“Today, the better opportunities are buying things at 80 cents on the dollar when you think the dollar is worth $1.20 a year from now because of growth.” -Alan Fournier
He set out in life as an engineer, selling computer hardware. But soon, Alan Fournier (Trades, Portfolio) turned to the investment business and had the good fortune to land among many of the industry’s best and brightest.
Later, he was to start his own hedge fund, melding their best ideas into his own strategy—or strategies.
Fournier today has a solid track record and has more than justified the time he spent with several gurus, especially David Tepper (Trades, Portfolio).
Who is Fournier?
Fournier earned a Bachelor of Science in engineering at Wentworth Institute of Technology in 1983. After graduation, he became an account manager for a computer hardware company. Five years later, he made a major career change by going into the investment industry.
He started at Sanford C. Bernstein, where he made partner in just two years. While at Bernstein, he worked under Richard Pzena (Trades, Portfolio) (who was a mentor) and his clients included John Neff, Michael Price (Trades, Portfolio) and Tepper.
By 1996, he had joined Tepper at Appaloosa Management, where he ran global equity investments. Apparently, the decision to leave Appaloosa came from Tepper. In an interview with Value Investor Insight, Fournier recalls: “He said it was time for me to do my own thing.” Later, according to Inside Philanthropy, he and Tepper teamed up to create a political action committee called Better Education for New Jersey Kids.
So in 2001, he shifted course again, this time by forming his own hedge fund, Pennant Capital Management. He chose the Pennant name because of its connection with sailing. Fournier was an avid racing sailor, and a pennant helps sailors see the direction of the wind.
Surprisingly , Fournier said: “It's probably somewhat unusual for someone managing a hedge fund, but I've never taken a finance or accounting course.” However, as an article at Investing Post wryly observes, “At Pennant Capital, Mr. Fournier’s investment philosophy is to combine the best of all the strategies he learned at Bernstein, Pneza Investment and Appaloosa Management (and that for sure makes up for lack of finance classes).”
What is Pennant Capital?
Summit, New Jersey-based Pennant Capital Management LLC is an investment advisor to mainly pooled investment vehicles that serve sophisticated and institutional investors. It is a hedge fund that charges a management fee of 1.5% per year, plus a 20% performance fee, according to its Form ADV Part 2A.
Its working funds include, according to its 13F for the third quarter:
- Pennant Master Fund
- Pennant Windward Master Fund
- Pennant General Partner
In 2015, Fournier closed Pennant's Broadway Gate Fund, citing unsatisfactory returns, a desire to simplify the organization and a need to reduce the capital base. FINalternatives reports the fund was launched by Joerg Diedrich and Lee Atzil in 2008, and merged with Pennant in 2010. The two founders are leaving Pennant as the fund closes.
The 13F also shows $1.63 billion of assets under management as of Sept. 30, 2017. GuruFocus lists the same amount as the total of equity-only holdings.
Strategy
Fournier makes it clear, in his Form ADV Part 2A, that there are no boundaries on his strategies: “The Adviser may offer any advisory services, engage in any investment strategy and make any investment, including any not described in this brochure, that it considers appropriate, subject to each client's investment objectives and guidelines.”
He goes on to describe the strategies currently being used:
- Buy and hold.
- Long/short equity.
- Fundamental value.
- Growth.
- Hedging.
- Leverage.
- Option trading.
- Short selling.
Fournier does restrict his flagship fund in one sense. The Pennant Master Fund is not allowed to grow over $500 million, since he believes that makes it more likely he can pull in “outsized” returns in undervalued small caps (according to Bloomberg/FINalternatives).
Deep and continuous research is posited as Fournier's tactical center, according to Investing Post. It lays out his tactics this way:
- Research both micro and macro perspectives.
- Be patient and wait for a rebound on the long side and a deterioration on the short side.
- Manage risk by constantly monitoring and assessing the changing probabilities of success on the long and short sides.
- Skew long/short positions so the potential gain is three times the potential loss; corollary: don't let long/shorts deviate to pair-trades.
- Goal is a 1.5 times return on most investments; the holding period is normally 12 to 18 months, but may cut losers sooner or let winners run beyond 1.5 times.
Fournier is a value investor—of sorts. Along with his interest in getting a good deal, though, come a broad variety of tactics. How widely can he cast his net without getting caught up in mediocrity?
Holdings
This chart shows the extent of Fournier’s sectoral diversification:
GuruFocus lists these as Pennant’s top 10 equities:
- NRG Energy Inc. (NRG, Financial): 5.2%
- Fleetcor Technologies Inc. (FLT, Financial): 5.03%
- Acadia Healthcare Co. Inc. (ACHC, Financial): 4.73%
- TransDigm Group Inc. (TDG, Financial): 4.7%
- Allegheny Technologies Inc. (ATI, Financial): 3.97%
- Athene Holding Ltd. Class A (ATH, Financial): 3.84%
- Cognizant Technology Solutions Corp. Class A (CTSH, Financial): 3.79%
- Antero Resources Corp. (AR, Financial): 3.73%
- Huntsman Corp. (HUN, Financial): 3.72%
- Conduent Inc. (CNDT, Financial): 3.42%
Performance
Bloomberg reported (in 2015) that Pennant's oldest fund had returned an average of 15% per year over the firm's first 14 years (gross or net is not specified). That period includes 2007, when his funds gained 40% thanks to shorting, and 2008, when his return was basically flat.
As noted above, Fournier likes to keep the Pennant Fund near $500 million. An example of that came in 2013, when he returned $265 million to clients. Institutional Investor's alpha says he is following in the footsteps of his former boss, Tepper. It said Pennant had returned $1.35 billion between inception and December 2013.
In the last few years, his performance may not have compelled as much return of client funds, as shown in this TipRanks chart:
In looking at this chart, remember Fournier closed the Broadway Gate fund in 2015, citing, among other reasons, the fund was underperforming. That drastic surgery may have contributed to the turnaround that began in 2017, although there have not yet been enough subsequent years (and disclosed information) to know for sure.
Getting money back from a hedge fund, because it would be overcapitalized, must be reassuring for investors. In addition, to average 15% a year, even if that is the gross, over a decade and a half must be even more reassuring.
Conclusion
Fournier has served his clients well, generating average returns that beat the S&P 500 in almost all years since his fund’s inception in 2001. In doing so, he adds additional credence to the mentorship of Tepper, who currently has the highest 10-year performance record among all gurus listed at GuruFocus, and likely all gurus period.
Value investors might consider several of his policies; one is the ongoing upper limit on the size of his Pennant Fund. Few retail investors will reach $500 million, of course, but there is the broader lesson of knowing your limits. For example, is there a limit to the number of sectors, industries and stocks that each of us can know well?
A second is the management of risk by constantly watching and assessing the odds on both the long and short sides, even for those who do not short.
A third is having a specific expectation for stock price appreciation; Fournier goes into a long position only when believing he will get a 1.5 times return within 18 months.
Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours.
