solid competitive advantages that allow them to do something their competitors cannot.

East Coast's letter also goes on to quote Steve Mandel of Lone Pine Capital who said, "Our ability to identify businesses that have the market opportunity, product distinction, competitive advantage and management skill to grow earnings and cash flow for longer than is factored into consensus expectations has distinguished our investment effort over the years."

Lastly, Begg gives an example of misclassifying an investment in Cisco Systems (CSCO) and how he has learned from the mistake. Investors never stop learning and this is the perfect example of why many successful investors critically focus on competitive advantage.

Embedded below is East Coast Asset Management's latest letter:



You can download a .pdf copy here.

Begg has also accepted a position as an Adjunct Professor at Columbia Business School and will be teaching Security Analysis this summer. For more great insight from this firm, check out East Coast on gaining an investment edge.

Best Investments During Deflation

Today we're laying a loose framework for the best investments during deflation. Why? Because deflationary signals have reared their ugly head as of late. Not to mention, many prominent investment managers have voiced their concern about the dreaded scenario. While inflation versus deflation has been the great debate over the past two years, the deflationistas have been boasting quite loudly as of late.

We've detailed how David Gerstenhaber's global macro hedge fund Argonaut Capital thinks deflation is the greater risk. Additionally, Broyhill's Affinity hedge fund has been betting on deflation as of late. PIMCO's bond king Bill Gross has been buying treasuries in order to combat these fears. And for more, The Reformed Broker has a quick summary of the New York Times' deflation round-up as well.

While investing during the dreaded 'D' word is not impossible, the options to preserve and grow capital are certainly limited. So, what is the best investment for deflation? Very broadly and in no particular order, here's some potential answers:


Cash/US Dollar: The phrase "cash is king" is often cliche. It's not cliche during deflation, it's rule number one. Assuredly, cash is one of the few 'safe' investments you can make in this scenario. Over the normal course of investing, most investors focus on their return on capital. This time around, the focus is simply on return *of* capital. While many wouldn't consider this an investment, having physical cash notes saved and on hand can be crucial during extreme situations including: bank failures, a collapse in credit, or the government defaulting on its debt. Not to mention, the US dollar has been a strong performer during deflationary times. Holding the physical currency is easy enough, but those wishing to further their wager can play the PowerShares US Dollar Bullish Index (UUP).


Pay Off Debt: Again while 'paying down debt' doesn't sound like an investment, it most definitely is during deflation. In a period where literally every single dollar matters, each dollar of debt can become crippling.


Buy Long-Term Bonds: Alternative to cash, fixed income is also seen as an option for those who seek protection. While fixed income yields decline due to Federal Reserve easing in an effort to combat deflation, the underlying bond should appreciate (or at the very least, depreciate much less than equities). US Treasuries are highly coveted here as they are the safest and most in-demand. If one were to go the corporate bond route, seeking high quality bonds is preferred. The thesis behind this play is laid out by Broyhill's Affinity hedge fund in their presentations: ten reasons to buy bonds as well as their bet on long-term treasuries. The most logical wager here would be the iShares Barclays 20+ year Treasury (TLT).


Short Equities: Traditional investments will start to suffer as underlying companies will see lower margins and losses. Not to mention, highly leveraged companies make ideal short selling targets and certain companies can face the risk of becoming insolvent. If your conviction is strong enough, you could simply short the S&P 500 index (SPY). There is, however, one potential safe haven in equities (keyword being 'potential'), which brings us to the next investment:


Buy High Quality Dividend Paying Stocks: Understand that during deflation, equities in general are one of the major investments to avoid. However, high quality stocks could be a potentially dim light in an otherwise dark scenario. While the majority of companies will lose pricing power and succumb to weak margins, large cap high quality companies that dominate their industries may be able to maintain pricing power. Not to mention, many of these stocks pay dividends which generate valuable cash during deflation. Seek companies with pristine balance sheets.

