3F Sunday, and today, Pennant!
CHAPTER 16 – Pennant Capital Management
In his book, The Big Short, about the subprime mortgage mess that led to the financial meltdown, author Michael Lewis tells the story of how a handful of money managers figured out the problem and made gargantuan profits by betting against mortgage-backed securities (MBS) with arcane derivatives called credit default swaps. Despite the global nature of the MBS market, the number of hedge fund managers and others who participated in that “big short,” Lewis says, was “more than 10, fewer than twenty.” One of them was hedge fund manager Alan Fournier.
Fournier, whose Pennant Capital Management runs more than $6 billion, was up more than 40% in 2007 on the subprime short. (2) The bet exhibited his willingness to play the markets in ways that may not be popular with many of his peers. His goal: “asymmetric” investments where he believes the potential return is three times the risk of loss.
While he sometimes dabbles in credit and other strategies, his core competency is as a long-short hedge fund manager, which is how he invests most of his capital. He is a value investor who often looks for deep value, including distressed situations and bankruptcies where he feels he can buy cheap and earn a big payoff in a company’s recovery. Unlike some distressed investors who shy from troubled companies with highly leveraged balance sheets, Fournier will often jump in if he feels the company has a good chance of making a comeback despite its heavy debt load.
Fournier runs several funds with different levels of position concentration. His biggest fund typically carries about 45 long positions, while a more concentrated version runs with about 25. As for favored themes or sectors, Fournier really doesn’t have any, preferring to scan the investment landscape in search of the best opportunities he can find, keeping an eye out for anything that might act as a catalyst capable of moving a stock or other instrument, whether that is a macro economic or market theme, or simply a matter of company fundamentals. In stock picking, he uses valuation screens to help highlight opportunities and maintains a healthy dose of short positions in his book. Making money, he says, is a matter of finding undiscovered opportunities by using sound analysis and having enough nerve to stick with bets.
“It’s all about setting up those asymmetric bets and getting more of them right than wrong.” he once said. “Our losers generally aren’t big and we’ve had a number of very significant winners. We do well on the short side – earning more on our shorts when the market has been down and losing less when the market has been up. At the end of the day, it’s your batting average that counts.”
Fournier has done well by that last measure. Since its launch in 2001 through early Dec., 2013, Pennant produced compounded returns of 15.8%, versus 3.9% for the S&P 500.
Fournier earned his stripes as a long-short equity portfolio manager at David Tepper’s Appaloosa Management. He describes his departure from Appaloosa in 2000 as a friendly firing in which Tepper told Fournier it was time for him to leave the nest and run his own fund.
Prior to Appaloosa, Fournier worked for Sanford C. Bernstein, where he got his initial introduction to Wall Street. That job was a career switch for Fournier, who earned a mechanical engineering degree from Wentworth Institute of Technology in Boston and then went to work as a computer salesman for Digital Equipment. Indeed, nothing in his academic or early career suggested his emergence as an important hedge fund manager.
“It’s probably somewhat unusual for someone managing a hedge fund, but I’ve never taken a finance or accounting course,” Fournier once said.
Not a bad recommendation for all those amateur investors intimidated by the blue-chip degrees in finance and economics that so many Wall Street mavens hold.
FIGURE – Equity Curve vs. S&P500
FIGURE – Top 10 Holdings