Investment Blog Marketfolly made available a copy of the 4Q09 letter to investors of Hedge Fund firm Maverick Capital. Thanks to Marketfolly we can have a glimpse of the performance of funds and the outlook of fund manager Lee Ainslie
Performance
Maverick Capital manages a number of funds, each having had a impressive track record. For the past ten years, during which S&P 500 dropped an annual rate of 0.9%, Maverick’s funds returned decent positive returns. The flagship Maverick Fund returned an average of 8.1% per year for the past 10 years and 14.2% since March 1995. (see the letter at the end for details).
However, in 2009, despite several funds on the long strategy side of the firm returned more than 50%, the flagship Maverick Fund returned 23.6%, lagging behind the benchmarks. The performance short fall is primarily due to an “extremely challenging” environment for shorting positions.
Outlook
Lee Ainslie does not think the worldwide stock market rally is here to stay. He cited three uncertainties that should bring back the volatilities:
For these reasons, he is very confident that the his short position will do well in the future, as he offers this explanation:
But Lee Ainslie has not entirely given up on the long side. He thinks high quality businesses offers good value:
Top Long Positions
While we do not which “low quality” stocks Ainslie is shorting, we do have an extensive database for the long positions he is holding as of December 31, 2009. Chiefly among then:
No. 1: Apple Inc. (AAPL, Financial), Weightings: 3.73% - 1,591,444 Shares
Apple Inc. has a market cap of $178.41 billion; its shares were traded at around $197.059 with a P/E ratio of 24.1 and P/S ratio of 4.9. Apple Inc. had an annual average earning growth of 90.5% over the past 5 years.
Ainslie had 2.28 million shares of Apple in 1Q08 and has since sold some. He held 1.6 million shares or about $335 million worth of AAPL as of 4Q09.
No. 2: Apollo Group Inc. (APOL, Financial), Weightings: 3.49% - 5,184,649 Shares
Apollo Group, Inc. has been providing higher education to working adults. Apollo Group Inc. has a market cap of $9.08 billion; its shares were traded at around $58.8 with a P/E ratio of 12.9 and P/S ratio of 2.2. Apollo Group Inc. had an annual average earning growth of 29.1% over the past 10 years. GuruFocus rated Apollo Group Inc. the business predictability rank of 4-star.
GuruFocus data shows that Ainslie had 4.4 million shares of APOL in 3Q08. He sold down to 1.8 million shares during 1Q09 but has since built to the current position of 5.2 million shares.
No. 3: Bank of America Corp. PRFD ‘S’(BAC-PS), Weightings: 2.99% - 18,000,000 Shares
Ainslie bought 18 million shares of this Series S of preferred shares of Bank of America Corp in 4Q09.
No. 4: DIRECTV Group Inc. The (DTV, Financial), Weightings: 2.88% - 7,772,080 Shares
DIRECTV Class A is a provider of digital multichannel television entertainment, broadband satellite networks and services, and global video and data broadcasting in the United States and Latin America. Directv Group Inc. The has a market cap of $31.98 billion; its shares were traded at around $33.42 with a P/E ratio of 23 and P/S ratio of 1.5. Directv Group Inc. The had an annual average earning growth of 12.7% over the past 10 years.
Ainslie held as much as 7.1 million shares of DTV in 1Q08 and has sold dow to 3.1 million shares recenty.
No. 5: Oracle Corp. (ORCL, Financial), Weightings: 2.83% - 10,385,328 Shares
Oracle Corporation is one of the world's suppliers of software for information management. Oracle Corp. has a market cap of $122.67 billion; its shares were traded at around $24.48 with a P/E ratio of 17 and P/S ratio of 5.2. The dividend yield of Oracle Corp. stocks is 0.8%. Oracle Corp. had an annual average earning growth of 18.2% over the past 10 years. GuruFocus rated Oracle Corp. the business predictability rank of 3-star.
Ainslie initiated this position in 4Q09.
No. 6: Macy's Inc. (M, Financial), Weightings: 2.6% - 13,944,210 Shares
Macy's Inc., through its subsidiaries, is one of the operators of full-line department stores in the United States. Macy's Inc. has a market cap of $7.86 billion; its shares were traded at around $18.67 with a P/E ratio of 17.5 and P/S ratio of 0.3. The dividend yield of Macy's Inc. stocks is 1.1%. Macy's Inc. had an annual average earning growth of 2.6% over the past 10 years.
Ainslie has built a stake of 14 million shares since he initiated a position in 2Q08.
Conclusion
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Maverick Capital Q4 2009 Letter
Performance
Maverick Capital manages a number of funds, each having had a impressive track record. For the past ten years, during which S&P 500 dropped an annual rate of 0.9%, Maverick’s funds returned decent positive returns. The flagship Maverick Fund returned an average of 8.1% per year for the past 10 years and 14.2% since March 1995. (see the letter at the end for details).
However, in 2009, despite several funds on the long strategy side of the firm returned more than 50%, the flagship Maverick Fund returned 23.6%, lagging behind the benchmarks. The performance short fall is primarily due to an “extremely challenging” environment for shorting positions.
Outlook
Lee Ainslie does not think the worldwide stock market rally is here to stay. He cited three uncertainties that should bring back the volatilities:
· Government intervention of historic proportions has been of tremendous benefit to economies and markets around the world. But what happens when such support is extricated? We maysoon have a test as GSE (Fannie Mae and Freddie Mac) mortgage-backed securities will no longer be purchased by the Fed as of March (although this deadline may well be pushed back). Mortgage rates are currently at all time lows, but if the largest purchaser of mortgages effectively disappears that may end quickly. Oh and by the way, US housing prices would likely then resume their tumble as a result. This is just one of a myriad of government programs and support mechanisms that exist around the world today.