GMO's Jeremy Grantham recently voiced concern about deflation and one of his few investment recommendations was to buy high quality stocks. For ideas, hedge fund T2 Partners recently issued a presentation on 3 large cap stocks. Sectors to look toward include healthcare, technology, and telecom as those have outperformed in Japan during their deflationary lost decade. Microsoft (MSFT) is one name that has been repeatedly mentioned by strategists and managers. Keep in mind though that despite being high quality blue-chip companies, these are still equities. As such, there is obviously inherent risk in owning them during deflation.


Short Housing/Avoid Real Estate: In deflation, prices fall. As such, rent rather than own. Stand back and let the landlords watch the values of their properties plummet. You can short the iShares Dow Jones US Real Estate (IYR) for some exposure.


Short Leverage: Deleveraging should be a big theme playing out in the future, environment notwithstanding. As mentioned earlier, short the equity of companies that have poor balance sheets and are highly levered. In deflation, leverage begins to unwind and currency plays can be found. A massive leveraged carry trade in the Yen has taken place over the years and as such would be unwound in deflation, thus benefiting the Yen.


Long Technology: Regardless of environment, technology will advance and will be in demand. The technology sector was highlighted as one of the few areas to possible allocate capital in high quality equities. Companies that have strangleholds on their industry should have an advantage. A basket of technology stocks could be purchased via the technology exchange traded fund (XLK). However, that gives you exposure to a lot of companies and it's probably more preferable to single out high quality technology names with pristine balance sheets such as Microsoft (MSFT), Intel (INTC), and Cisco Systems (CSCO).


Gold: Conventional wisdom says to avoid precious metals during deflation. During the Great Depression from 1929-1932, commodities in general crashed. However, in very extreme circumstances (emphasis on extreme), some have argued that gold can make sense when acting as currency. The majority of proponents for owning gold during deflation would cite its store of value or hedge against uncertainty. While gold can be played via the SPDR Gold Fund (GLD), many hedge funds advocate physical gold. That said, those doing so are mainly seeking inflationary protection.


Buy TIPS: Treasury Inflation Protected Securities, or TIPS, serve as long-term protection from inflation. Buying TIPS during deflation? What's the point? This is an option if investors believe that deflation will eventually lead to inflation two or three years later. As policy makers attempt to combat deflation, the natural antidote is inflationary medicine. As such, investors looking further down the road can fend off these inflationary pressures with TIPS. And even if deflation persists for an extended period of time, TIPS still produce income via yield and investors can regain their bond's face value at maturity. This can be played via iShares Barclays TIPS Bond Fund (TIP) for those looking for an easy solution.


That sums up some of the best ways to position a portfolio when confronted with deflation. Recent concern is duly warranted considering that deflation typically rears its ugly head after periods of prolonged globalization and global growth. Such growth leads to increased investment, a massive increase in production, and thus excess capacity all around the world. This excess capacity then brings forth lower prices. In deflation, companies suffer while the consumer is the real winner. The above present theoretical options of how to invest during such a scenario. Make no mistake though, investing during deflation can be quite difficult and painful.

Back in August 2008 when the crisis was heating up, we penned a very broad outline of investment scenarios for inflation versus deflation. During the pinnacle of the crisis, it wasn't quite clear which situation would play out so it made sense to lay a framework for each context. (And arguably, it's still not entirely clear. Many have hypothesized that we'll see a compromise of views: deflation in the near-term and inflation in the long-term). A few months ago, inflation was all the rage. Now, deflation is the primary concern. Investors have been flip-flopping more frequently than politicians as of late.

Regardless of outcome, it makes sense to be prepared for either environment. Check back tomorrow as we'll turn the tables and outline the best investments during inflation in order to present both sides of the argument. In the mean time, be sure to see what hedge funds are investing in these days with our daily coverage.

Hedge Fund Shumway Capital Partners Adds Large New Stakes in Kraft Foods, Comcast (13F Filing Q1 2010)

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund filings.)

