This quarter, we used our screening tools to select a group of top performing managers for further analysis. The annualized performance of their 13F portfolios had to be more than 20% and the track record had to be at least six years long. We narrowed down this list of managers by excluding portfolios with high concentrations or low liquidity, then selected only a few managers for the sake of brevity. To avoid confusion, it's important to mention that our filters use simple returns for comparing managers whereas performance is compounded when studying a single manager (that's why the italicized numbers below are larger than annualized figures in the discussion text). The final four managers were Joho Capital, Shannon River Fund Management, Sound Energy Partners, and Caymus Capital Partners.
Joho Capital, ($1.4bn, 37% return): It's a shame this fund is shutting down and returning money to its investors; Bob Karr and his team have done an admirable job managing money over the last eighteen years. Their long stock portfolio had an annualized compound return of nearly 27.5% since March 2007. Over the same period, an equally weighted portfolio composed of only the top two stock holdings had an annualized compound return of 33%! Although sector allocations have varied over time, the fund has maintained a fairly high allocation to technology companies. The portfolio's high concentration (the top five positions have typically accounted for 60-80% of overall holdings) is balanced by their liquidity. The average number of shares held per position as a proportion of each stock's daily volume - that is, the volume required to liquidate the entire portfolio - has stayed at around one day.
Shannon River Fund Management, ($1.4bn, 27% return): This is the second best performing fund in our list with an annualized compound return of 19.25%. Similar to Joho Capital, an equal weighted portfolio of their top two positions has a higher performance than their real portfolio, coming in at around 27.9%. The fund has historically invested in technology and media companies and remains well balanced with around 40-60 positions and a concentration of only 20-30%. On the other hand, their liquidity is worse than Joho Capital's, running anywhere from one to four days of average daily volume.
Sound Energy Partners, ($120mn, 22% return): An energy focused hedge fund, performance was more modest than the first two funds on our list but still quite strong. Their annualized compound return was 11.22% and an equal weighted portfolio constructed using their top two positions has a lower return of 4.89%. The fund has had periods of higher concentration in the last few years, although it has varied from as low as 30% to as high as 70%. The average position liquidity, however, is excellent at less than 0.2 days.
Caymus Capital, ($160mn, 21% return): Not to be confused with the real estate or private equity groups, this is a relatively small hedge fund based out of Texas. The fund has an 11.23% annualized compound return, almost exactly the same as Sound Energy Partner. Interestingly, the top two portfolios had a very close return of 11.02%. The fund tends to be concentrated, with only 15-20 positions in the portfolio and their top five holdings usually account for 40-50%. Like Sound Energy Partners, the liquidity is excellent, making the concentration not as much of a concern.
Using fresh 13F filings (Q4 2013), we analyzed changes from their third quarter holdings. Although we ignored ETFs, it's worth noting that Caymus Capital initiated a 5.36% position in XLE, the energy SPDR ETF. We break down portfolio changes based on New, Old, Redeemed, and Long Term Holdings and also examine a focused clone portfolio.
Across all four managers, the top five new holdings were Broadcom (BRCM), WebMD (WBMD), Noble Energy (NBL), 58.com (WUBA), and IAC/InterActiveCorp (IACI). Their weights were 4.06%, 3.77%, 2.72%, 2.41%, and 2.36%, respectively. The majority of these are technology stocks. In fact, for the most part, the two energy focused managers either redeemed from large positions or rotated out of long-term holdings.
Laredo Petroleum Holdings (LPI), Pioneer Natural Resources (PXD), and Allot Communications (ALLT) are now held by two out of the four managers. Both Caymus Capital and Sound Energy Partners are invested in Laredo Petroleum Holdings and Pioneer Natural Resources. Sound Energy Partners joined Shannon River Fund Management by adding a very small stake in Allot Communications .
Caymus Capital increased its holding of Cimarex Energy (XEC) as well as Cabot Oil & Gas (COG). Meanwhile, Sound Energy Partners nearly doubled its stake in Weatherford International (WFT) and Halliburton (HAL).
In the more technology focused group, Joho Capital increased its holdings in Veeco Instruments (VECO) and Vipshop Holdings (VIPS) significantly, while Shannon River Fund Management bought more Facebook (FB) and Activision Blizzard (ATVI).
Notable energy reductions include Northern Oil & Gas (NOG), Rosetta Resources (ROSE), and Interoil Corp (IOC). On the technology side, Shannon River Fund Management cut its holding in Ellie Mae (ELLI) to less than 1% from over 4%. Joho Capital cut holdings across a few different sectors, reducing its holding of Mindray Medical International (MR) to 1.6% from 5%, as well as cuts in Micron Technology (MU) and Lauder Estee (EL).
Caymus Capital redeemed its entire 5.8% stake in QEP Resources (QEP) and Sound Energy Partners got rid of its OIH puts and some smaller positions in Transocean (RIG), Cameron International Corp (CAM), and SM Energy (SM). Shannon River Fund Management also redeemed small stakes in LifeLock (LOCK), Pandora (P), and Rogers Communications (RCI) while Joho Capital didn't sell out of any of its positions.
These are holdings that have been in the managers' portfolios for a long period of time. We construct tables showing how long each position has been held by a manager, as well as the high and low weight in their portfolio and the popularity of the position amongst other filers.
Caymus Capital Partners redeemed Comstock Resources (CRK) after a little more than five years of holding the position (21 quarters). The second longest term holding was Cabot Oil & Gas .
Sound Energy Partners has held Hallibruton and Cameron International Corp for the last six years.
Given the strength of their historical returns and the results we saw when analyzing equal weighted performances, we decided to build a focused portfolio of the top two Technology and Basic Material positions in each manager's portfolio. The back-tested portfolio was rebalanced quarterly starting March 31st, 2007 and had a total return of 353% compared to the S&P 500's return of 48% (using quarterly returns). Sector ETFs Vanguard Information Technology (VGT) and iShares US Basic Materials (IYM) had total returns of 75% and 36% respectively. These calculations don't take into account the information lag in filings but results are still impressive. On an annualized basis our clone portfolio had an impressive performance of 24.6%!
Using the same strategy to select stocks, the YTD performance of an equal weighted portfolio is around 4.4% and the best performing holdings are NQ Mobile (NQ), Facebook, and Allot Communications.