· The regulatory environment is arguably now more unpredictable than anytime since the 1930’s introducing an unprecedented level of uncertainty for a wide range of businesses. A few months ago it appeared that managed care companies may cease to exist as we know them. More recently proposals have been floated that could force major financial institutions to change their business models significantly – in some cases unwinding major portions of shotgun marriages that the same government strongly encouraged less than eighteen months ago.
· The US monetary base has doubled in this two year period, as the below chart on the left shows (I am fascinated and horrified every time I look at the vertical eruption in this chart.) Total US debt (consumer, corporate and government) is now 370% of GDP – roughly twice the long-term average – as shown on the below chart on the right. The longer-term repercussions of this explosion of liquidity for the dollar, inflation and interest rates are ominous at best.
· Of course, US unemployment has doubled as well – crossing 10% for only the second time since World War II. The health of the consumer in the US and other developed markets is further burdened by the forced diet from credit that the credit-obese consumer will face for the next several years. I believe there is substantial risk that today’s economic recovery may prove to be unsustainable given moribund spending by consumers.
For these reasons, he is very confident that the his short position will do well in the future, as he offers this explanation:
A wide range of securities seem to be discounting economic nirvana for 2011 with valuations that leave little room for upside even if the economic recovery remains quite robust and operating margins return to peak levels. The herd mentality of the one-way markets of 2008 and 2009 is already showing signs of dissipating, resulting in a more discerning investment landscape. As you may have inferred from my above comments, I believe that in both equity and debt markets risk is not dear enough and that we may face a jolt to the price of risk, which would induce more rational valuations for many of our short investments.
But Lee Ainslie has not entirely given up on the long side. He thinks high quality businesses offers good value:
The flip side of this low-quality rally is that many high-quality businesses were simply left behind. As a result, we have been able to build positions in companies in different industries that should be able to maintain meaningful earnings growth in a wide range of economic environments. While clearly valuations are no longer as attractive as those offered by the market early last year, the free cash flow yields of our longs are significantly above corporate bond yields and are still very compelling by historical standards. The stability of these business models and the cushion provided by these attractive valuations should enable these stocks to survive my feared expansion of risk premiums on a relatively unscathed basis. The ability to buy such high-quality businesses (see Jefferson rule 4) at such attractive valuations is unusual. The discrepancies between our long and short portfolios are significant, and we believe unlikely to persist.
Top Long Positions
While we do not which “low quality” stocks Ainslie is shorting, we do have an extensive database for the long positions he is holding as of December 31, 2009. Chiefly among then:
No. 1: Apple Inc. (AAPL, Financial), Weightings: 3.73% - 1,591,444 Shares
Apple Inc. has a market cap of $178.41 billion; its shares were traded at around $197.059 with a P/E ratio of 24.1 and P/S ratio of 4.9. Apple Inc. had an annual average earning growth of 90.5% over the past 5 years.
Ainslie had 2.28 million shares of Apple in 1Q08 and has since sold some. He held 1.6 million shares or about $335 million worth of AAPL as of 4Q09.
No. 2: Apollo Group Inc. (APOL, Financial), Weightings: 3.49% - 5,184,649 Shares
Apollo Group, Inc. has been providing higher education to working adults. Apollo Group Inc. has a market cap of $9.08 billion; its shares were traded at around $58.8 with a P/E ratio of 12.9 and P/S ratio of 2.2. Apollo Group Inc. had an annual average earning growth of 29.1% over the past 10 years. GuruFocus rated Apollo Group Inc. the business predictability rank of 4-star.
GuruFocus data shows that Ainslie had 4.4 million shares of APOL in 3Q08. He sold down to 1.8 million shares during 1Q09 but has since built to the current position of 5.2 million shares.
No. 3: Bank of America Corp. PRFD ‘S’(BAC-PS), Weightings: 2.99% - 18,000,000 Shares
Ainslie bought 18 million shares of this Series S of preferred shares of Bank of America Corp in 4Q09.
No. 4: DIRECTV Group Inc. The (DTV, Financial), Weightings: 2.88% - 7,772,080 Shares
DIRECTV Class A is a provider of digital multichannel television entertainment, broadband satellite networks and services, and global video and data broadcasting in the United States and Latin America. Directv Group Inc. The has a market cap of $31.98 billion; its shares were traded at around $33.42 with a P/E ratio of 23 and P/S ratio of 1.5. Directv Group Inc. The had an annual average earning growth of 12.7% over the past 10 years.
Ainslie held as much as 7.1 million shares of DTV in 1Q08 and has sold dow to 3.1 million shares recenty.
No. 5: Oracle Corp. (ORCL, Financial), Weightings: 2.83% - 10,385,328 Shares
Oracle Corporation is one of the world's suppliers of software for information management. Oracle Corp. has a market cap of $122.67 billion; its shares were traded at around $24.48 with a P/E ratio of 17 and P/S ratio of 5.2. The dividend yield of Oracle Corp. stocks is 0.8%. Oracle Corp. had an annual average earning growth of 18.2% over the past 10 years. GuruFocus rated Oracle Corp. the business predictability rank of 3-star.
Ainslie initiated this position in 4Q09.
No. 6: Macy's Inc. (M, Financial), Weightings: 2.6% - 13,944,210 Shares
Macy's Inc., through its subsidiaries, is one of the operators of full-line department stores in the United States. Macy's Inc. has a market cap of $7.86 billion; its shares were traded at around $18.67 with a P/E ratio of 17.5 and P/S ratio of 0.3. The dividend yield of Macy's Inc. stocks is 1.1%. Macy's Inc. had an annual average earning growth of 2.6% over the past 10 years.
Ainslie has built a stake of 14 million shares since he initiated a position in 2Q08.
Conclusion
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Lee Ainslie for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
