I spend a lot of my time covering and writing about hedge funds. The hedge fund industry is an interesting beast to analyze. Fund managers are employed to find investments, but these managers are momentum traders more often than not. Many hedge funds focus on finding the market's hottest ideas. They then chase these ideas higher, using leverage to increase returns.
Momentum chasers
Fund managers are incentivized to follow this strategy. Performance fees and management fees are based on performance and assets under management. If a fund does not perform well, assets will not grow. Therefore, fund managers have an overwhelming desire to outperform or, at the very least, match the market.
Unfortunately, this approach does not lend itself to buying and holding stocks for the long term. If a company has fallen out of favor with the market for one reason or another, it could be years before the company is back in favor. During this period, the manager will have to report lackluster performance for the portfolio. Assets may shrink and there will be no performance fees.
That is why many managers are momentum traders. If you buy something that is already going up, rather than something that might go up at some point in the future, you are more likely to achieve a positive return for yourself.
Of course, this is not the approach favored by all managers. Some managers are able to take a different approach. Long-term capital, fund lockups and a devoted investor base all provide some managers with the flexibility to take a different approach.
When I come across a fund that uses a really different approach, I think it is something worth writing about and studying. These managers are rare because it requires a certain mentality to stand out from the crowd and move against the herd. That is exactly the same reason why Charlie Munger (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) receive so much attention. For the best part of eight decades, they have been moving against the herd.
Long-term investor
Shad Rowe's Greenbrier Partners Capital is one fund that has recently crossed my radar. Rowe is one of the rare fund managers who can buy and hold stocks for years without needing to trade in and out of positions.
According to 13F data, Greenbrier's largest holding at the end of September 2021 was Apple. The fund had owned this position since 2011, suggesting that it has been a feature of the portfolio for a decade. As 13Fs only provides a snapshot of a portfolio at one point in time and have other limitations, there is a chance this holding could be an even longer-term investment.
At the end of September, Apple accounted for 20% of the portfolio, followed by Facebook (FB, Financial), Paypal (PYPL, Financial) and Amazon (AMZN, Financial). There are only 16 holdings in the portfolio overall according to the 13F, although these reports only show U.S. equity holdings, so there could be other international or non-stock positions in the portfolio.
Apple alone has returned 28% per annum over the past decade. It would have taken a lot of conviction and patience to hold the stock over this period. Greenbrier has reaped the rewards. Assets under management have jumped from around $170 million in 2012 to just under $1 billion today. I assume most of this return was from stock performance rather than asset inflows.
As well as Rowe's long-term holding period, he also knows how to let winners run. Apple was the firm's largest holding at the end of 2011, but the other top five holdings were Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), Bank of America (BOA), Carmax (KMX) and Costco (COST, Financial). These positions have since been replaced.
Considering the long-term nature of the portfolio and the hedge fund's desire to let winners run and sell losses, I think investors may benefit from taking a closer look at Greenbrier.
