Manager Monday: Corvex Management LP

Corvex Capital was founded in 2010 by Keith Meister, formerly of Icahn Enterprises. At Icahn he served as CEO and as vice chairman of the board. He took the skills he learned under the renowned Carl Icahn and founded his own activist hedge fund with the backing of another hedge fund giant, George Soros.

Like all 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 the short side, non-equity securities, many non-US securities and all non-public information such as actual fund performance.

Corvex Management LP’s Performance

First, let’s examine performance of this fund. Since it has begun filing the fund has returned 94% cumulatively against the S&P500’s 69.6%. The fund had two solid years of outperformance compared to the market, and has had a decent 2015 through August.

The returns, using a rolling six month time window, offer insight into when the outperformance occurred. Recently, the fund has experienced outperformance during late 2013 and a large amount over the course of 2014, but this does not demonstrate skills of the manager or provide insight into the portfolios aggregate dynamics. So, let’s dig in.

Corvex Management LP’s Portfolio Attributes: Asset Growth, Position Changes, Concentration

Corvex began filing in December of 2011 and has seen almost a 20x increase in reported market value. Since December of 2012 the market value of filed positions has almost doubled from $4.8B to $9.4B. This rapid increase in asset growth must cause a change in the portfolio whether changes in market cap, number of positions, or concentration. This growth probably stems from a mix of large capital inflows captured in the filings spikes below and from the good performance of the fund.

While assets doubled to over $9B, the number of securities has decreased 30% from a peak of 62 positions to 41 currently. If assets are growing while securities count decreases then the concentration of the portfolio must increase.

Indeed the portfolio’s concentration has increased. Corvex has become heavily concentrated in their 5 securities while assets rose and this shifted from around 40%, the historical average, in December of 2013 to 60%, its peak, currently. This concentration has increased steadily in the top 5 securities.

The top 20 securities represent approximately 93% of the portfolio, a highly concentrated book, considering that the other 20 securities represent the remaining 7%. This has steadily increased from 70% in December of 2013. We are only examining the publicly filed long positions, but we gain insight into how these dynamics are changing as the assets grow. What does this increased concentration mean for the portfolio? Usually this will indicate that we should see higher win/loss ratios as the portfolio focuses on generating most of its returns from fewer positions.

Corvex Management LP’s Position Breakdown and Attribution

At an aggregate portfolio level, Corvex has put up some impressive numbers. It has owned 272 securities, 71% have been up with 73% of capital allocated to those winning names, which has led to approximately a 2x win/loss ratio. This means that each winning name has contributed twice as much to the portfolio as the average loser has detracted, which is good, but not fantastic for an activist. Let’s breakdown these aggregate stats into the underlying positions.

The top contributing position has been Williams (WMB), generating 1,393bps with an average position size of 14.87%, which is about the same contribution as the next three positions. In comparison, the top detractor, YUM detracted 300bps, and only 8 securities have detracted more than 100bps, demonstrating an ability to cut their losers.

Digging into the Williams position, Corvex built into the position over time and filed a 13D in December 2013. After reaching an agreement for a board seat with Williams in February 2014, they increased their shares in March 2014. Williams has stayed above a 20% position since then with most of the contribution occurring from June 2014 until presently. Williams’ contribution to the fund is driven by Security Selection, meaning that the individual security generated contribution and not from the relative factors of the market and sector. The effect of its activist investment seems to be taking hold and finally paying off.

Another security that drove performance in 2014 was Fidelity (FNF). It has generated approx. 500bps with an average position size of 8.5%. Corvex announced its investment through a 13D filing in October of 2013. Although the security initially detracted, it began to outperform half way through 2014 and is Corvex’s second highest contributor. There is a delay to the activist’s ability to generate value in these longer term investments and because Corvex is still invested in them. We will have to wait and see how it plays out.

Breaking down the top contributors on a relative basis, we see all but four of them have generated greater than 50% of their contribution from Security Selection. Corvex’s winners are winners because of Security Selection, but let’s compare this to the largest average positions.

Sorting on Avg. Pos. Size reveals that of the positions greater than 4% only 5 of them have detracted value, but Williams is the only major contributor. This provides context for the great batting averages, but that their other investments have not paid off or did not generate the excess returns that an activist needs from its concentrated positions.