Next up is Chris Shumway's hedge fund Shumway Capital Partners. Prior to founding his firm, Shumway was previously one of Julian Robertson's right-hand men at legendary hedge fund Tiger Management. As such, he joins the other successful Tiger Cubs and is included in the Tiger Cub portfolio created with Alphaclone for hedge fund replication. Shumway Capital Partners focuses on intensive fundamental research to drive their long/short equity strategy. Back in 2009, Shumway was listed in Barron's top 100 hedge funds for 2009 with a rolling 3-year annualized return of 28%. However, 2010 has proven difficult for the firm as their Sakkonet Fund was down 10% in May after they had gained 4.3% through April. Shumway received his MBA from Harvard Business School and his undergraduate degree from the University of Virginia.

The positions listed below were their long equity, note, and options holdings as of March 31st, 2010 as filed with the SEC. All holdings are common stock unless otherwise denoted:


Brand New Positions
Kraft Foods (KFT)
Comcast (CMCSA)
Air Products & Chemicals (APD)
Bank of America (BAC)
General Dynamics (GD)
Bard (BCR)
Staples (SPLS)
Liberty Global (LBTYA)
CME Group (CME)
Comcast (CMCSK)
TD Ameritrade (AMTD)
Illumina (ILMN)
Lowe's (LOW)
Discovery Communications (DISCA)
Cablevision (CVC)
Hartford Financial (HIG)
Sigma Aldrich (SIAL)
Waters (WAT)
Annaly Capital Management (NLY)
Credit Suisse (CS)
Liberty Global (LBTYK)
Illinois Toolworks (ITW)
SBA Communications (SBAC) Notes


Increased Positions
Novo (NVO): Increased position size by 413.8%
Goldman Sachs (GS): Increased by 275.4%
Baidu (BIDU): Increased by 85.4%
Apple (AAPL): Increased by 62.4%
Cisco Systems (CSCO): Increased by 57.2%
Disney (DIS): Increased by 47.6%
PNC Financial (PNC): Increased by 32.2%
Ingersoll-Rand (IR): Increased by 28.5%
Pfizer (PFE): Increased by 21.1%


Reduced Positions
Wells Fargo (WFC): Reduced position by 74.7%
Omnicom Group (OMC): Reduced by 70.8%
Juniper Networks (JNPR): Reduced by 62.4%
Pepsico (PEP): Reduced by 61.4%
Las Vegas Sands (LVS): Reduced by 60.2%
Urban Outfitters (URBN): Reduced by 57.9%
St Jude Medical (STJ): Reduced by 54.8%
Ctrip (CTRP): Reduced by 53.7%
JPMorgan Chase (JPM): Reduced by 45.8%
Gap (GPS): Reduced by 41.9%
Mastercard (MA): Reduced by 36.4%
Johnson & Johnson (JNJ): Reduced by 24.7%
Quest Diagnostics (DGX): Reduced by 22.9%
Visa (V): Reduced by 22.6%
Salesforce.com (CRM): Reduced by 15.4%


Positions They Sold Out of Completely
Qualcomm (QCOM)
Qualcomm (QCOM) Calls
Select Sector Financials (XLF) Calls
EMC (EMC)
Freeport McMoran (FCX)
Brocade Communications (BRCD)
Colgate Palmolive (CL)
CVS Caremark (CVS)
Radioshack (RSH)
Memc Electronics (WFR)
Fifth Third (FITB)
Allstate (ALL)
AOL (AOL)
Monsanto (MON)
Research in Motion (RIMM)
NII Holdings (NIHD) Notes
Kinross Gold (KGC) Notes
BioMarin Pharmaceutical (BMRN) Notes


Top 15 Holdings (by percentage of assets reported on 13F filing)

1. Apple (AAPL): 9.5%
2. Disney (DIS): 5.8%
3. Cisco Systems (CSCO): 5.3%
4. Kraft Foods (KFT): 5.3%
5. Teva Pharmaceuticals (TEVA): 5.3%
6. Pfizer (PFE): 4.6%
7. Equinix (EQIX): 4.5%
8. Goldman Sachs (GS): 3.9%
9. Time Warner (TWX): 3.7%
10. Johnson & Johnson (JNJ): 3.5%
11. Comcast (CMCSA): 2.7%
12. Visa (V): 2.5%
13. Baidu (BIDU): 2.4%
14. Mastercard (MA): 2.2%
15. JPMorgan Chase (JPM): 2.1%

Shumway's biggest portfolio change was their new position in Kraft Foods (KFT) as it is now their fourth largest US equity long. Numerous other hedgies like KFT these days, including Bill Ackman who previously detailed his investment thesis on Kraft. Additionally, Shumway started quite a sizable stake in Comcast (via CMCSA and CMCSK). They were also out adding to some of their mainstay holdings such as Apple, Cisco Systems, Disney, and Pfizer.

