Stephen Mandel Jr. protégé Matthew Iorio is emerging as one of the up-and-coming elite long-short equity managers and Tiger Management Corp. offspring.
White Elm Capital Partners, managed out of Iorio’s Greenwich, Connecticut–based firm, White Elm Capital, tacked on a 6.5 percent or so net gain — depending on the share class — in the third quarter, bringing its net return for the first nine months to as high as 18.09 percent for its best-performing class, just shy of the 19.8 percent gain posted by the S&P 500. The strong performance comes on the heels of a roughly 32 percent profit in 2012.
Not too shabby given that, unlike the benchmark, the fund engages in a fair amount of shorting. Add in that the hedge fund has historically maintained a relatively low net exposure to the market, and its performance looks especially impressive.
In fact, since its September 1, 2007 inception, White Elm, which now manages a little more than $1.2 billion, has generated a cumulative 77 percent gross return and 61.3 percent net return in its best-performing class, compared with just a 30.47 percent gain for the S&P 500.
Iorio is known as a Tiger Grandcub, having worked with Tiger Cub Mandel of Greenwich, Connecticut–based Lone Pine Capital for six years. Mandel, of course, previously worked for Julian Robertson Jr.’s Tiger Management.
Little surprise longs have played a prominent role in White Elm’s success of late. According to a recent quarterly report obtained by Institutional Investor’s Alpha, North America longs, led by mortgage servicers, outperformed the S&P 500 index by nearly 9 percentage points in the third quarter alone. And like his mentor Mandel, Iorio invests globally, producing gains in Europe and losses in the rest of the world. Altogether, 90 percent of the fund’s portfolio’s longs were profitable.
Also not surprising, White Elm experienced much less success in its short portfolio. The firm notes in its letter that it was especially hurt by “one large short” in North America, although — like all hedge funds — it does not divulge the name of the company to its investors even though many of them have entrusted millions of dollars to the firm. But that’s a different issue for another time.
In any case, Iorio laments that many of his shorts went up in price even though their fundamentals worsened. “A number of our shorts have experienced material declines in earnings expectations yet their stock prices remain flat as their multiples have expanded,” he writes in the letter. As a result, just 28 percent of his shorts have been profitable year to date.
Over the long haul, however, Iorio is not complaining. He points out in the letter that since his fund’s inception, longs have returned nearly 80 percent, beating the MSCI All Country World Index — designed to measure the equity market performance of developed and emerging markets — on an exposure-weighted basis by roughly 64 percentage points, while his shorts have gained nearly 15 percent and have outperformed the MSCI All Country World Index on an exposure-weighted basis by 22 percentage points.
Iorio and his team look for stocks that could double over three years. In addition, they seek out sectors and themes where he can find clear winners and losers that he says create dispersion. They also avoid 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 an earlier report.
White Elm has also generally maintained a low net exposure to the overall market. For example, while it has averaged a 99.15 percent exposure in its long book since inception, that has been offset by a 48 percent short exposure, for a net exposure of just 51.27 percent, according to the third-quarter letter. Year to date, White Elm has averaged a 62.8 percent net exposure. In the third quarter, it slightly increased its long exposure and trimmed its short exposure.
At the end of the third quarter, Iorio’s top five longs were the same as the prior quarter: in alphabetical order, Altisource Portfolio Solutions, a Luxembourg-based provider of services to the real estate and mortgage portfolio management industry; Golar LNG, a London-based liquefied natural gas shipping company; cable operator Liberty Global; Ocwen Financial Corp., which serves high-risk real estate loans; and SBA Communications Corp., which owns and operates wireless communications towers.
