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Like Tiger, Like Cub the Progeny of Julian Robertson Leave Tracks in the Master’S Footprints by Stan Altshuller, Joe Peta and Christopher Jordan

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Like Tiger, Like Cub the Progeny of Julian Robertson Leave Tracks in the Master’S Footprints by Stan Altshuller, Joe Peta and Christopher Jordan RESEARCH Like Tiger, Like Cub The progeny of Julian Robertson leave tracks in the master’s footprints By Stan Altshuller, Joe Peta and Christopher Jordan In the National Football League, it’s known as the “coaching tree.” By tracing the lineage of a team’s head coach to the different coaches he served under as an assistant, the head coach is said to belong to the coaching tree of a single patriarch. This discussion gained a following in NFL circles during the late 1990s, when a number of Bill Walsh’s assistants, having employed the same type of offensive system that Walsh pioneered, enjoyed considerable success in their own right. Walsh, dubbed “The Genius” by observers in and out of the NFL for his tactics and his analytical approach to the game, is lauded by many as one of the most innovative offensive coaches ever, and the unquestioned architect of the so- called “West Coast offense.” If he’s not the greatest coach of all time, he’s certainly in the photo. Walsh 2 > Novus Tiger Portfolio April 2014 NOVUS RESEARCH™ won three Super Bowls, and his assistants led what we’ll call Julian Robertson’s “investing tree” five other teams to the Super Bowl, winning three account for over $250 billion of AUM. more. The six championships won by Walsh and NFL coaches are ultimately judged by their win- his direct coaching decedents since 1982, when loss record and number of championships. Yet, Walsh won his first, only tell part of the story. As- to truly dissect a coach’s offensive and defensive sistants of his assistants have coached in virtually schemes, one must go to the film room to, in the every city with an NFL franchise, collecting anoth- parlance of football coaches, “break down the er five Lombardi trophies in the process. tape.” The financial industry doesn’t afford observ- Fruitful succession “trees” in the NFL don’t ers that type of documentation; there aren’t web always occur in other creative enterprises. It’s rare cams at the morning meetings and idea dinners of for bands to spawn successor bands. Television prominent asset managers. Still, there are public may have coined the term “spin-off,” but the prac- filings that can be broken down like game film. It’s tice’s legacy is spotty at best. For every “Laverne those filings—quarterly 13F reports required by and Shirley” or “The Jeffersons,” there are dozens the SEC of institutional investors managing over of (thankfully) long-forgotten spin-offs from fab- $100MM in assets—that form the basis of our ulously successful shows. (We present, for your analysis. To be sure, there are limitations—manag- consideration, “Joey,” “Joanie Loves Chachi” and ers are not required to disclose any short positions, “AfterMASH.”) among others. Nonetheless, our review of publicly Within the financial industry, however, the available information reveals that similar to how discipline of asset management has a “coaching many of Bill Walsh’s assistants ran variations of tree” of its own—and it may be even more prolific his West Coast offense when they became head and successful than Bill Walsh’s legacy. Descend- coaches, the progeny of Julian Robertson tend ed from Tiger Management, Julian Robertson’s to have similar skill-sets and investing styles. To massively successful and pioneering hedge fund, examine the performance of Robertson's progeny, today’s funds run by the “Tiger Cubs” and “Grand we created a hypothetical blended portfolio of 49 Cubs” occupy a prominent place in the current managers, selected based on the criteria below. world of asset management. We call this the Novus Tiger Portfolio (NTP). Consider this: Based on our methodology, there (See the Appendix for a complete review of our are currently 120 hedge funds with ties to the methodology as well as a glossary of terms used original Tiger Management. These funds that form in this study.) PORTFOLIO MAKEUP – FILTERING METHODOLOGY filters managers notes Initial hedge 3,000+ Complete Novus Hedge fund universe Fund database Associated 120 Per our definitions of Tiger with Tiger Cub, Seed and Grand Cub Above AUM 62 Removes all managers too threshold and small, inactive or fund of funds active Equities strategies 49* Active in U.S. equities * The 49 managers used in this study were combined into a blended asset-weighted portfolio. For a list of these managers, please contact [email protected] Cover Illustration by Jesse byLefkowitz Illustration Cover 3 > Novus Tiger Portfolio April 2014 NOVUS RESEARCH™ Performance The Novus Tiger Portfolio (“NTP”) outperformed Taken as a whole, except for the extraordinary an equivalent long position in the S&P 1500 by events that led to market dislocations in 2008, NTP 53.9% since portfolio inception on January 1, has, over the long run, consistently posted an aver- 2006. NTP posted