Returning to the portfolio level metrics, Corvex has demonstrated an ability to pick and allocate to outperformers with a 54% batting average and 58% of capital deployed to those names. This has led to around 4300bps of Security Selection.

That is an impressive amount of Stock Selection. Corvex can picks names and allocate capital, but has only had one large winner so far. Let’s dive under the hood and examine Corvex’s investments across several additional dimensions to understand how this switch towards a more concentrated strategy has affected the book.

Corvex Management LP’s Sector Allocations

The sector allocations initially centered on Energy, Consumer Discretionary, and Tech, and became more balanced as it grew. But, in 2013 the fund began to concentrate again and now focuses on Consumer Discretionary, Energy, and Financials, which represent ~72% of the portfolio, while cutting Telecom and Utilities.

Regardless of sector, Corvex has an ability to pick winning names. Every sector has above 50% batting averages and those below 60%, industrials and materials, make up less than 6% of the current long book.

In terms of the Win/Loss ratios, 90% of the portfolio is allocated to sectors that have greater than 1x win/loss ratios. As an activist we expect high/win loss ratios, but Corvex has shifted away from sectors that do not contribute like Industrials, Technology, and Materials. Corvex has demonstrated an ability to identify the sectors they do not do well in and get out of them to focus on those that they perform well in. Telecomm has an incredible win/loss ratio of 21.87x, so let’s see what names are contributing to this outsized ratio.

LVLT, ABVT, TWTC are the largest contributions and positions, but only one of these securities had a position size greater than 5%. The win/loss ratio stems from these medium size positions offering healthy contribution and only a few tiny positions detracting. Although a successful sector, it has not been a heavy allocation for them, but the few names they have invested in did well.

Overall, Corvex has picked winning names across sectors, but has learned over its short time to focus on the sectors it knows best and drive the best batting averages and win/loss ratios. These metrics across their favorites sectors will be something to follow because it is still early to judge the results of this newer concentration strategy.

Corvex Management LP’s Market Cap

Market Cap has predominately been Large Cap and Mid Cap and has shifted upwards slightly towards more Large and even Mega cap names.

All batting averages are over 60% across the spectrum, indicating they can pick names well, but the win/loss ratio is what matters for an activist. Across the spectrum Corvex has above 1x win/loss ratios with Mega, Large, Mid, and Small cap having 1.75x, 1.55x, 1.91x, and 1.22x ratios respectively. Although these are good, they could be better. Again, it is still early to tell how these longer and larger investments will pay off.

On a ROIC basis the larger buckets have performed better with each above 15% and only micro-cap, a minor allocation in the past detracted.

Across the larger buckets they have also generated alpha through Stock Selection. Overall they understand their investments on a market cap basis and have shifted into their best market cap bucket.

Corvex Management LP’s Concentration

Returning to our question about concentration, we see that Corvex has shifted into larger position sizes since March of 2014. Specifically, since December of 2013 position sizes have more than doubled from ~30% to ~65%. We know that the fund has become concentrated in these positions and that some of those names like Williams and Fidelity have generated returns, but have done so slowly and steadily over 2014 and 2015. These names still need more time to play out in an activist play.

We can compare the portfolio’s returns against an equally weighted portfolio’s to understand if the fund has added value, and we see two periods in 2014 and 2015 with outperformance. We know that these are some early effects of their new concentration strategy like their positions in WMB and FLF. Ultimately, this concentration play has contributed to the portfolio, but it is a little early to conclusively know because it is still running its course. We know Corvex has had good batting averages and decent win/loss ratios, meaning Corvex picks winning names but needs time for them to generate those larger returns we expect from concentrated positions.

Conclusion

Corvex may only have been around since 2010, but this fund has demonstrated a skill for picking winning securities across sectors and market cap buckets. They understand what sectors and market caps they are good at and know to focus on them while getting out of those that do not perform well for them. Corvex has solid win/loss ratios in those areas, but it could be better, especially for an activist. This can get better as these new investments have more time for the activist influence to gain transaction at the targeted companies. Even as Corvex experienced extraordinary asset growth, it maintained its ability to pick names and continues to adapt to its concentrated strategy. Although an Icahn protégé started Corvex, it has found a style and skillset all its own as it continues to focus. Corvex is a manager that we will watch closely as it continues to grow and its investments have more time to play out.