Former Lone Pine Manager Posts 25 Percent Gain with White Elm

November 16, 2012   Stephen Taub

Who says fundamental stock picking is out of favor? Matthew Iorio, who trained at the hand of Tiger Cub Stephen Mandel, is handily beating both traditional and hedge fund indexes this year.

Matthew Iorio, who learned his stock-picking prowess from Lone Pine Capital founder Stephen Mandel, has one of the hottest hands in hedge funds this year. His main fund, White Elm Capital Partners, surged more than 8.5 percent in the third quarter alone, putting its full-year gains at around 25 percent or so, depending on which of the fund’s three share classes you look at.

Since its September 1, 2007 inception, the $269 million fund has risen between 31.6 percent and 33.5 percent net of fees and 44.33 percent gross, compared with a 3 percent loss for the MSCI World Index and a 9.31 percent gain for the S&P 500.

The long-short fund manager attributed this year’s gains to strong performance among its long positions, which are up 39 percent this year. Iorio said in a letter to clients that these provided nearly 23 percentage points of alpha or outperformance versus the MSCI All Country World Index.

Since inception, some 26 percent of the fund’s approximately 44 percent gross gain is attributed to the fund’s long positions outperforming the market, while nearly 16 percent is attributed to shorts declining more than the market. Approximately 2 percent is attributed to having a net long position, according to the firm’s recent third-quarter letter.

Iorio, whose firm manages nearly $500 million, is what some people call a Tiger Grandcub. He spent six years working at Lone Pine. Mandel is what is known as a Tiger Cub because he previously worked for Julian Robertson’s Tiger Management.

Iorio and his team of analysts seek out stocks that could double over three years. He also prides himself in making money and generating strong outperformance on his short positions. "We focus on what we can analyze and avoid macro debates," he explained in the third-quarter report.

He also looks for sectors and themes where he can find clear winners and losers that he says create dispersion. They eschew cyclicality, negative free cash flow and macro or policy-related debates. "Put simply, if we cannot answer the key questions with research, we are not investing," he told clients in the report.

And when it comes to emerging markets, Iorio says he has taken a more targeted approach, asserting that many emerging markets are dependent on foreign capital flows and therefore are riskier bets on developed markets. "As a result, we have moved more of our capital into the developed markets and have reduced our emerging markets exposure," he states.

In any case, Iorio pointed out in the quarterly letter that in the third quarter and the full year, more than 80 percent of the fund’s longs made money. "We have been doing a good job in security selection across the board, or to use a baseball analogy, 'We are hitting for both power and for average,’" he told clients.

More specifically, he noted that in the September three-month period, longs that rank among his top-five holdings, such as Sirius XM Radio, Liberty Global and Kabel Deutschland Holding, were among the top performers. He noted they are part of his Digital Revolution theme — businesses that are affected by the transition from analog to digital technologies and the infrastructure providers facilitating this transition.

Looking ahead, Iorio warned in the October 19 letter of uncertainty in the markets, including questions surrounding the election, the fiscal cliff, China and the impact of the monetary stimulus, both in the U.S. and abroad. But he reminded clients that he is less concerned about these macro issues, stressing he is a bottom-up investor focused on identifying "secular winners and losers" and benefitting from "time horizon arbitrage" by setting longer-term price goals for the stocks he owns.

Among longs, he said he is looking for factors including strong demand growth, pricing power and innovation.

He cites, as an example, Germany’s Brenntag, the largest third-party chemicals distributor worldwide. He says the company, whose stock he began purchasing in late 2011, demonstrates White Elm’s focus on "compounders," defined as businesses that generate lots of cash and that reinvest their capital for high rates of return and have solid demand for their products.

As of September 30, his top five longs as a percentage of equity were Golar LNG Ltd., which transports liquified natural gas; Kabel Deutschland Holding AG (Germany), that country’s largest cable operator; Liberty Global, an international cable company; SBA Communications, a wireless communications company; and Sirius XM Radio, the satellite radio company.

On the short side, Iorio explained that he looks for companies that are crumbling but not because of the economy. "Our favorites are those where we see limited terminal value and clear catalysts to get the market to see this decline," he added.

He won’t name names, suggesting he described specific examples at his recent annual meeting. But, he did say he presented the short cases for a wireline telecommunications company, an email marketing company and a commoditizing supplier to the battery industry.



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