We also wanted to point out that their Equinix (EQIX) position listed above is only their equity stake. Shumway also holds various notes and their aggregate exposure to EQIX actually makes it one of their largest positions (slightly smaller than the size of their CSCO stake). And if you hadn't already noticed, many stocks in their portfolio are those on Goldman Sachs' VIP list of stocks most important to hedge funds. Maybe that helps explain their poor performance in the month of May.

On the selling side of things, Shumway Capital Partners was also somewhat active. In the fourth quarter of 2009, we saw that Shumway was betting big on Wells Fargo (WFC). Well, that certainly changed quickly as they dumped almost 75% of their position in the first quarter of 2010. However, in the financial sector they added to their stakes in Goldman Sachs and PNC Financial. Additionally, they sold completely out of hedge fund favorite stocks Qualcomm, EMC, Research in Motion and Freeport McMoran. It was also interesting to see Shumway sell out of CVS Caremark as we've seen some other hedge fund managers bullish on CVS shares as of late.

Assets reported on Shumway's 13F filing were $7.9 billion this quarter. Data from the SEC is aggregated and sorted automatically by Alphaclone, our source for hedge fund tracking, replicating, and performance backtesting (Market Folly readers can receive a special free 14 day trial). Remember that these filings are not representative of the hedge fund's entire base of AUM.

This post is part of our daily hedge fund portfolio tracking series. We've already detailed activity from numerous managers so click the links below to be taken to the respective portfolio updates: Seth Klarman's Baupost Group, Warren Buffett's Berkshire Hathaway, Stephen Mandel's Lone Pine Capital, and Bill Ackman's Pershing Square, David Einhorn's Greenlight Capital, Eddie Lampert's RBS Partners, David Tepper's Appaloosa Management, Mohnish Pabrai's Investment Fund, John Griffin's Blue Ridge Capital, Lee Ainslie's Maverick Capital, Bruce Berkowitz's Fairholme Capital Management, Andreas Halvorsen's Viking Global, Dan Loeb's Third Point, John Paulson's hedge fund Paulson & Co, Chase Coleman's Tiger Global, Roberto Mignone's Bridger Management, Phil Falcone's Harbinger Capital Partners, and David Stemerman's Conatus Capital. Be sure to check back daily for new hedge fund updates.

David Stemerman's Conatus Capital Added To Tech Holdings, Bought Homebuilders

This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.

Next up in our series is David Stemerman's hedge fund Conatus Capital. This is only the fourth time we've covered their portfolio because this is literally only their fourth 13F filing. They are a newer fund, but their manager definitely has experience. Conatus raised $2.3 billion and began trading last year after David Stemerman left Stephen Mandel's Lone Pine Capital to start his own hedge fund.

Conatus is an interesting story to follow because Stemerman's old employer is a prominent 'Tiger Cub' hedge fund. Stephen Mandel was part of the group of Tiger Cubs that left Julian Robertson's successful Tiger Management to start their own hedge funds. Now Mandel has taken on the role of mentor and is seeing former employees going on to start their own funds. Things have come full circle and we're starting to see Tiger GrandCubs. In addition to David Stemerman, Matt Iorio also left Lone Pine to start his own firm, White Elm Capital, who we will track for the first time tomorrow. We find it appropriate to track these two gentlemen because they are well-versed in the successful bottom-up 'Tiger' stockpicking and have contributed to Lone Pine's solid track record over the years. You can check out our previous Conatus portfolio update here. Let's now move onto Conatus' portfolio from the third quarter of 2009.

