Manager Monday: Coatue Management

Philippe Laffont of Coatue Management is perhaps one of the most talented active hedge fund managers today. His is a story that needs to be told – and heard—which is why we decided to profile him in this Manager Monday.

According to a OneWire interview, Laffont developed his passion for technology at an early age. In the interview, Laffont tells Skiddy von Stade that he lacked confidence as a young boy, and so spent most of his time on his computer at home. Intrigued by the technology, Laffont decided to attend the prestigious Massachusetts Institute of Technology (MIT).

After graduating from MIT, Laffont wanted to work for Apple. He interviewed for three different roles across three departments, only to be turned down by all of them. The irony here is that today, Laffont’s Coatue Management is one of the largest hedge fund investors in Apple, Inc. Although he wasn’t hired there, Laffont credits much of his investing successes to his early investments in the company.

Unable to land a job at Apple, Laffont took a different road and began his career at McKinsey & Co. before moving to Spain with his wife. Investing for Laffont began during his time in Spain, where he began trading with his brother in the late nineties, primarily in blue-chip tech stocks.

Laffont moved to NYC shortly after where he was introduced to Julian Robertson and landed a job at his famed Tiger Management. He spent three and a half years there before launching Coatue Management in 1999.

Based in New York, Coatue is arguably one of the top technology-focused hedge funds today. Even among more generalist hedge funds, Coatue remains in the highest echelon.

Performance

According to the Novus Ownership Platform™, from January 2001 through March 2016, Coatue has performed remarkably well for its investors, generating returns of 443%, beating both the S&P 1500 and the MSCI World by wide margins – over 350% to be specific:

Some may suggest that Laffont’s impressive returns are due to over a decade of growth amongst technology names in the market, yet even when comparing Coatue’s returns against the sector-specific S&P 1500 Information Technology benchmark, his fund delivers more than 3x the returns to investors, out-performing the benchmark by a handsome 381.28%:

Attribution

It’s one thing to look at returns, but let’s take a look at how Coatue has performed so well, generating nearly 65% of the fund’s total AUM purely from P&L:

The first thing we notice about the fund is that it produced ~35% of its total historical contribution directly from stock selection skill – picking the right stocks within each sector:

Whether Laffont’s selection skill is a result of having strong domain expertise due to his time at MIT or simply due to his passion and understanding of technology is a question only he can answer. But the undeniable fact here is that Laffont is an outstanding technology stock-picker, one of the best in the industry – but he’s also great at something else – Position Sizing.

Position Sizing

Across the thousands of portfolio managers we analyze at Novus, Coatue exhibits one of the top position-sizing skills of any manager we’ve seen. Since it’s inception in 1999, the fund has generated over 420% higher returns through position-sizing alpha vs. an equally weighted portfolio:

Laffont’s ability to correctly size his winning positions is matched by his ability to trim (or not add to) his losing positions as well. Despite investing in a greater # of losing securities, the total historical contribution of his winning names was 3x that of his losses:

Consumer Discretionary

Although Laffont’s Coatue is known as a technology-focused investor, as seen below, the fund has actually generated more lifetime contribution from investing in Consumer Discretionary stocks than from its larger technology book:

Looking closer at Coatue’s Consumer Discretionary stocks, we see that although his top contributing positions in the sector are technically Consumer Discretionary, at their core, they’re highly disruptive technology-driven companies (i.e. Netflix, Amazon, CTRIP.com, etc.):

Conclusion

The world of hedge funds is filled with thousands of managers with Ivy League resumes and 3-year track records. In order to pick the right managers, investors need to look beyond a 3-year time series and look at multiple factors that complete the picture. With Coatue, our position-level analysis found that, not surprisingly, Laffont generates alpha by picking the right securities within Tech. But in addition, his portfolio management skills, especially his sizing ability, have been a meaningful driver for his success and his investors’ returns.

Data

As usual for our Manager Mondays, everything mentioned in this post is sourced exclusively from public data, including the manager’s profile, simulated performance and all other analysis and commentary. The data used here omits most non-equity securities and all non-public information such as actual fund performance. To simulate performance and determine portfolio attributes such as liquidity, we combine public holdings data with market and pricing data and make simple assumptions. Please note that for a manager investing globally, reporting standards differ greatly from US 13Fs and the portfolio we use here may significantly misrepresent the actual holdings of the fund. This analysis is for illustrational purposes only, makes no assertions of accuracy and completeness, and does not represent any advice or investment opinion.