| O. Andreas Halvorsen, Viking Global Investors (Bloomberg) |
Viking Global Investors posted decent gains across all three of its funds in October. Given its portfolio, this is a big victory.
Viking Global Equities (VGE), its long-short fund, gained 1.1 percent for the month and is now up 5.2 percent for the year.
Viking Long Fund (VLF) jumped 5 percent for the month and is now up 3.9 percent for the year, while Viking Global Opportunities, the hybrid liquid-illiquid fund launched in January, rose another 1.1 percent and is now up 12.4 percent for the year.
While the October gain for the long-short fund may have lagged other similar funds — let alone the overall market — it is in the black, unlike many others.
Viking’s results for the month and the year underscore the firm’s strong risk management skills and why it is one of the best-performing, least volatile Tiger Cubs, funds managed by former employees of Julian Robertson Jr.’s Tiger Management Corp.
The Greenwich, Connecticut, firm’s biggest sector bet is health care, a big winner for the firm for some time but one that has taken a beating in the past few months.
Other firms, such as Glenview Capital Management, are suffering huge losses this year due to big health care bets.
At the end of the third quarter, health care accounted for 43.3 percent of Viking’s long-short fund’s 159.7 percent gross exposure and 13.1 percent of its 46.5 percent net exposure, according to Viking’s third-quarter letter, obtained by Alpha. Health care also accounted for 27.5 percent of the long fund’s total exposure of 100.4 percent.
Four of the ten largest long holdings at the end of the third quarter in both VGE and VLF were health care stocks, including Laval, Quebec–based Valeant Pharmaceuticals International, which Viking not only retained despite the stock’s huge recent sell-off but was its eighth-largest holding at the end of the period, down just one notch in the ranking from the previous quarter.
The other top health care holdings include Dublin-based Allergan; Deerfield, Illinois’ Walgreens Boots Alliance; and Anthem, based in Indianapolis.
Not surprisingly, the sector was the firm’s worst performer in the third quarter, accounting for more than half its long losses, when VGE lost 1.4 percent and VLF fell 7.9 percent.
Most of the big sell-off in the sector took place toward the end of the quarter. Three of the five biggest losers in the quarter in both the hedge fund and long-only fund were drug stocks: Dublin-based Mallinckrodt and Allergan and Valeant.
However, Viking did not bail on the group, especially the heavily battered drug stocks, although it did cut back on some positions. “We continue to hold many of these positions, having added to our favorites, and expect the sector to remain volatile in the near-term due to investor concerns about price control on drugs,” Viking wrote in its third-quarter letter.
Health insurer Anthem is new to the top ten list this quarter.
Viking also retained a position in Mallinckrodt, its biggest loser in the quarter. It did trim the position, noting that it identified other competing longs it felt had more immediate upside potential.
The specialty pharma company, which makes mostly generic and branded pain medications as well as therapies for autoimmune diseases, has aggressively grown through acquisitions. Viking points out that in the third quarter the company reported disappointing generics sales and reduced guidance for two key branded drugs. Thanks also to the drug sell-off, the stock plunged 46 percent for the three-month period. “We believe that Mallinckrodt’s core franchises remain well-positioned to achieve strong organic growth over the long-term, despite facing increased competition and a more challenging reimbursement environment,” Viking wrote.
Viking also added short exposure to health care companies it believes “are likely to be impacted by this overhang.” The firm does not identify stocks it shorts.
As a result, during the quarter Viking reduced its net exposure in health care by 6 percentage points through a combination of price declines in its longs and increased short exposure.
Information technology, especially software and services, accounted for the second-largest exposure. IT accounted for 28.2 percent of gross exposure and 12.9 percent of net exposure in VGE and 20.1 percent of the long fund’s total exposure.
In fact, the firm’s largest long at the end of the third quarter was Palo Alto–based Alphabet — the new holding company for Google — which was also Viking’s best-performing long in the most recent three-month period. “Our core thesis revolves around the company’s transition from desktop to mobile,” Viking said. “In our opinion, prevailing concerns around this transition are misguided and mobile represents a tremendous revenue opportunity.” Viking called the stock’s current valuation “compelling,” noting that it is looking for an expansion of the stock’s price-to-earnings multiple.
Viking, co-founded by O. Andreas Halvorsen, was the world’s sixth-largest hedge fund firm at the beginning of the year. Halvorsen spent seven years at Tiger, overseeing equity investments for part of the time, before leaving to start Viking in 1999. Viking managed $31 billion at the end of the third quarter.
This does not include $945 million in new capital that it took in for Viking Global Opportunities on October 1, bringing the fund’s total capital to $2.7 billion.