Keep in mind that the positions listed below were Conatus' long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.


Some New Positions
Brand new positions that they initiated last quarter:
Wells Fargo (WFC)
Weatherford International (WFT)
DR Horton (DHI)
Toll Brothers (TOL)
Monsanto (MON)
Mindray Medical (MR)
Bed Bath & Beyond (BBBY)
Carnival (CCL)
Citrix (CTXS)
Baidu (BIDU)
Freeport McMoran (FCX)
BHP Billiton (BHP)


Some Increased Positions
Positions they already owned but added shares to:
Cisco Systems (CSCO): Increased position by 150.5%
Google (GOOG): Increased by 61.5%
Petrohawk (HK): Increased by 48.4%
SBA Communications (SBAC): Increased by 47.5%
Itau Unibanco (ITUB): Increased by 32.2%
Crown Castle (CCI): Increased by 30.6%
Apollo Group (APOL): Increased by 28.9%
Express Scripts (ESRX): Increased by 17%


Some Reduced Positions
Stakes they sold shares in but still own:
Priceline (PCLN): Reduced position by 42.8%
CTrip (CTRP): Reduced by 37.1%
Teradata (TDC): Reduced by 30.6%
Cognizant Tech (CTSH): Reduced by 25.1%
CH Robinson (CHRW): Reduced by 21.5%
Walter Energy (WLT): Reduced by 20.1%
Amazon (AMZN): Reduced by 14.2%


Removed Positions
Positions they sold out of completely:
Mastercard (MA)
Visa (V)
American Tower (AMT)
Discovery Communications (DISCA)
Southwestern Energy (SWN)


Top 15 Holdings by percentage of assets reported on 13F filing

1. Apple (AAPL): 5.34%
2. Apollo Group (APOL): 4.98%
3. Range Resources (RRC): 4.84%
4. Medco Health (MHS): 4.41%
5. Cisco Systems (CSCO): 4.33%
6. Express Scripts (ESRX): 4.32%
7. Walter Energy (WLT): 3.7%
8. Google (GOOG): 3.63%
9. Wells Fargo (WFC): 3.63%
10. Weatherford International (WFT): 3.53%
11. JPMorgan Chase (JPM): 3.53%
12. Itau Unibanco (ITUB): 3.27%
13. Cognizant Tech (CTSH): 3.08%
14. DR Horton (DHI): 3.05%
15. Toll Brothers (TOL): 3.04%
    

Overall, Conatus increased their holdings in basic materials and decreased their stakes in services. It was very intriguing to see them sell completely out of the payment processing duo of Mastercard and Visa. It is notable because almost almost all of the other Tiger Cub hedge funds own one or both of these stocks and Conatus' sale means they've taken a different path.

In terms of positions they added to, they were fond of technology as they added heavily to their positions in Google and Cisco Systems. Stemerman's hedge fund also started brand new stakes in the home builders (Toll Brothers & DR Horton) which was worth noting given the tough times these companies have faced with the economy. Much like fellow hedge fund John Griffin's Blue Ridge Capital, Conatus also had Apple (AAPL) as their top long US equity holding. Coming in at their #2 holding was their stake in Apollo Group (APOL), another favorite amongst Tiger Cub hedge funds. Conatus' portfolio overall includes three stocks found on the list of most popular stocks amongst hedge funds.

Assets from the collective holdings reported to the SEC via 13F filing were $1.9 billion this quarter compared to $1.2 billion last quarter. So, like many other hedge funds, their long exposure to US equities increased substantially. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Also, please again note that these positions were as of September 30th so two months have elapsed and they've undoubtedly shifted around their portfolio since then.

This is just one of the 40+ prominent funds that we'll be covering in our Q3 2009 hedge fund portfolio series. We've already covered Seth Klarman's Baupost Group Bill Ackman's Pershing Square, Stephen Mandel's Lone Pine Capital, Dan Loeb's Third Point LLC, David Einhorn's Greenlight Capital, John Paulson's firm Paulson & Co, Lee Ainslie's Maverick Capital, Andreas Halvorsen's Viking Global, Chase Coleman's Tiger Global, Brett Barakett's Tremblant Capital, John Griffin's Blue Ridge Capital, Shumway Capital Partners (Chris Shumway) and Thomas Steyer's Farallon Capital. Check back daily as we'll be covering new hedge fund portfolios.

