Why Value Investing Isn't Working In This Market (Hedge Fund Ivory Capital)

Curtis Macnguyen's value-oriented hedge fund Ivory Capital says that the current market is very difficult for fundamental value investors as market participants opt for growth over value.

Earlier today we posted up Ivory Capital's Q2 letter and in it they outline the main reasons why the rules of value investing aren't working:


1. Excess Liquidity: "If there is very little cost to money, then it matters much less how much one is willing to pay for an asset; valuation becomes less relevant."

2. Scarcity Value of Growth Stocks: Investors are willing to pay-up for revenue growth in a low growth environment.

3. Mutual Fund Flows & ETFs: As value funds underperform, investors sell them off, depressing prices even further.

4. Quantitative Strategies: Models have de-emphasized valuation and emphasized momentum and revenue growth instead.

5. Poor Capital Allocation: Large/mega cap companies aren't allocating efficiently, creating an overhang in shares. Activism is needed to alleviate this.

6. Short-term Focus: There is a ton of pressure on funds from investors to generate returns NOW. Managers sell positions that aren't working (i.e. value stocks), sending shares lower. We noted how fellow hedge fund Shumway Capital shut down mainly due to short-term fixation by investors.



So while many value investors are having a hard time in this market, momentum chasers are seemingly having a field day. Be sure to check out Ivory Capital's investor letter for risks in the current market and updates on their current positions.

Curtis Macnguyen's Ivory Capital Q2 Letter

Founded in 1998 by Curtis Macnguyen, Ivory Capital is a long/short equity hedge fund that focuses on value-based investments. It's worth noting that before founding Ivory, Macnguyen worked at Siegler, Colliery & Co, the same shop that Greenlight Capital founder David Einhorn previously worked for.

Ivory is based in Los Angeles and today we're covering their second quarter letter that updates their portfolio.

At quarter end, Ivory Capital's top five positions were:

1. Microsoft (MSFT) 6.5%
2. Yahoo! (YHOO) 5.1%
3. Citigroup (C) 4.0%
4. DeNA Co (TYO:2432) 2.7%
5. Advanced Micro Devices (AMD) 2.6%


Performance & Equity Exposure

Ivory finished the second quarter -2.2% and year to date for 2011 they are -1.85%. Their equity exposure is 69.5% long and 43.4% short, leaving them net long 26.1%. While they saw outperformance in their other long positions of Sprint Nextel (S) and CVS Caremark (CVS), other longs hurt them.


Position Updates: Western Digital (WDC), Seagate Technology (STX) & Hospira (HSP)

The hedge fund thinks that consolidation in the hard disk drive industry should bring solid economics and dampen the cyclical nature of the industry. They also like STX's share repurchases and dividend (4.5% yield).

The current issue of our Hedge Fund Wisdom newsletter analyzes STX as numerous other hedge funds own shares (and it also features analysis of YHOO, a controversial stock at the moment).

Ivory also fancies generic injectables and infusion pump maker Hospira (HSP) because they see it as a strategic asset with 25% market share and high barriers to entry.

Embedded below is Ivory Capital's Q2 letter to investors (email readers come to the site to view):



For more letters from hedge funds, we've posted up the following:

- Oaktree Capital: Howard Marks' latest commentary

- Corsair Capital sees increased volatility ahead

- David Einhorn & Greenlight Capital's Q2 letter

- Third Point buys MOS & SLE

- Jonathan Ruffer worried about China