market folly

John Burbank's hedge fund firm Passport Capital provides a glimpse as to their overall portfolio positioning in its third quarter letter. Passport's Global Fund has returned 23.1% annualized since inception in August of 2000. At the end of the third quarter, the fund was up 7.9% year to date and the firm manages over $5 billion. Passport's largest net long exposures were in basic materials and consumer. Overall, they ended the third quarter 95% long, 39% short, leaving them with net exposure of 56%.

Top Holdings

At the end of the third quarter, Passport's top ten equity positions represented 33% of their assets under management (AUM). The top 10 holdings are sorted by percentage of net asset value (NAV):

1. Riversdale Mining (RIV): 10% of NAV
2. Microsoft (MSFT): 4%
3. Exxon Mobil (XOM): 4%
4. Las Vegas Sands (LVS): 3%
5. Financial Technologies (FTECH): 2%
6. Tarpon Investimentos (TRPN3): 2%
7. CF Industries (CF): 2%
8. Wendy's Arby's Group (WEN): 2%
9. Labrador Iron Mines (LIM): 2%
10. Jordan Phosphate Mines (JOPH): 2%

Keep in mind that we've also detailed the rest of Passport's portfolio.


Equity Update: Riversdale Mining (RIV.AU)

Given that Riversdale is Passport's largest holding, it makes sense that they singled out a portion of their letter to provide commentary. On Monday, Riversdale said it was in talks with Rio Tinto (RTP), which is offering AUD $15 per share for the company and RIV shares traded north of AUD $16 on the news (around 15% higher than where it was trading prior to the news). So, Passport has already made some nice money on this play and it will be interesting to follow the developments. Overall though, Burbank definitely advocates hard assets.


Physical Gold

Passport also mentions that 8% of the fund's NAV is in physical gold. The hedge fund firm owns 100,000 ounces of the precious metal stored in Zurich. They highlight various purchases by central banks as a bullish indicator. However, they are also partially concerned by the fact that some gold miners have been de-hedging. As a result, Passport delta hedged their entire gold position. For more hedge fund advocates of gold, head to our in-depth post on John Paulson's gold fund as well as David Einhorn's preference of physical gold.


Added Large-Cap Multinational Stocks

During the third quarter, Burbank's firm also bought high quality large cap companies. This is a prevalent theme we've seen in hedge fund portfolios as of late. Regarding this theme, Burbank writes:

"Recently, we have begun adding certain large-cap, multinational stocks to our portfolio. These are the same stocks that we largely avoided for the last ten years. What has changed? For one, many such companies have dividend yields of greater than 3% and "earnings yields" of 6-9%. Compared to "risk-free" 10-year Treasuries (yielding 2.5% at quarter end), these are quite appealing. While these companies' future earnings and dividends are uncertain, we think they are very likely to rise over time given strong franchises (predictable pricing and market share) and meaningful exposures to faster-growing emerging markets. We have sought out companies we believe are characterized by strong management teams, powerful competitive moats, healthy balance sheets, predictable cash flows, and healthy growth prospects."

Companies that they recently added include Exxon Mobil (XOM) and Microsoft (MSFT). Oaktree Capital's Howard Marks has said to buy high quality large-caps as well. And for a specific look at MSFT, T2 Partners' Whitney Tilson has put together his investment thesis on Microsoft.

Embedded below is Passport Capital's third quarter letter to investors:



You can download a .pdf copy here.

For analysis of Passport's US equity longs, head to the new issue of our Hedge Fund Wisdom newsletter. And for more thoughts directly from Passport's founder, head to his presentation from the Value Investing Congress.