Despite all the hype about them in the previous decade, relatively few hedge fund managers have matched the S&P 500 Index since 2008. Unfortunately, that is true even on gross returns, before taking off 20% performance fees.
Glenn Greenberg (Trades, Portfolio) is among the minority. Over the past five years, he has matched the average annual return of the S&P 500 Index and in most earlier years he outdid the benchmark. What’s more, he did it without charging a performance fee, just a management fee of 2% per year.
This guru is a value investor who runs a long-only equity portfolio. He is also a high-conviction investor who has made some big bets.
Who is Greenberg?
The head of Brave Warrior started his working life as a school teacher, after majoring in English while in college.
After three years as an educator, he headed to the Columbia Business School, then spent five years with JPMorgan Chase & Co. While at the latter, he was introduced to value investing.
In 1984, he and partner John Shapiro founded Chieftain Capital Management, which enjoyed excellent returns. The anonymous writer of a ValueWalk profile says Greenberg achieved a record "as good, or better, than that of Warren Buffett (Trades, Portfolio)" until 2008.
While the returns were fine, apparently relations between the fund's founders were not. In 2009-10, they decided to split, with Shapiro leaving and taking the Chieftain name with him. Greenberg stayed at the original business, which was renamed Brave Warrior.
A chapter of Bruce Greenwald’s 2004 book, “Value Investing: From Graham to Buffett and Beyond,” is devoted to Greenberg.
What is Brave Warrior?
Wholly owned by Greenberg, Brave Warrior Advisors LLC describes itself as an investment advisor. It focuses on clients who want a portfolio constructed from a limited number of long equity positions.
In the Form ADV filed March 31, 2017, the firm listed $2.9 billion in discretionary assets under management. GuruFocus reports the firm held $2 billion of equities on Jan. 22, 2017. Clients must have at least $5 million of long-term capital.
It does not charge performance fees, and the management fee is 2% per year.
Strategy
Greenberg's strategy is to focus on a limited number of long-only equity positions.
In the Form ADV Part 2A, he says the firm does fundamental analysis, mainly internally generated, by studying annual reports, prospectuses, filings and other sources. Research also involves assessing candidate companies by examining metrics such as financial ratios, the quality of the management team and assessing the potential risks and rewards of the company's industry.
An article at Base Hit Investing, based on a 2010 lecture at Columbia University (and no longer available online), observes Greenberg returned to "his roots of simplicity" when he broke up with Shapiro and founded Brave Warrior.
Article author John Huber says this means not using computer models to calculate valuation; instead Greenberg relies on his own analysis and judgement. In addition, he returned to writing notes on a yellow legal pad.
He also reviews the key points of the lecture to pull out the most salient insights. They include:
- Buy quality businesses: Greenberg adds the current free cash flow yield to a conservative estimate of the growth rate. Anything that adds up to more than the hurdle rate of 15% becomes a candidate.
- Clearly understand the business: knowing why a company is a good business is more important than short-term metrics such as this year's earnings per share.
- Use simple and common-sense analysis, as observed above.
- Buy at low prices: buy a strong company at a low price and then wait for high compounding over time.
An undated article (but also based on the 2010 lecture) at ValueWalk points out Greenberg does not invest in a candidate unless he is prepared to put 5% of client assets into it. A high degree of surety comes from knowing the company extremely well and holding a strong conviction about its potential.
Among the criteria he considers: unchallenged by new entrants, growing earnings and not vulnerable to new technology. Not surprisingly, Greenberg considers himself an owner of a company.
In an interview in March of 2017, he said he was bullish about financial stocks. He told CNBC, "We made a big bet that normal interest rates would not stay at zero" and "It was that simple. And we didn't know when they would change, but the payoff we felt would be substantial so we have had a lot of financial stocks in our portfolio the last couple years."
One of those financial stocks he favored was JPMorgan Chase & Co. (JPM, Financial); he said it should earn $8 or $9 per share if interest rates increase moderately, as the Federal Reserve is planning. Basic earnings per share for 2017 was $6.35.
Greenberg also told CNBC that Valeant Pharmaceuticals International Inc. (VRX, Financial) had been the biggest mistake of his career. This 10-year chart shows why:
FINalternatives reports Greenberg had up to 25% of his portfolio invested in Valeant at one point. He sold off 67% of his holding in the first quarter of 2016.
Greenberg has a strong value orientation, including the objectives of buying quality businesses and understanding why a company is a good long-term business. However, that model failed him with Valeant. And, to make a bad situation worse, he had a high proportion of his portfolio invested in it.
Holdings
Apparently not discouraged by the Valeant results, Greenberg now has a very big bet on the financial sector:
These are the 10 biggest of his 14 stocks (at the end of the third quarter of 2017):
- Charles Schwab Corp. (SCHW, Financial): 15.12%
- Alliance Data Systems Corp. (ADS, Financial): 14.89%
- HCA Healthcare Inc. (HCA, Financial): 11.24%
- Liberty Global PLC Class C (LBTYK, Financial): 11.03%
- Antero Resources Corp. (AR, Financial): 10.76%
- JPMorgan Chase & Co.: 9.35%
- Brookfield Asset Management Inc. Class A (BAM, Financial): 7.73%
- Primerica Inc. (PRI, Financial): 5.86%
- Axalta Coating Systems Ltd. (AXTA, Financial): 5.27%
- Quintiles IMS Holdings Inc. (Q, Financial): 4.37%
Once again, Greenberg is making a bet on one industry, this time the financial industry. The odds seem good for a stronger resurgence, yet prudent investors will always ask: Is this too much?
Performance
With the exception of 2008 and 2015, Greenberg consistently generated above-average returns for his clients, with gross returns in the mid-20s. In 2008, that flipped around, with a 25% loss.
This TipRanks chart shows his performance over the past five years:
Between 2012 and 2015, he continued to outperform the returns of both the benchmark and his peers. Before 2015 was over, however, he was to pay the price for investing heavily in Valeant, but by 2016 he was back on course.
While we do not have results for 2009 through 2011, it is clear Greenberg has served his clients well over the past 33 years. Two down years (that we know of) in 33 years would make most other investors envious.
Conclusion
Greenberg had a rough time in 2015 because of his major commitment to Valeant, but he has since recovered enough to essentially tie with the S&P 500 benchmark. Of course, his management fee is significantly higher than an investor would pay to own an S&P 500 basket through an exchange-traded fund. But an investor who stuck with Greenberg for the long run would do much better.
For value investors, a couple of ideas come to mind. First, he is a hedge fund manager who has done well, unlike most of his peers.
Second, his hurdle rate of 15% helps him sort potential investments; that’s enough intrinsic value to help cushion most stock and market corrections.
Third, trust in intrinsic value is not necessarily enough. As seen in the Valeant chart, a quality company can turn into a dog extremely quickly. Spend as much time and effort on risk management as on picking the stocks.
Disclosure: I do not own shares in any of the companies listed, and I do not expect to buy any in the next 72 hours.
