Kleinheinz Capital Starts Position in MWB Business Exchange

Hedge fund Kleinheinz Capital recently filed a disclosure with UK regulators. In it, they revealed a new position in MWB Business Exchange (LON: MBE). Due to trading on May 19th, Kleinheinz now owns 5.01% of MWB's outstanding shares.

In the past, we've also detailed how Kleinheinz thinks inflation is the biggest threat to emerging markets as well as some of their past portfolio commentary.

Per Google Finance, MWB Business Exchange is a "United Kingdom-based supplier of serviced offices. As at December 31, 2009, Business Exchange operated 73 centers providing over 14,000 workstations covering 1.2 million square feet of office space. The Company operates in two segments: four and five star serviced office accommodation under the Business Exchange brand, and three star serviced office accommodation under the City Executive Centres brand."

Kleinheinz Capital: Inflation is Biggest Threat to Emerging Markets

John Kleinheinz's hedge fund Kleinheinz Capital recently sent out its year-end market commentary and 2011 outlook. The focus? Emerging markets and why inflation is the biggest threat to the belief that those countries can rebalance global growth.


Emerging Markets / Developing Economies

In the hedge fund's third quarter commentary, Kleinheinz said Russia is the cheapest emerging market. Their commentary this time around focuses on developing nations in general. They feel that food inflation is a large threat as it causes social unrest. However, the most important reason inflation is a concern is because,

"if developing economies cannot grow at above trend levels in a non-inflationary way then the whole proposition that these economies can gently rebalance the world economy may be untrue. The above average rates of growth in markets like China may simply be the result of trade surpluses that arise from lower cost of labor and fast monetary growth spurred by large domestic and foreign investment in capacity. Without real productivity advances and a migration to higher value-added products and services, which would allow higher incomes, the citizens of those countries cannot be expected to upgrade to a Western lifestyle that favors consumption over savings."


End of Bull Market in Treasury Bonds?

Another interesting focus of Kleinheinz's year-end letter is the notion that the three decade long bull market in US Treasuries is over. In the past, Kleinheinz held some bonds as a hedge. However, they sold out of those positions in the third quarter of last year.

Since then, they've begun "tactically shorting bonds ... until we become more certain about the timing and magnitude of a secular decline in longer dated bonds."


Japanese Yen

On the other side of the spectrum, the hedge fund has also started short positions in the Japanese Yen and Japanese government bonds. The rationale behind the play?

"Simply put - because Japan cannot afford to let its interest rates go higher, its currency will likely go lower to adjust interest rate differentials, slowing trade surplus and dwindling savings."

Readers will recall that hedge fund colleague Kyle Bass is short Japanese government bonds as well.


At the end of 2010, here were Kleinheinz's Top Holdings:

1. Apple (AAPL)
2. Research in Motion (RIMM)
3. China Mobile (CHL)
4. Veeco Instruments (VECO)
5. Monsanto (MON)
6. Hong Kong Exchange & Clearing (HK:0388)
7. LUKoil Holdings
8. Google (GOOG)
9. Major Drilling Group (MDI)
10. Yahoo! (YHOO)

From the third quarter to the fourth quarter, the most notable change in the upper echelon of their portfolio was Baidu (BIDU) falling just outside of the top 10 and their position in VECO ramping up a few spots.

Since inception, the fund has seen a compound annual growth rate of 26.6%. Intriguingly, you can replicate Kleinheinz's portfolio via Alphaclone. Investing in Kleinheinz's top 10 US equity holdings returned 19.5% 2010 compared to the hedge fund's actual performance of 22.86% (get free access to Alphaclone here).

To conclude, we'll leave you with a quote from John Kleinheinz's letter that stuck out the most: "A broad correction in stock market multiples will only occur if ten year U.S. government bond rates exceed 5% and corporate earnings growth slows to low single digit levels."

Kleinheinz Capital Says Russia is the Cheapest Emerging Market: Q3 Letter

John Kleinheinz founded Kleinheinz Capital Partners in 1996 and manages the Global Undervalued Securities Fund. He has seen a compound annual growth rate (CAGR) of 26.8% since inception and a total compound return of 3,162%. Given the solid performance, we've added this hedge fund to our portfolio tracking series and today we're detailing Kleinheinz's third quarter letter/market commentary.

Kleinheinz's fund primarily focuses on equities but also invests in emerging market debt. They utilize macroeconomic analysis to identify various investment themes across the globe with solid risk/reward profiles. Prior to founding his fund, he worked in the corporate finance unit of Nomura Securities in Tokyo as well as Merrill Lynch. Kleinheinz graduated from Stanford University with a degree in Economics.

Current Market Commentary

Kleinheinz's fund is up over 18% year to date. Interestingly enough, you can replicate Kleinheinz's portfolio at Alphaclone and investing in their top 5 holdings has returned 31.6% year-to-date and their top 10 holdings 19.7% ytd (get a free membership to Alphaclone here). This past quarter, Kleinheinz has lost money on their puts and hedges as the market practically prices in another round of quantitative easing. Their short positions in the energy sector (specifically in high beta natural gas producers) also hurt the fund.

While talk of an emerging market bubble seems to have increased, Kleinheinz is quick to point out that despite the fierce rallies, these valuations are still "within historical norms and economic fundamentals appear favorable relative to developed market peers." He believes that the formation of a consumer society in these emerging markets will be a key investment theme for them going forward.

Currently, their focus is on the geographies of Russia, Africa, China, and Brazil. In China, they like healthcare, telecom and technology. They also believe Russia is the cheapest emerging market and they're honing in on energy and utilities. Kleinheinz is generally focused on markets "with stable banking systems, under-levered consumers with rising disposable incomes and attractive valuations relative to growth prospects."

Specific Investment: Yahoo (YHOO)

Kleinheinz also dedicates a portion of the letter to talk about Yahoo (YHOO). He feels the market is under-appreciating Yahoo's international assets such as Alibaba Group and Yahoo Japan. He writes, "assuming an average multiple of 8-10x EBITDA for its core U.S. internet assets on a sum of the parts basis, we believe Yahoo could be worth $32 per share, more than double the Fund's acquisition cost and about equal to the price Microsoft was willing to pay for Yahoo during its aborted takeover attempt in May 2008."

Top 10 Positions (as of September 30th):

1. Apple (AAPL)
2. China Mobile (CHL)
3. Research in Motion (RIMM)
4. Baidu (BIDU)
5. LUKoil Holdings
6. Hong Kong Exchange & Clearing (HK:0388)
7. Veeco Instruments (VECO)
8. Google (GOOG)
9. Akamai Technologies (AKAM)
10. Chubb Corp (CB)

Embedded below is Kleinheinz's third quarter letter to investors:

*Update: Letter removed per request of representatives from Klenheinz

For thoughts from more great managers we also posted up Lee Ainslie & Maverick Capital's letter as well as Jeremy Grantham's commentary and Corsair Capital's latest ideas.