Yen Liow is the managing partner at Aravt Global LLC, which is a fundamental global equity investment firm based out of New York. I recently stumbled across an interview with this fund manager in the Australian Financial Review, where he talked about uncovering the hidden value in technology stocks.
Having cut his teeth in the dot-com bubble, Liow is somewhat skeptical about high-flying, unprofitable technology companies. According to the interview, the fund manager is looking for "monopoly and oligopoly growth stocks" which have substantial economies of scale.
Payment giants
Liow's fund is particularly focused on payments and payment networks. According to Aravt Global's fourth quarter 13F report, the fund owned 10 equity positions at the end of December. Investors should note that 13F statements are only required to include U.S. equity positions and may not include international positions, short positions, cash or other types of securities or assets that may otherwise be managed by the firm in question. The 13F should never be considered a comprehensive look at an investment firm's assets.
Around 19% of the 13F portfolio is invested in Visa (V, Financial) and PayPal (PYPL, Financial); these are core positions for the fund manager who, according to interviews, believes that they are leading the charge in the global payments revolution.
At the end of last year, the largest holding in the portfolio was the discount retailer Five Below (FIVE, Financial). According to the 13F report, at the end of 2021, the fund had 13% of its assets invested in this retailer, a position worth $40 million compared to the overall fund value of $307 million. The position first appeared on the 13F for the third quarter of 2020. It started off with just 76,000 shares before bulking the holding up to just under 200,000 shares, making it the largest position in the portfolio.
Five Below has tripled the number of outlets it operates over the past eight years, selling cheap electronics, pet foods and footwear to customers across the U.S. Liow explained in the interview that he loves the company because it operates a winning model.
"Scale economics shared with your customer," is a business model that has succeeded all over the world. Amazon (AMZN, Financial) is probably the best example of a company that reinvests heavily to lower costs and improve service for customers. The fund manager explained that these discount models “All come in different shapes and forms but the formula is almost identical in all of them.”
Avoiding mega-cap stocks
Interestingly, Liow has been reducing his exposure to large mega-cap technology stocks, unlike many other fund managers. While other fund managers have been increasing their holdings as shares in the technology giants have come under pressure, Aravt has been re-focusing its portfolio "back into small and medium-sized companies." These companies face far less "regulatory scrutiny," which could give them more flexibility to grow in the years ahead, argues the fund manager.
The prospect of additional regulatory scrutiny is the main reason why his fund decided to dump its position in Chinese e-commerce giant Alibaba (BABA, Financial). The regulatory risk became too significant to understand and factor into the company's valuation model.
Other companies that feature in the portfolio exhibit similar qualities to the businesses outlined above. They operate in a specific niche and are relatively small compared to the global giants' other hedge fund managers may prefer.
TransDigm Group Inc (TDG, Financial) is the second-largest position in the portfolio with a 12.7% portfolio weight. The corporation is a leading global producer, designer and supplier of engineered aerospace components, systems and subsystems.
The third-largest holding with a 12.5% portfolio weighting is Black Knight Inc. (BKI). This company provides integrated technology systems to facilitate parts of the homeownership life cycle.
Both of these businesses appear to fit into the framework Liow described in his interview. They are monopoly and oligopoly companies with substantial economies of scale and growth potential.
Aravt's portfolio provides an interesting alternative viewpoint to the mega-cap equity portfolios many other hedge funds pursue.
