Jeffrey N. Vinik, the hedge-fund manager whose stock selections have beaten markets for the better part of two decades, has invested almost half of his U.S. equity portfolio in passive index funds.
Of the $3.39 billion in equities Vinik oversaw as of Sept. 30, about 48 percent was comprised of exchange-traded funds that track industries and global markets, according to a November regulatory filing. His Boston-based firm held more shares than any other hedge fund in 11 of the 13 ETFs he owned, according to data compiled by Bloomberg.
A self-described “bottom-up” investor, Vinik is known for making big moves that defy conventional wisdom, including an ill-timed decision to sell technology shares and buy U.S. Treasuries as head of the Fidelity Magellan mutual fund in 1996. ETFs are passive index funds used more often by managers who invest based on broad economic trends than those who scrutinize the individual companies they wager on or against.
“I don’t think I know of any stock-picking hedge fund that uses ETFs on the long side,” Eric Weinstein, chief investment officer for the fund-of-funds business at New York-based Neuberger Berman Group LLC, said in a telephone interview. “Macro managers do use ETFs as part of their ordinary day to day portfolio management business -- betting on which markets are going to go up or down.”
Mark Hostetter, chief operating officer for Vinik Asset Management LP, declined to comment.
Unlike shares of traditional open-end mutual funds that can only be sold at the end of each day at net asset value, ETFs are listed on stock exchanges, allowing investors to trade them whenever markets are open. Most ETFs are passive, holding the stocks that comprise market benchmarks such as the Standard & Poor’s 500 Index of large U.S. companies and S&P’s Energy Select Sector Index, a bellwether for the oil and gas industry.
Managers use ETFs to speculate on stock, bond and commodity markets, or to reduce the risks of investing in those assets. Some park money in the funds as they research specific stocks within an industry or index.
“There are a lot of people who use ETFs as a simpler, cheaper way to do a portfolio trade,” said Peter Shea, a lawyer in the New York office of Katten Muchin Rosenman LLP who works with exchange funds and commodity products. “It can be a way of getting in quickly where you don’t have a lot of rigmarole.”
Beating the S&P
As far back as 1996, Vinik made investment decisions on 25 companies a day while running Vinik Overseas Fund Ltd., according to the website for his alma mater, Duke University’s Pratt School of Engineering in Durham, North Carolina. The fund returned about 76 percent, 45 percent and 29 percent after fees in 1997, 1998 and 1999, respectively, outpacing the S&P 500’s gains of 33 percent, 29 percent and 21 percent.
Vinik’s current vehicle, JNV Overseas Fund Ltd., rose 50 percent in 2007, compared with the 5.5 percent return for the S&P 500 including dividends, according to foundation tax records filed by Michael Gordon, another manager at Vinik Asset Management. The next year, JNV Overseas fell about 3 percent as the benchmark plunged 37 percent, the tax records show.
Vinik doesn’t publicly disclose the fees he charges, and releases little information on JNV Overseas, which he established in November 2004 after taking a break from formal money management to spend more time with his family. He set up JNV Overseas mainly to invest his own money along with cash from friends, family and a few outside clients including billionaire George Soros, said two people briefed on the matter who asked not to be named because the fund isn’t public.
The endowment for Duke University, where Vinik received a bachelor’s degree in civil engineering in 1981, listed a $50 million investment in JNV Overseas in 2006 financial statements. Other shareholders include Permal Asset Management Inc. in New York and Hunt Financial Ventures LP of Dallas, which describe JNV Overseas in investor reports as a long-short equity fund. That means it takes “long” positions by purchasing stocks while betting against others through short sales, or borrowing and then selling shares in anticipation of a price decline.
At the end of last year, Vinik held ETFs valued at $555.6 million, equaling 17 percent of the $3.2 billion in stocks he listed in a Form 13F filed with the U.S. Securities and Exchange Commission. The value almost tripled to $1.64 billion by the end of the third quarter after additional purchases and market gains.
The shift coincided with a move out of retailers and other consumer-discretionary stocks, as Vinik’s firm reduced its holdings in companies such as Ross Stores Inc. and Amazon.com Inc. to $802 million as of Sept. 30 from $2.08 billion at midyear.
