Hedge fund boss and former Fidelity Magellan portfolio manager Jeff Vinik declared victory today and retreated from the field of battle.
Soros swoon or
Robertson wreck for Vinik. After four years in business,
Vinik Asset Management
has racked up a spectacular 53% average annual return for the customers of the eponymous company.
In comparison, the
S&P 500 index gained 21% a year, after reinvestment of dividends. His firm made about $600 million in management fees and profit participation by my estimates, so he can certainly afford to quit. Vinik says that he wants to spend more time with his kids. His investors must hate those brats.
We spoke with two lucky fellas today and came away thinking that Vinik's remarkable success and unexpected retirement hold lessons for both professional and amateur investors in a topsy-turvy stock market causing so much pain. (Look at
today's volatility as an example.)
Let's consider first what Vinik himself said about his firm's success.
In a written release, Vinik attributed his firm's success to "an investment strategy ... based on intensive company-by-company fundamental analysis within an overall framework of sector and market trends."
His partner, Mike Gordon, added in the release that they achieved these results "by a combination of hard work and plain vanilla stock picking ... Jeff and I applied a fundamental and valuation-oriented analysis in our stock picking, buying what we considered to be undervalued companies with good earnings prospects -- growth at reasonable price -- and selling what we believed were overvalued companies with poor or declining earnings outlooks." (Translation: Vinik played the momentum game brilliantly, trading like a maniac.)
Vinik went on to say that his firm looked at thousands of companies and their financial statements and created their own earnings models to identify good longs and shorts. They typically owned about 350 different stocks, almost all U.S. stocks. And unlike
John Meriwether of
Long Term Capital Management
notoriety, Vinik & Co. was not enormously leveraged via futures, options or other financial derivatives.
His soon-to-be-former customers take away somewhat different lessons from Vinik's success.
Sometimes, a Tie Is as Good as a Win
The first lesson: Not losing is winning. Note, the clients say, how consistent Vinik's gains were on a quarter-to-quarter basis. In 17 quarters of performance, only one was a money-loser -- the third quarter of 1998 -- when the overall market dropped in response to the crisis in Russia and the collapse of Long Term Capital Management.
"All I know is that he was enormously consistent," said one early investor in Vinik's hedge fund who declined to be identified. "It is the lack of large losses that allowed him to put up such good numbers." (It was those good performance numbers that allowed Vinik to keep many of his clients in the dark about precisely how he made the money. In the wake of LTCM's 1998 collapse, most hedge fund managers were forced by their customers to provide detailed, monthly portfolio reports.)
Volatility Can Pay
The second lesson: Market timing and clever trading can work in volatile markets. There are times to be long and times not to be. Market timing saved Vinik this year, say his clients. (Some accounts were up about 45% net of fees through Sept. 30, according to several sources. They have not gained or lost much since then, according to Vinik's written release.) He was long into the rallies and largely in cash during the routs.
"He made some good twists and turns," says another investor who has money with Vinik. "He was long tech early in the year. Made money in January and gave it back in February. He went quickly to cash in the March-May decline. Where he really cleaned up was in the rally off the May bottom. He pretty much caught the move from late May to mid-July that took the NDX
the Nasdaq 100 stock index from 3000 to 4000. He was about 80% invested when the NDX went from 3000 to 4000. That is 30 percentage points of the year's return right there."
Vinik's quarterly results, which he released today, bear out this client's analysis. He finished March up 7.6% net of fees, but he really made the bulk of the money in the second quarter when his accounts rose 27.8% net. In contrast, the S&P
"The second good call he made this year was to go to cash by early September," says the source. "A month-and-a-half ago, he was 15% long stocks, 15% short stocks and 70% in cash equivalents. By early October, he was 5% long, 5% short and 90% in cash." (So don't worry about Vinik selling and putting more downward pressure on the market. He's long gone.)
What, you may ask, convinced Vinik to go to cash in March-April and then again after Labor Day? "He thought tech earnings were going to weaken. They spoke to a lot of companies and then got out. That is my understanding," says the client.
What do they make of his decision to quit the money game and play with the kids? Do they think there is a larger message for investors?
One customer says not. "It's for personal reasons, I think. He is very smart. He has been working 80-hour weeks. His performance has been great, better than he or his clients expected. He's become seriously rich. Why not get out," says the source. Is his departure yet another bearish sign? "I don't think so," says the source, "because he always had the opportunity to go short if he wanted to."
But another client does see a larger meaning. "Jeff knows that it is a lot tougher to make money in the market today than it has been for years. And he is basically a long investor. That is where he has always made his big money. When he is worried, he goes to cash. I think he sees that the period of time when a stock would break out and then keep going is over. Now, it may break out, but then it tends to lose momentum. That is not a great market for Jeff."