Hedge Fund
Maximus Long Short Equity Fund, LP - Investor Newsletter - June 2021
June 2021
Dear Interested Parties,
We hope all is well. While we ended May down 1% net of fees and expenses, we are up nearly 2% so far to start June despite XLI and XLB down nearly 2%. The loss in May can largely be explained by three long positions (LCY, CCK and BLDR) that were all down 6-8% along with the associated opportunity cost of being long them instead of other stocks, in a month when we didn’t have any material contributors on the short side as the market went up once again. This is one of the trickiest aspects of running a low-net portfolio (i.e. the opportunity cost aspect). I also wanted to highlight that we believe our performance in recent months has been held back by the delay in the “de-SPAC” process of JIH and LCY (both large positions for us), having nothing specific to do with JIH or LCY. When we initiated JIH in December we thought the de-SPAC process would be completed by the end of March or early April. It was finally completed on June 7th with its first day of trading on June 8th and has traded well in June thus far. The process at LCY has similarly been slower than expected because the SEC has been taking a closer look at how warrants are being treated across all SPACs. However, we believe good things will come to those who wait and are confident these two positions will be big winners in 2021 and each of these have performed well so far to start June. As mentioned above, it has been a good start to June thus far.
Landcadia III Holdings, Inc. (LCY) was our largest loser in the month and cost us roughly 60bps of performance. However, we are very excited about this position and the timing of owning the stock, especially post a conference call I had with Doug Cahill, CEO of The Hillman Group, Inc. (“Hillman”), and Rocky Kraft, CFO of Hillman, the other day. LCY (a SPAC backed by Richard Handler and Tillman Fertitta SPAC) will be combining with Hillman at the end of June and will be listed on the Nasdaq as HLMN. Founded in 1964, and based in Cincinnati, OH, Hillman grew from distributing fasteners to independent hardware stores to becoming a leading distributor of hardware and improvement products, jobsite protective solutions, and robotic kiosk technologies. The company now manages ~112,000 SKUs across 42,000 stores in the US and Canada. Hillman has grown revenue in 55 out of the last 56 years and currently trades at a 40% discount to comps based on EV/2022 EBITDA. We think HLMN is worth $19 which is >60% upside from here. We are willing to sacrifice some near-term performance for what we think is significant upside potential.
We thought we would highlight some attribution analysis as food for thought given the difficulty of shorting over the last 12 months. Since July 1, 2020, we have generated 946bps of alpha relative to the S&P 500 in our long portfolio. For those of you who would be interested in a long-only product, we would be happy to have a discussion. Please feel free to reach out.
Maximus Proprietary Portfolio Performance, net of Founders Class fees and expenses:
December ‘18-February ‘19: Paper/Hypothetical Portfolio | March ‘19-August ‘19: Live Capital (in TD Ameritrade) | September ‘19-June ‘20: SMA | July ’20-Present: Onshore Fund
Please see disclaimers at end of this letter.
Portfolio/Performance Statistics:
Benchmark Returns:
Top three winners and losers, both long and short, in the month of May 2021:
Winners (Longs):
- Vertiv Holdings Co (VRT)
- Vontier Corporation (VNT)
- Aptiv PLC (APTV)
Vertiv Holdings Co (VRT): After a strong month in April, VRT was up 9% in May based on solid follow-through from a good 1Q21 earnings report along with the company presenting at various conferences in May. We still like the stock for all the reasons we have mentioned in previous months, but we have trimmed back the position by 40-50% given the strong move lately (up ~30% since end of March).
Winners (Shorts):
- Kennametal Inc. (KMT)
- Ecolab Inc. (ECL)
- C.H. Robinson Worldwide, Inc. (CHRW)
Kennametal Inc. (KMT): KMT declined ~7% in May. The stock tends to be correlated with the rate of change in the ISM Manufacturing index (which declined in May) along with having exposure to various sub-industries that are experiencing shortages.
Losers (Longs):
- Landcadia Holdings III, Inc. (LCY)
- Crown Holdings, Inc. (CCK)
- Builders FirstSource, Inc. (BLDR)
Please see page 1 for commentary on LCY.
Losers (Shorts):
- Xylem, Inc. (XYL)
- Snap-on Incorporation (SNA)
- International Paper Company (IP)
Xylem, Inc. (XYL): XYL appreciated ~7% in May. This stock trades at 44x 2021 EPS and 36x 2022 EPS. While I do understand that ESG is an important theme, and we do have ESG-related longs, we don’t really understand why this company, who seems to disappoint quite often in terms of guidance, should receive this type of ESG multiple. We would way rather own ESG stocks like Mueller Industries, Inc. (MLI) which trade at 10x EPS (not 40x!) and are comfortably worth 50% higher than last sale.