Shumway Capital Partners Adds Long Exposure Via Blue Chip Stocks

This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.

Next up in our series is Chris Shumway's hedge fund firm, Shumway Capital Partners. Chris Shumway runs an $8+ billion hedge fund and is best known for intensive fundamental research to create long/short equity portfolios. He is a 'Tiger Cub' because he formerly served as Julian Robertson's right-hand man while at Tiger Management. Taken from our post on 'Tiger Cub' biographies, "Chris Shumway is the Founding Partner of Shumway Capital Partners (“SCP”), an investment management firm founded in 2001. SCP, which manages a multibillion dollar group of private investment funds, uses a private equity-like research model for public market investment on a global basis. Prior to forming SCP, Mr. Shumway was a Senior Managing Director at Tiger Management (1992-1999), an Analyst at Brentwood Associates (1990-1991), and an Analyst at Morgan Stanley & Co. (1988-1990). He received an M.B.A. from Harvard Business School (1993) and a B.S. from the McIntire School of Commerce at the University of Virginia (1988)."

Shumway has an solid performance record since inception and a rolling 3-year annualized return of 28+%. Shumway's performance at this metric landed them at #11 in Barron's top 100 hedge funds for 2009. Shumway's portfolio is one of the hedge funds included in our Market Folly portfolio that replicates hedge fund portfolios. It was created with Alphaclone and has over 25.5% annualized returns.

Keep in mind that the positions listed below were their long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.


Some New Positions
Brand new positions that they initiated last quarter:
Yum Brands (YUM)
Pepsico (PEP)
Colgate Palmolive (CL)
Procter & Gamble (PG)
Walt Disney (DIS)
JPMorgan Chase (JPM)
Zimmer Holdings (ZMH)
Google (GOOG)
Google (GOOG) Calls
Cemex (CX)
Bard (BCR)
Time Warner (TWX)
PNC Financial (PNC)
CTrip (CTRP)
Charles Schwab (SCHW)
Laboratory Corp (LH)
Weatherford International (WFT)
Nordstrom (JWN)
Omnicom (OMC)
BB&T (BBT)
American Tower (AMT)
Quest Diagnostic (DGX)
Ingersoll-Rand (IR)
CSX (CSX)


Some Increased Positions
Positions they already owned but added shares to:
Visa (V): Increased position by 400%
Juniper Networks (JNPR): Increased by 242.4%
Las Vegas Sands (LVS): Increased by 183.8%
Wyeth (WYE): Increased by 173.9%
Qualcomm (QCOM): Increased by 147.7%
Goldman Sachs (GS): Increased by 140.9%
Walgreen (WAG): Increased by 36.2%
Equinix (EQIX): Increased by 35.5%
Waters (WAT): Increased by 30.5%
EMC (EMC): Increased by 26.4%


Some Reduced Positions
Stakes they sold shares in but still own:
SBA Communications (SBAC): Reduced position by 58.8%
Bank of America (BAC): Reduced by 38.4%
Wells Fargo (WFC): Reduced by 28.1%
Mastercard (MA): Reduced by 21.2%
Urban Outfitters (URBN): Reduced by 19.7%


Removed Positions
Positions they sold out of completely:
Priceline (PCLN)
CVS Caremark (CVS)
Pfizer (PFE)
Research in Motion (RIMM)
RenaissanceRe (RNR)
Entergy (ETR)
Annaly Capital Management (NLY)
Bank of America (BAC) Calls
D&B (DNB)
Crown Castle (CCI)
Partnerre (PRE)
Arch Capital Group (ACGL)
Covance (CVD)
Nii Holdings (NIHD) Bonds
Cisco Systems (CSCO) Calls
Netease (NTES)
Citigroup (C)
Blackboard (BBBB) Bonds


