Viking Global Bets Big on Visa: Portfolio Update

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 |  Includes: BAC, BCS, ESRX, IVZ, JPM, MA, MET, NWSA, TYC, UN, V
by: Market Folly

Dealbreaker recently posted up the latest letter from Andreas Halvorsen's hedge fund Viking Global. In it, we learn that Chief Investment Officer David Ott will be stepping down to spend more time with family. We also get a glimpse as to what Viking's portfolio looked like at the end of the first quarter and what its next 13F filing will likely look like. Here are Viking's top 10 positions:

1. Visa (NYSE:V)
2. Invesco (NYSE:IVZ)
3. Unilever (NYSE:UN)
4. Express Scripts (NASDAQ:ESRX)
5. Tyco International (NYSE:TYC)
6. Bank of America (NYSE:BAC)
7. Metlife (NYSE:MET)
8. News Corp (NASDAQ:NWSA)
9. JPMorgan Chase (NYSE:JPM)
10. Barclays (NYSE:BCS)

Right away you'll notice that these positions are slightly different from Viking's prior portfolio that we examined. Four of its top ten longs are either new or re-entered positions, including: Tyco, Metlife, News Corp, and Barclays.

Viking's largest position, Visa, represents 7.0% of capital in its Viking Global Equities fund. We finally get some color as to the investment thesis for each payment processor in particular via Halvorsen's letter. Viking previously owned Mastercard (NYSE:MA) as well, but it did not own it at the end of the first quarter. Halvorsen writes,

"Our largest loss in the quarter was in Mastercard which cost us 0.7% in VGE and 0.9% in VLF. We have owned Mastercard at various points since its IPO and continue to believe in the long-term strength of its business model. Mastercard was our largest profit contributor in 2007, second-largest in 2008 and third-largest in 2009. Although we continue to believe in strong secular revenue growth for transaction processors, Mastercard relies heavily on credit card spending (which offers slower secular growth than debit cards) and has suffered a few key customer losses that will weigh on results in the short-to-medium term. Visa, which was our largest position as of March 31, was the beneficiary of this share shift."

This is intriguing to note because some hedge funds have owned both payment processors while some managers have favored one over the other. While Viking is monitoring Mastercard for potential re-entry points, it's clear that for now the fund will stick with Visa as it expects the company's strong debit card exposure to bolster performance. You can see which hedge funds own Mastercard here and which hedge funds own Visa here.

The letter also provides some color on Viking's Express Scripts stake as it expects this big pharmacy benefit manager (PBM) to profit from the impending brand-to-generic drug conversion. Viking sees significant upside and thinks ESRX commands a multiple of 20x earnings versus the current 16.5x 2011 numbers. Last, we just want to highlight Viking's large position in News Corp (NWSA). That stock of course is one of Seth Klarman's big holdings at Baupost Group.

Results wise, Viking has struggled recently. In the first quarter, it was down 0.1% as noted in our recent hedge fund performance numbers post. Halvorsen mentioned that its poor performance this time around was attributed to a few large long positions. This is a shift from the losses it suffered on the short side of the portfolio in 2009 as covered in a previous Viking investor letter. Viking Global Equities' ten largest single name short positions accounted for 15.9% of capital as of March 31st, 2010.

In terms of a pure long/short trade, Viking, like many other hedge funds, had on a long money-center banks, short regional banks trade. Halvorsen writes,

Bank longs contributed 0.2% while Bank shorts cost us 1.3%. The longs represented large, well-capitalized banks that, in our opinion, have adequately provided for losses in their loan portfolios. We were short a collection of smaller, regional banks with significant commercial real-estate related loan exposures that we believe have not yet been fully marked-to-market leading to a need for additional capital over time.

One last thing we found interesting in Halvorsen's commentary is that he essentially confirmed that all the Tiger Cubs talk and bounce investment ideas off each other. Let's face it, we already knew this. But it's still intriguing to see his response to investor concern over holding stocks that many other hedge funds also own.

While Viking Global was originally founded by three Tiger Management veterans (Brian Olson, David Ott, & Andreas Halvorsen), only one of those founders now remains (Halvorsen).

[Note: Viking's letter has been removed per request of representatives from Viking.]

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