a 116.1% return over the sev- age monthly return in excess of the S&P 1500 some- en-and-a-half year period, while the S&P 1500 where in the range of 75 to 95 basis points. Over returned 62.2% during the same period. the 90-month period encompassed by our study, Over the seven-and-a-half year study, there including the 2008 financial crisis, the outperfor- have been three distinct periods of comparative mance has averaged 60 basis points per month. performance: Our review reveals that the underperformance 1| From inception to the dawn of the financial during the onset of the financial crisis has concrete crisis in September 2008, NTP generated causes: over-allocation relative to benchmarks in the significant outperformance versus the bench- Technology sector, with multiple-manager partici- mark, with its cumulative spread peaking in pation in some of the biggest underperforming tech Q2 2008 at 22%. That equates to an average names. Critics can certainly cite this period as an monthly outperformance of about 75 basis example of the perils of groupthink, with the implica- points (ignoring compounding). tion, if not explicitly stated, that it was bound to hap- 2| While it’s no surprise that NTP fell sharp- pen to any group of like-minded investors crowded ly in value during September and October into similar names. Yet, it might be equally accurate 2008, what’s notable is how much worse it to infer that the Tiger-taught approach of stock performed relative to the S&P. In just two selection is just as vulnerable to periods of severe months, the 22% lead built up over two-and- market dislocations as any haphazard investing ap- a-half years had been essentially wiped out. proach. Perhaps it is even destined to underperform 3| Stabilization, relative to the index, began anew in that environment. The term “100-year storm” is in November 2008, and by January 2009, as widely overused by investment managers as the a new period of consistent outperformance notation “ex-extraordinary items” by the companies began that has persisted for nearly five years. they analyze, but in the case of the 2008 financial The NTP recorded cumulative outperformance crisis that imperiled the American economy in a way of 53.9% in the four-and-three-quarter years not seen for 80 years, it seems prudent to at least since the end of 2008—equating to an average consider examining investing performance with and outperformance of 95 basis points per month. without 2008’s Q4 included. MONTHLY ALPHA/NTP RETURN VS. S&P 1500 Cumulative Returns & Alpha Monthly Alpha (bars) (line and area) % % Cumulative Alpha % % 2008 Financial Crisis NTP Cumulative Return % % % % Monthly Alpha S&P 1500 Cumulative Return % % Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Return 120% 60.00% 100% 50.00% 80% 40.00% 60% 30.00% 40% 20.00% 20% 10.00% 0% 0.00% -20% -10.00% -40% -20.00% 4 > Novus Tiger Portfolio April 2014 NOVUS RESEARCH™ Sector breakdown Sector breakdown vs. S&P 1500 overweighting those sectors has been consistent. Within the investment community, Tiger alums have Combined, the two sectors have accounted for a reputation for being astute stock-pickers within an average of 44% of the portfolio compared to sectors they understand with exceptional clarity. In just under 28% for the S&P 1500 benchmark. Over his biography on Julian Robertson, Daniel Strach- time, we’re able to see that this holds true not just man describes Robertson using this exact pitch on average, but also that allocation to these sec- when presenting to potential investors. Therefore, tors has increased as their respective trades con- over our eight-year observation period, it’s not tinued to prove successful, eventually accounting surprising that they show a fondness for exposure for more than half of the portfolio. in both the Consumer Discretionary and Technology Whether it's part of the Tiger philosophy or train- sectors, at the expense of exposure to Utilities and ing can’t be known for sure, but as evidenced by the Energy stocks, compared to the benchmark. sector weightings below and an examination of al- Although their exposure to both Consumer Dis- pha generated by sector on the following page, our cretionary and Technology has ebbed and flowed analysis shows the Tiger descendants know what over the last eight years, the trend of Tiger alums they’re good at and allocate capital accordingly. AVERAGE SECTOR EXPOSUREAvera VS.ge S&P Sec 1500tor Exposure Vs S&P1500 Sector 1500 0 5 10 15 20 25 Exposure % TECHNOLOGY AND CONSUMERNT DISCRETIONARYP Expsoure- Technology and Consumer Discretionary Exposure (%) 60 50 40 30 20 10 0 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Consumer Disc Technology 9 7 6 9 8 6 2 0 2 1 1 1 0 0 0 11 08 1 1 0 0 0 -12 -13 -12 -13 -09 -11 -09 -10 -06 -11 -08 -10 -07 -08 -07 - - - - - - - l l l l l l l l n n n n n n n v v v v v v v y-13 y-10 y-07 u u u u u a a a o o o o o o o a a a J Ju J J Ju J J Ju J J Ja Ja J Ja Ja N N N N N N N M May- May- M May- May- M May- 5 > Novus Tiger Portfolio April 2014 NOVUS RESEARCH™ Alpha by Sector Alpha, as we define it here, is a fund’s outperfor- of the two.
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