Vinik simultaneously bought stakes valued at $446 million in a pair of ETFs that track the S&P 500 and the Russell 2000, two benchmarks for U.S. stocks, the latest document shows. He also acquired a $146 million stake in the iShares MSCI Emerging Markets Index, raised his holdings in an iShares exchange-traded fund for Brazil and pared his bets on iShares funds for Australia, Canada and China.
The manager added a $292 million stake in the Energy Select Sector SPDR Fund, comprising oil and gas companies such as Irving, Texas-based Exxon Mobil Corp. and Chevron Corp. in San Ramon, California, during the quarter. He purchased $105 million of shares in the Industrial Select Sector SPDR Fund, whose largest holding is General Electric Co. of Fairfield, Connecticut, while selling half of the 20 million shares he owned in the Financial Select Sector SPDR at the end of June.
‘Feet on the Ground’
“He is clearly using ETFs where it is hard to get his own feet on the ground and do the analysis,” such as in emerging markets, said James Lowell, chief investment strategist at Adviser Investment Management Inc., a Newton, Massachusetts, firm that has about $1.3 billion in mutual and exchange-traded funds. “If he is going into oil and gas and building up broad emerging markets, that has a correlation with the way energy plays,” Lowell said, noting that crude oil and natural gas are key exports for countries such as Mexico and Venezuela.
Other hedge funds have reported owning ETFs in their Form 13Fs, a document used by money managers to show their holdings in stocks listed on U.S. exchanges at the end of each quarter. The forms don’t include stocks sold short. Most hedge funds list holdings in one or two ETFs.
In 2004, Louis Moore Bacon’s fund owned shares of the SPDR S&P 500 ETF valued at $922 million, or more than half its equity holdings. Eton Park Capital Management LP held 4.6 million SPDR Gold Trust shares valued at $585 million as of Sept. 30.
Hedge funds accounted for 9 percent of the $154 billion in ETF assets held by U.S. money managers at the end of 2008, the latest data available from BlackRock Inc., the New York-based firm that runs the iShares funds.
Hedge funds have increased their use of ETFs when they want to protect against declining markets, said Weinstein at Neuberger Berman. Shorting single companies has become riskier because this year’s rise in correlation among stocks means that there is a higher probability that even weak companies might surge when the market does.
“A lot of the moves in the market have been macro-based rather than based on individual company news,” said Duncan Hennes, a partner at Atrevida Partners LLC, a multi-strategy hedge fund based in Rye, New York, and former chief executive officer of Soros’s money-management firm. “It’s tougher to make money by being long undervalued companies and short overvalued companies when all stocks tend to move in the same direction.”
Magellan’s Bold Bet
It was a broad, so-called macro bet that marked the end of Vinik’s career at Fidelity Magellan, which he oversaw from July 1992 until May 1996, when it ranked as the world’s largest mutual fund with more than $56 billion in assets. In the fund’s shareholder reports, Vinik said he was managing Magellan on a “stock-by-stock” basis, seeking out companies that could produce the best long-term earnings growth while selling at the most reasonable valuations.
During the fourth quarter of 1995 and first quarter of 1996, Vinik cut Fidelity Magellan’s technology holdings to 3.5 percent of net assets from 40 percent, stating that revenue growth was slowing at such companies. He simultaneously plowed 21 percent of the fund into U.S. Treasuries.
The move generated an outcry from shareholders who complained that Fidelity Magellan, a growth fund formerly run by Vinik’s mentor Peter Lynch, shouldn’t be investing in bonds. Vinik, who beat the market with average annual returns of 18 percent through 1995, left Boston-based Fidelity the next May and Magellan finished the year with a total return of 12 percent, about half the 23 percent gain recorded by the S&P 500.
“He is most famous, for better or for worse, for making an asset-allocation bet at the end of his tenure,” said Christopher Davis, a research analyst at Chicago-based Morningstar Inc. “Investing in bonds in the late 1990s was not going to endear you to anybody.”