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 their next 13F filing will likely look like. Here are their top 10 positions:


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


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

Their largest position, Visa, represents 7.0% of capital in their 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 (MA) as well, but they did not own it at the end of the first quarter. Halvorsen writes,

"Our largest loss in the quarter was in Mastercard (MA.N) 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 they'll stick with Visa as they expect its 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 their Express Scripts (ESRX) stake as they expect this big pharmacy benefit manager (PBM) to benefit from the impending brand-t0-generic drug conversion. Viking sees significant upside and thinks ESRX commands a multiple of 20x earnings versus the current 16.5x 2011 numbers. Lastly, 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, they were down 0.1% as noted in our recent hedge fund performance numbers post. Halvorsen mentioned that their poor performance this time around was attributed to a few large long positions. This is a shift from the losses they 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 moneycenter 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."

Below is an excerpt Viking's first quarter commentary where Halvorsen addresses the notion of hedge fund herding:

"We are often asked by investors how we think about owning stocks that are widely held by other hedge funds. There is no categorical answer to this question, but I would like to discuss some of the factors we consider when establishing and maintaining positions in companies known to be popular with our peers. First and foremost, the critical issue is whether we are ultimately proven right in our analysis. Every single position we take has been independently researched by a Viking analyst and each investment decision has been thoughtfully deliberated by one or more of our portfolio managers. We do not borrow conviction from another firm or individual, although we frequently find it informative to talk to other investors to understand the attributes they value. These conversations can help us better assess what has already been reflected in the prevailing stock price. Incidentally, we often find the greatest success in investments where we have a differentiated view from the Street, but we do not shy away from high conviction ideas just because other hedge funds are involved. Although we thrive on standing alone, we do not take positions opposite other firms just to be contrarian. We recognize that all the shares of a given company must be owned by someone and it can be comforting to know that the other shareholders represent firms that we respect rather than not. There is obviously some risk associated with being in an investment alongside likeminded investors who may have been trained in the stock-picking trade in similar ways in that we may decide to sell at the same time. To limit the consequences of crowded exits, we pay attention to the liquidity of the stocks we trade and take large positions only in the most liquid stocks in the world. The problem of crowding is most acute in our shorts due to the risk of unlimited loss and the potential for cancelled borrow arrangements. Here we do tread carefully. As you are aware, we are guarded in disclosing our shorts to anyone and we do on occasion limit the size of our positions, or eliminate them altogether, when we perceive a position to be tight in the borrow market or crowded by equity long-short investors. Ultimately, we live and die by our analysis, portfolio management skills and efforts to contain risk – managing crowded trades is merely another challenge we face in delivering attractive returns at reasonable risk."

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.

Keep in mind that you can replicate Viking's long US equity holdings via the Tiger Cub Portfolio created with Alphaclone, the hedge fund backtesting and replication software we use. Alphaclone gave our readers a special free 30 day trial for those interested, so take advantage of it. 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).