A clutch of hedge funds including Maverick Capital has ridden a surge in beaten-down parts of the equity market to post large gains so far in 2021.
Despite losing about 9 per cent in its flagship hedge fund in a choppy January, Lee Ainslie’s Dallas-based Maverick, which manages $11bn in assets, gained roughly 25 per cent in February and a further 20 per cent last month, according to figures sent to investors and seen by the Financial Times.
The bets on previously unloved “value stocks” in sectors such as retail, airlines and banks has left Maverick up about 36 per cent in its flagship fund this year to late March, making it one of the world’s top-performing hedge funds, according to numbers sent to investors. Maverick declined to comment.
The performance, bolstered by a longstanding position in SoftBank-backed ecommerce firm Coupang, which floated last month, and a timely bet on GameStop, whose share price rocketed this year, shows how abruptly hedge funds warmed to an investment style that has long been out of favour.
Value stocks have badly lagged behind more expensive stocks with faster earnings growth in sectors such as technology for years, but they have enjoyed a rally in recent months on expectations that progress on coronavirus vaccines and the easing of lockdown restrictions will lift economic growth and improve their earnings. That has rewarded funds that held on to their value positions or switched into them more recently.
Managers betting value stocks were finally ripe for a rebound were confounded by the onset of the coronavirus pandemic last year, which further battered these sectors. In October, $10bn-in-assets AJO Partners announced it would shut, saying that “the drought in value — the longest on record — is at the heart of our challenge”.
Ainslie, a technology specialist and a “Tiger cub” who previously worked at Julian Robertson’s Tiger Management, profited last year from contrasting bets on tech stocks such as Netflix, Microsoft and Facebook.
But towards the end of the year, Maverick refocused on the potential for a strong economic rebound, according to a person familiar with its positioning. Following the example of previous market rebounds such as in 2003 and 2009, when beaten-down, economically-sensitive stocks recovered quickly, it began buying.
Sydney-based Platinum Asset Management, which runs $20bn, has also tapped in to the rally in value stocks.
Since the start of November, just before the BioNTech/Pfizer vaccine was revealed to be more than 90 per cent effective, the global MSCI World value index has risen 29 per cent, outpacing the growth gauge, which is up around 19 per cent over that time.
Platinum, co-founded by ex-Bankers Trust managers Kerr Neilson and Andrew Clifford, has gained around 30 per cent in its flagship Global fund since the start of November.
Platinum cut positions in stocks such as Facebook, Google and Tencent last year, and instead bought cyclical stocks such as chipmaker Samsung Electronics and Micron Technology.
“Valuations were such that you knew you would make money,” said Clifford, the firm’s chief executive, who added that being able to buy some unloved stocks at book value was “as obvious as it gets in investing”.
Also profiting is New York-based Axonic Capital. Its Credit Opportunities fund was hard hit during last March’s credit market sell-off but has gained around 8 per cent this year to March, said a person who had seen the numbers, helped by a rally in some of its asset-backed securities focused on aviation and aircraft as lockdowns ease.
However, some managers now question whether recent gains mean the rally in value stocks has run its course, at least for now.
Maverick expects the rally has come to an end and that big tech stocks with stable growth look attractively valued again, said a person familiar with its positioning.
And Platinum has trimmed its exposure to names that have performed strongly in recent months, although it has not sold out entirely.
“Stocks have rallied very hard,” said Clifford. “We’re in a difficult middle ground. Over the next three to five years there are returns to be had [from value and cyclicals]. But in 2021 maybe there’s not a lot more to be had.”