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
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
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
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.