Thursday, February 11, 2010

Is Whitney Tilson Running an Alpha-clone Fund?

This post was subsequently featured on World Beta/Mebane Faber  and MarketFolly. It was also linked to by WSJ columnist James Altucher on his dailyfinance blogwatch.

Let me preface this by saying that I like Mr. Tilson's work. He has done a lot in the worlds of  value investing and value investing education. Further, he has been very forthcoming with a number of high quality materials on the housing crisis. I also follow all of his slides from events like the Value Investing Congress, as well as situation-specific presentations, like the General Growth dispute with Hovde. In addition, I doubt I will ever reach his level of prominence or AUM, or write a book, or have 5-star mutual funds like his.
Mr. Tilson is also one of the better thinkers on school reform (bet you did not know that). I have been blogging for over a year now, and Mr. Tilson is on my original "People Smarter Than Me" list on the blogspot site. I have no axe to grind.

So, back to the topic, is Mr. Tilson running a "clone" portfolio? I think the answer is yes.

In his 2009 annual letter, Mr. Tilson comments on a number of topics, but what got me thinking is the list of his top 12 positions. It seemed to me, after a cursory look, that most of his top positions are in equities that are in one way or another pre-approved or "blessed" by prominent value or activist investors (or both- i.e. Ackman).

(1) GGP Brand-name investor: Ackman
GGP/GGWPQ is one of the most fascinating stories of the crisis (yes, geeky). Mr. Ackman hit it out of the ballpark by realizing that (1) the assets are of superb quality, (2) the problem was a roll-over rather than a solvency issue, and (3) the structure of the liabilities was favorable. He coined what I am sure will be a classic: "good liabilities are an asset." GGP has returned multiples for his fund. More recently, Pershing and T2 have been involved in a public discussion vs. Hovde regarding GGP: if you like reading arguments about the proper ways to calculate NOI (even arguments about cash!), this series of presentations are for you.
(2) BRK Brand-name investor: Buffett
No further comments are necessary. Let The Oracle do your thinking for you.
(3) IRDM
This is a formerly bankrupt satellite phone service provider. T2 has some great slides on the whole idea, a nice "deep value" situation.
(4) MSFT
No comments here, either, though one has to wonder how much alpha generation is possible with everybody's favorite monopolist.
(5) AXP Brand-name investor: Buffett
In addition to being a long time  BRK holding, AXP has been attracting attention of other value investors, such as Katsenelson. No longer in the deep value category.
(6) HUN Brand-name investor: Black/Apollo
This one is a bit of a stretch (both the idea and calling Black a "brand-name" investor). Huntsman will be a case study in corporate finance. Apollo and its banks were penalized for trying to walk away from a buyout/merger deal with Hexion, a portfolio company.
(7) PFE Brand-name investor: Berkowitz
Pharma is also attracting a lot of value investors, now that valuations have been depressed for numerous reasons. Berkowitz is a value investing celebrity, and his Fairholme Fund was the largest single fund holder in PFE the last time I checked. I do wonder what PFE's holiday gift baskets contain.
(8) DLIA
This is a unique T2 situation. Delia's is an online clothing retailer for girls. Market cap is ~50 mm. Tilson has quite a bit on it in both the '08 and '09 letters.
(9) Sears Canada Brand-name investors: Lampert, Ackman
Lampert, if you remember, had a huge hit with the Kmart bankruptcy and subsequent acquisition of Sears (US). It seems that he was the first fund manager in the recent past to both recognize and monetize the value of the underlying RE in a retail context. Both Lampert and Ackman own Sears Canada shares. There was some noise last year about Lampert trying to acquire the whole company after his failed attempt in 2006.
(10) YHOO Brand-name investor: Icahn
Yahoo, as probably everyone knows, was targeted by one of the old school raiders, Icahn, around its potential sale to MSFT. Icahn is still a holder.
(11) FFH Brand-name investor: Watsa
Watsa is often compared to Buffett; FFH is the insurance company he runs. Large holdings in KFT, WFC, just like The Oracle.
(12) WEN Brand-name investors: Ackman, Peltz
This is another two-fer. Ackman was an activist there a while back with his usual approach (also seen with MCD and TGT). WEN was then acquired by Arby's, which is a holding of Nelson Peltz. For the uninitiated, Peltz is a well-known activist in the consumer space, he has been involved at one time or another with Snapple, Arby's, Kraft and Heinz (probably the most public battle).

The more substantive question is, does "cloning" matter?

Probably not, but at 2 and 20 (presumably) one would expect more of the IRDMs and DLIAs and less of MSFTs or BRKs or AXPs. It is not unusual for big-time investors and their teams to reach the same conclusions about certain companies, especially ones of larger capitalization. This is particularly true when these investors adhere to a well-defined style, such as "value" which describes most of the names above. Further, PMs obviously share and discuss ideas, and selling your ideas to other investors then becomes a bit of a self-fulfilling prophecy as demand for the stock picks up.

But if you want a true "alpha clone" portfolio, there is a service for that (ain't America great?). It is run by Mr. Mebane Faber. (I have not used it/not affiliated with it/do not know Mr Faber. I just read his blog regularly.)

Do you know of other "alpha clones"? Or, even, "alpha clowns"? Let us know in the comments.

(PLUG: the author of Barbarian Capital blog is available for the right consumer- or inflation-focused analyst opportunity within the US)

2 comments:

Daniel Y said...

Right on the money!

My Thoughts said...

This is a bit of a bizarre article. Based on your definition of alpha clone, I would argue that 90+% of hedge funds are alpha clones. There may have been a former time (pre-Internet) when ideas were independently produced, but that is long past. Look at the plethora of investment idea conferences; investment blogs; investors on twitter; websites like VIC or SumZero; SeekingAlpha; Idea newsletters like VII or Manual of Ideas; 13-Fs; etc.

The old game of sourcing or finding good ideas is long gone. The key now is to sort thru the noise of ideas to identify and verify the good ones.