| O. Andreas Halvorsen, Viking Global Investors (Bloomberg) |
Tiger Cub O. Andreas Halvorsen’s Viking Global Investors has cranked up its exposure to European equities — but not because Halvorsen thinks the Continent’s economy is strong.
The firm’s main long-short equity fund, Viking Global Equities, has sharply boosted its overall exposure levels, particularly its bets on European equities. Over the past six months, VGE raised its gross and net long exposures by more than 14 percentage points, to 165.4 percent and 46 percent, respectively, according to quarterly client letters obtained by Alpha.
It appears those moves have helped the firm to bounce back from its 8.8 percent loss in the first quarter. As we recently reported, VGE is now down just 0.5 percent through the first three quarters of the year, after posting a 5.7 percent gain in the third quarter. The firm’s Viking Long Fund is up 4.4 percent for the year, after surging 8.3 percent in the third quarter.
Halvorsen told investors that his firm’s increased emphasis on Europe is not a vote of confidence on the economy. Instead, it comes down to idiosyncratic investment opportunities his team is finding there — and that European markets are not as richly valued as some others.
“This increase does not represent a top-down macro bet on the European economy, but reflects strong idea flow from our analysts covering European stocks and general observations that valuations are relatively attractive in that region compared to other parts of the world,” Halvorsen asserts in his firm’s third-quarter letter.
This larger bullish bet was most pronounced in Western Europe, where VGE had roughly 10 percent net long exposure at the end of the third quarter, compared with a net short exposure of 6.1 percent just six months earlier.
Entering the final three months of the year, Europe accounted for more than 13 percent of VGE’s total gross exposure. Broken down, it was 16.1 percent long European stocks and 6.1 percent short. At the end of the first quarter, VGE was just 1.6 percent long Europe and 7.8 percent short. Over the same recent six-month period, Viking boosted its net long exposure to U.S. and Canada but slashed its net exposure to both Asia (excluding Japan) and emerging markets by more than half.
The increased bet on Europe is starting to pay off. For example, over the first nine months of the year, VGE lost 2.3 percent on its European longs, more than on any other geographic region. However, it made money in the third quarter. VGE also was slightly profitable on its European shorts, although it lost money on these bets over the entire nine-month period.
It is not known which specific stocks are contained in Viking’s European portfolio. However, one of them ranks among the firm’s top ten disclosed longs in its recent client letter. Viking singles out drug giant AstraZeneca, traded on the London Stock Exchange, as its fifth-largest disclosed long (the firm says it redacted certain positions).
The report also indicates that no European-traded firms were among VGE’s or VLF’s top five or bottom five performers in the third quarter. However, in the first quarter, Zurich-based bank Credit Suisse Group was the biggest loser for both funds.
In general, Halvorsen says Viking is seeing strong idea flow in consumer, financial services, petrochemicals, and pharmaceuticals. However, this sentiment is apparent only in the exposure reports for the broad consumer discretionary and consumer staples groups; Viking’s gross exposure to these areas is up only slightly from the first quarter, while its net exposure has roughly tripled.
Firmwide for the third straight quarter, e-commerce stalwart Amazon.com, search giant Alphabet (both share classes), and social media pioneer Facebook were the three largest long positions. They are also the three most widely held hedge fund stocks in general, according to Goldman Sachs.
Four of Viking’s top ten disclosed long holdings as of the end of September were not among the largest holdings in the two previous quarters: AstraZeneca, software giant Microsoft Corp., credit card company Mastercard, and Chinese e-commerce giant JD.com.
Altogether, at quarter’s end Viking’s ten largest longs accounted for 44.6 percent of the capital in VGE and 42.2 percent of VLF. Viking’s ten largest shorts — which of course the firm does not disclose — accounted for 22.6 percent of the long-short fund’s capital. The largest short accounted for 4 percent of capital.