Top 15 Holdings by percentage of assets reported on 13F filing

1. Cisco (CSCO): 4.62%
2. Equinix (EQIX): 4.29%
3. EMC (EMC): 4.08%
4. Mastercard (MA): 3.93%
5. Teva Pharmaceutical (TEVA): 3.88%
6. Visa (V): 3.87%
7. Apple (AAPL): 3.68%
8. Bank of America (BAC): 3.37%
9. Juniper (JNPR): 2.96%
10. Yum Brands (YUM): 2.81%
11. Pepsico (PEP): 2.74%
12. Colgate Palmolive (CL): 2.73%
13. Procter & Gamble (PG): 2.71%
14. Qualcomm (QCOM): 2.47%
15. Walgreen (WAG): 2.46%
    

The main thing to takeaway from Shumway Capital Partners' portfolio update is that they increased long US equities exposure. And, the interesting thing is that it was mainly via brand new positions, many in large cap, blue-chip names including Yum Brands, Pepsico, Colgate Palmolive, Procter & Gamble, and more.

Shumway's top three holdings are very concentrated in the tech trade and in particular, data. They increased their positions in EMC and EQIX by over 25% each. One name they really boosted was Visa (V) as they added to it by a whopping 400%. Additionally, they increased stakes in Juniper Networks and Las Vegas Sands by sizable amounts. They sold completely out of Priceline (PCLN), CVS Caremark (CVS), Pfizer (PFE), and Research in Motion (RIMM) all positions that had previously been over 2% of their reported 13F assets.

They decreased their holdings in technology and increased their stake in services. Below you'll find graphical representations of the recent shifts in Shumway Capital Partners' portfolio courtesy of Drew Robertson at Financial Research Station:

(click to enlarge)

(click to enlarge)

Assets from the collective holdings reported to the SEC via 13F filing were $7.4 billion this quarter compared to $4.4 billion last quarter, so a substantial amount of capital was deployed on the long side. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Also, please again note that these positions were as of September 30th so two months have elapsed and they've undoubtedly shifted around their portfolio since then.

This is just one of the 40+ prominent funds that we'll be covering in our Q3 2009 hedge fund portfolio series. We've already covered Seth Klarman's Baupost Group Bill Ackman's Pershing Square, Stephen Mandel's Lone Pine Capital, Dan Loeb's Third Point LLC, David Einhorn's Greenlight Capital, John Paulson's firm Paulson & Co, Lee Ainslie's Maverick Capital, Andreas Halvorsen's Viking Global, Chase Coleman's Tiger Global, Brett Barakett's Tremblant Capital, and John Griffin's Blue Ridge Capital. Check back daily as we'll be covering new hedge fund portfolios.

Top Ten Stocks Held By Hedge Funds

Thanks to the fine folks at FINalternatives, we see the latest quarterly Hedge Fund Monitor Report out of Bank of America Merrill Lynch. These quarterly reports are along the same lines of what we do here at Market Folly in that they examine hedge fund portfolios. Rather than focus on a unique set of funds like we do, they survey the majority of the industry landscape to frame a 'top hedge fund holdings' list.

This data is very useful for those of you wondering which stocks are most widely held amongst hedge funds and we presented the hedge fund data from Q2 earlier on the blog. In the third quarter, hedge funds increased their long equity holdings as gross exposure was up 14% and net exposure was up a whopping 130%.

The ten most popular stocks held by hedge funds include:

1. Bank of America (BAC)
2. Pfizer (PFE)
3. JPMorgan Chase (JPM)
4. Microsoft (MSFT)
5. Citigroup (C)
6. Apple (AAPL)
7. Google (GOOG)
8. Qualcomm (QCOM)
9. Cisco Systems (CSCO)
10. Walmart (WMT)
    

Embedded below is Bank of America Merrill Lynch's Q3 Hedge Fund Monitor Report. RSS & Email readers you will have to come to the blog to view the report & as always we recommend using 'full screen' mode to read the document:






Additionally, you can view the hedge fund trend monitor report from last quarter here.