Maverick Capital, the brainchild of Lee Ainslie and Sam Wyly, was founded in October of 1993 with assets of thirty eight million dollars. Today the fund is worth over 9.7 billion dollars, averaging more than 13% compounded return annually from 1995 to 2009. Although Maverick Capital lost about thirty percent in the financial crisis of 2008 (which was still a significant relative outperformance of the S&P 500), most of their clients remained loyal to them and today they are serving a total of one thousand investors.
Mr. Ainslie investment tenure unofficially began while attending the University of North Carolina’s business school. More particularly, it began when Mr. Ainslie met alumnus and future mentor, Julian Richardson. After graduating in 1990, he was offered the position of an analyst in the technology sector by Mr. Robertson at Tiger Management. As an analyst his job was mainly to originate and sell his ideas, both long and short, to his boss Mr. Robertson who made the final investments decisions.
Flourishing under Mr. Robertson, Mr. Ainslie became managing director at Tiger Management and worked there for the next three years before being approached by Texas billionaire Sam Wyly who offered to start a fund with him. The decision to leave Tiger Management was difficult and heart-wrenching for Mr. Ainslie, but he could not resist the unique opportunity being presented to him, especially considering the source of the offer.
So, in October 1993, Maverick Capital was co-founded by Mr. Ainslie and Mr. Wyly, with the latter providing the seed capital. Two years later, Mr. Ainslie was running the entire portfolio and in 1997, he bought out the majority interest of the firm thereby acquiring total control of it. The stage was set then for Mr. Ainslie to practice the investment philosophy and methodology that he had learned from his mentor at Tiger Management.
Maverick Capital, akin to most hedge funds founded by Tiger Cubs, practices a long/short equity investment philosophy with a fundamental, bottom-up approach with great emphasis on the quality of management teams. Rather than trading bonds, currencies, commodities or options, the fund relies on old-fashioned stock picking to generate profits. It is a pure stock picker hedge fund buying what it reckons will beat the market and selling what it thinks will underperform. Even though the fund picks both long and short positions, Mr. Ainslie insists that it does not “pair trade”.
Mr. Ainslie relies heavily upon his team of analysts for making investment decisions. The team is fashioned on the two most widely used models in the industry: Julian Robertson’s method of “one to two guys run the show” and the other, chosen by Paul Jones and Steven A.Cohen, with various autonomous desks and a leader at the helm.
The resulting hybrid consists of half a dozen managers spanning their expertise in consumer, healthcare, cyclical, financial, retail and technology sectors. Each sector head, with an average of fifteen years of experience in investing in their respective sector, is supported by seven analysts comprising a team which is the core of Maverick Capital’s investment staff. Each analyst normally holds only about five to six positions, while keeping each position between five to eight percent of the fund, giving Maverick Capital one of the lowest ratios of positions per investment professional in the industry. The team concentrates on analyzing and understanding which stocks will out- and under-perform in each sector, while ignoring timing market movements overall.
Before investing in a business, Maverick Capital performs an in-depth analysis to understand each and every aspects of the company. As mentioned before, Mr. Ainslie puts a top priority on the management team. He insists on spending an exorbitant amount of time learning the quality, aptitude and motivation of the management team. The sector heads, who typically have spent the entirety of their careers on a sole industry, form and develop long-term relationship with senior management with the goal of knowing more about the business than any other “non-insider”.
Much to his chagrin, Mr. Ainslie learned the hard way that even though a company might have an attractive valuation, a weak management team can spell doom if it has historically made poor strategic decisions and concentrated on empire building rather than returns.
To evaluate a company, Mr. Ainslie uses a variety of valuation methodologies, the standard being to compare sustainable free cash flow to enterprise value. However, Mr. Ainslie warns against the erroneous approach of using the same valuation metric towards different sectors. One has to realize that different sectors react differently to events and hence should be analyzed in a distinct manner. The key is to identify which approach is most pertinent to a given situation in a given sector over a period of time.
As far as returns are concerned, Mr. Ainslie targets stocks that he believes will either under- or out-perform the market by twenty percent on an annual basis. Given the long term volatility and returns of the markets, Mr. Ainslie points out that it is a difficult task to figure out the best and the worst performers.
For example, last year, thirty five percent of all the stocks in the S&P 500 index had either under- or -out-performed the index by twenty percent making success of the fund heavily reliant on a multitude of good decisions rather than a few. Mr. Ainslie believes that such an approach creates a much more sustainable investment model.
A company’s growth is also taken into consideration before investing, and is analyzed to figure out its sustainability and effect on capital returns. Mr. Ainslie, obviously, prefers organic growth as its incremental return on capital is much higher than that of acquired growth.
As mentioned before, Mr. Ainslie clarifies that the fund does not “pair trade”. Maverick Capital is a genuine hedge fund and it has an even allocation of longs and shorts in every sector and region. This form of allocation is an extensive part of their risk management.
The fund mostly invests in the US (even though it is a global fund) due to familiarity with management, liquidity and the facility of shorting in the US markets. Mr. Ainslie further extrapolates that this is the region is where they feel most comfortable and where the fund has had the most consistent performance.
However, as Maverick Capital takes a bottom-up approach intermingling with companies, talking to management and analyzing cash flow, shorting is exercised with prudence so as not to upset relationships with the companies and corporate executives. Even though the mechanics of shorting is somewhat cumbersome to produce large gains, a 100 percent (pure) return keeps it as an attractive prospect.
In 2006, Mr. Ainslie decided to make certain that each single short is an investment in itself and not a hedge. It was the fact that after 2003, for the next two years Maverick Capital’s short portfolio did not end up making money. As the firm had gone through an extended period of losing money on the short side, Mr. Ainslie became much more precautious and changed the firm’s attitude by thinking of where not to lose money rather than where to make it.
Maverick Capital also relies on the gap between the short positions and the long positions to drive profitability. However, the core of the fund is inclined towards the long side mainly because the market has a tendency to go up and the majority of investors — mutual and pension funds, individuals– buy stock on the conjecture that they will rise.
As such, Mr. Ainslie employs some leverage with gross exposure at around 200-250%. He makes the case for using this minimal amount of leverage as a means to run a more balanced portfolio. Without leverage, a 75% long and 25% short portfolio gives you a ratio of longs: shorts of 3:1. But, when employing a slight amount of leverage, he can run his book 150% long and 100% short leaving his ratio of longs: shorts at a less risky 1.5:1.
“There are no ‘holds.’ Everyday you’re either willing to buy more at the current price, or, if you aren’t, you should redeploy the capital to something you believe does deserve incremental capital.”
“The odds of my adding value consistently by trying to time the market are very slim. At the time of maximum pain, you need to maintain your discipline.”