We continue to wish for everyone’s health and safety. For anyone who is comfortable meeting in person, I’d be happy to host you in our office or get together for coffee or lunch. I’m in New York City and would enjoy seeing you again. As always, we would be happy to discuss any of the above and look forward to a continued dialogue. Please do not hesitate to reach out with any questions.
Best regards,
Greg Royce
Founder & Chief Investment Officer
Maximus Long Short Equity Management, LP
900 Third Avenue, Suite 201-5
New York, NY 10022
646-787-0563 (office)
917-510-3187 (mobile)
Please see disclaimers below.
The Fund is a recently formed entity and has limited operating history upon which investors can evaluate its likely performance.
The returns set forth in this letter reflect the performance of various types of accounts over different periods. Past performance is no guarantee of future results.
Returns for the period beginning on December 1, 2018 through February 28, 2019 represent pro forma results (the “Pro Forma Period”), reflecting a mock portfolio with the hypothetical performance an investor would have obtained had it invested with Maximus and does not represent returns that any investor actually attained. The pro forma performance results are net of a 1% management fee, a 10% incentive allocation, in addition to fifty basis points of “expenses” which are intended to be an approximate representation of the trading expenses the portfolio would bear, but is not net of any trading expenses or other expenses that are typically incurred by a hedge fund (and all of such expenses may materially affect performance results), although the fifty basis points is meant to capture these types of expenses. Maximus’ mock portfolio during the Pro Forma Period is based on its investment strategy and the results of such investments. The information presented is based upon the following hypothetical assumptions: that Maximus would have been able to acquire and dispose of such investments based on Bloomberg’s market quotations on the applicable dates.
The mock portfolio was submitted to General Risk Advisors on a daily basis (at days end) to calculate a daily p&l based on gains/losses of the positions from the close of business of the prior business day through the close of business on the applicable day. However, a Maximus fund may have different cash flows, size and composition, strategy constraints, and other factors that differ from those of the mock portfolio and affect performance. Maximus cannot assure that the results will be similar to any Maximus fund (or that such fund would not experience losses) or that the results shown in the pro forma performance would be similar to what Maximus’ experience would have been had it actually been managing accounts in this manner for the period presented. Maximus believes that the results shown are reasonably representative of its expected management of the fund and is sufficiently relevant for consideration by potential fund investors.
Following the Pro Forma Period, the results represent the actual results of Maximus’ proprietary account. Such results are net of a 1% management fee and 10% incentive allocation, as well as trading costs, but not the other types of expenses typically incurred by a hedge fund (which may materially affect performance results).
Beginning on September 3, 2019, Maximus began managing external institutional capital in the form of a managed account (the “Original Account”). To calculate its performance results, Maximus multiplied the performance of the Original Account by 2 to capture its targeted 2x leverage ratio and reduced the results by the Founders Class fee terms (1% management fee and 10% incentive allocation).The fund’s targeted leverage ratio is subject to change, which would have the effect of changing the risk profile of the account. As of February 2020, Maximus began managing three other separately managed accounts. Maximus is reporting the performance of the Original Account for continuity purposes. Other accounts with a similar strategy may have different results due to various exposure limits and fee structures.
Returns for the period beginning on July 1, 2020 are based on the actual results of the Fund net of all expenses and fees (1% management fee and 10% incentive allocation).
All performance results herein are unaudited.
THE ACTUAL AND HYPOTHETICAL PERFORMANCE RESULTS ARE SHOWN FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE RELIED UPON. Pro forma performance results have many inherent limitations, some of which are described below. While the investments that form the basis for the pro forma performance results provided herein are actual investments, such performance results are not actual performance results and are based on a financial model prepared by Maximus. Since trades have not actually been executed, pro forma results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity, and may not reflect the impact that certain economic or market factors may have had on the decision-making process.
This letter does not constitute an offer to sell or a solicitation of any offer to buy or sell interests in the Fund or any other securities or provide any investment advisory services. Any such offer or solicitation will be made only by means of a private offering memorandum which will be provided only to qualified investors and only in those jurisdictions where permitted by law. This material is not meant as a general guide to investing or as a source of any specific investment recommendation.
No representation is made that Maximus will or is likely to achieve profits or losses in the future similar to those presented herein. In fact, there may be substantial differences in investment strategies, changes in personnel, counterparties, economic or market conditions and other factors which could adversely affect Maximus’ actual performance. There are numerous other factors related to the markets in general or to the implementation of a specific investment program which cannot be fully accounted for in the preparation of pro forma performance results and all of which can adversely affect actual results.