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Glenview Capital Third Quarter 2009

Glenview Capital Third Quarter 2009

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Published by balevin

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Published by: balevin on Dec 11, 2009
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 December 9, 2009Dear Investor,
Performance and Top Holdings
Set forth below is our performance for Glenview Institutional Partners, L.P. for the period ended September 30
GrossReturnNet ReturnGross LongExposureGross ShortExposureNet EquityExposureNet CreditExposure
Quarter 19.42%9.42%124%-54%40%30%
April14.93%14.93%130%-62%35%33%May 9.42%9.42%132%-65%34%32%June5.89%5.89%135%-72%36%26%
Quarter 233.18%33.18%132%-66%35%31%
July 6.87%6.87%132%-68%43%21%August7.59%7.59%127%-72%36%18%September2.84%2.84%122%-49%61%12%
Quarter 3 18.25%18.25%127%-63%47%17%YTD 2009 72.32%72.32%128%-61%41%26%Inception to Date (February 2001) 310.03%211.82%Inception to Date CAGR 17.68%14.02%
 As of September 30
, our top ten long positions listed alphabetically were AmerisourceBergen, CVS, eBay, ExpressScripts, Fidelity National Information Services, Laureate Education (credit position), McKesson, Oracle, RRDonnelley, and XM Satellite (credit position). Our top ten positions collectively represented 40% of our capital.Our top ten short positions represented 11% of our capital. Our short positions included three diversifiedindustrial/manufacturing companies, a chemicals company, a restaurant, a discount retailer, a telecom wirelessequipment company, a human resources firm, an insurance firm and a pharmaceutical services firm. In addition,throughout the quarter, we held short positions in various indices as hedges and, as described in our Q2 2009 letter,in the sovereign debt of six primarily European countries as a hedge against a second global liquidity crisis.Our performance attribution is set forth below:
Q1 09Q2 09Q3 09YTD 09
Equity Long-4.83%27.08%19.37%53.03%Equity Short7.86%-13.72%-8.82%-20.00%Credit Long7.18%19.65%7.78%40.03%Credit Short-0.79%0.17%-0.09%-0.74%
Total Gross Returns9.42%33.18%18.25%72.32%Performance Attribution (Gross Returns)
Performance and exposure information in this report are calculated excluding Designated Investments (or "side pocket"investments). Exposure figures are averages for the time period represented.
Executive Summary
The fund returned 18% during the quarter, continuing our strong portfolio performance during 2009.ii)
The economy has started to recover, but the pace and shape of the recovery are unclear, and our portfolio is
not levered to any particular economic scenario.iii)
Reflecting the bottoming of the economy, we have reduced gross short exposure and established some longpositions in businesses that are attractive in all scenarios outside of a free-fall economy.iv)
We have reduced corporate fixed income exposure and increased net equity exposure, resulting in aportfolio that is more liquid while offering attractive medium term returns.v)
We have initiated event driven positions within the equity and distressed fixed income strategies, and weexpect such opportunities to grow over the next twelve months.vi)
Our equity portfolio continues to exhibit favorable characteristics of strong operating momentum and lowvaluation (11.1x 2010 earnings, 9.6x 2011), against a backdrop of overall constructive liquidity conditions.
Third Quarter Discussion
Our performance for the quarter continued to exceed our long-term expectations with returns of more than 18%.This performance was driven by:a)
Strong performance across our equity long portfolio, including healthcare, business services and financials.b)
Continued broad strength within distressed fixed income, where security prices continue to recouple withthe relatively strong fundamentals of our underlying issuers.c)
While these gains were offset by losses in our equity short book, our reduction in gross short equitiesthroughout the quarter reduced the magnitude of such hedging losses.During the quarter, we reduced our gross short equity position to reflect our increasing confidence that an economicbottom of some form had been established based upon anecdotal commentary of a broad number of contacts across awide variety of industries. Given improving liquidity, a firmer economy and relatively low valuation levels, webelieved it was prudent to reduce our gross short book to control the risk of a significant short squeeze across mostequities. In order to contain our net exposure at reasonable levels, we also selectively trimmed our gross long equityexposure. Concurrently, we also began to reduce our gross long credit exposure as prices began to moresignificantly recouple with fundamentals in a positive manner. As a result of these actions, our gross exposure camedown approximately 25 points through the quarter, and our net exposure shifted from what was approximately a50/50 split between equity and credit strategies in the second quarter to a positioning that ended September withapproximately 3:1 exposure in favor of equity based strategies. We believe that credit’s relative attractiveness toequity most likely peaked early in Q3 09, and as such we are reallocating risk dollars to superior, risk adjustedequity opportunities.
Economic Discussion I’d Like To Buy a Vowel, Pat
Most of us have seen the popular game show “Wheel of Fortune”, in which contestants guess letters of a puzzle untilenough letters have been revealed for the contestants to solve the puzzle. While the object of the game is to earn themost money by guessing consonants that are contained in the word before solving, players may reinvest some of their prize money to buy a vowel, and with that additional information they increase their odds of correctly solvingthe puzzle.In our prior letters, we set forth our framework that liquidity and economy were the two central questions, and thatwe felt the answers to the liquidity puzzle were clear enough to base investment decisions upon. In contrast, webelieved that the answers to the economic puzzle were still highly speculative, and that three months ago we onlyknew enough to project that the economy had likely ceased its contraction, albeit for an indeterminate period of time. As such, we were willing to take on long exposure to those stocks or bonds whose securities were attractiveassuming that a bottom had been put in, regardless of the strength, length or shape of the recovery.
After three months of additional data and observations in order to determine the economic forecast over the mediumterm, we are forced to mutter those three little words that scare us all: “We don’t know”. While we recognize thatthere is probably much to be gained in correctly anticipating the course of the economy in 2010 and 2011, we alsorecognize that there is much to be lost in prematurely jumping to an inaccurate conclusion.Since a picture tells a thousand words, the easiest way to demonstrate the conundrum facing investors today isthrough the following set of pictures:
Scenario 1Death SpiralScenario 2V RecoveryScenario 3W RecoveryScenario 4Saw bottomScenario 5Square Root
As you are aware, every market pundit has their own description of the shape of the economic recovery, or lack thereof. Five of those are pictured above. At this point in the economic cycle, we know the following data points onUS (quarter on quarter annualized, latest revision) and Global (year on year) GDP:
US Global
Q2 08 1.5% 3.8%Q3 08 (2.7%) 2.6%Q4 08 (5.4%) (0.1%)Q1 09 (6.4%) (2.4%)Q2 09 (0.7%) (2.1%)Q3 09 2.8% (0.9%)In pictorial terms, we know that the beginning of this puzzle is a “V”. However, that could be the beginning of scenarios 2, 3, 4 and 5 above. Obviously, securities of issuers in cyclical industries such as capital goods, retail,basic materials and semiconductors will react quite differently in the event of a V recovery, a W or double dipeconomy, a saw bottom filled with fits and starts, or a square root economy of a small recovery followed by zerogrowth for a prolonged period of time. Not unlike three months ago, we believe that we only have enoughinformation to rule out scenario 1, an economic “death spiral”, where unprecedented monetary and fiscal stimulusstill failed to stem the decline in economic activity broadly.
The Waiting is the Hardest Part (Tom Petty)
We sense from talking with market participants, and our own investors, that everyone would like an answer to thispuzzle. Of course, we would like an answer as well. However, while in our last quarterly letter we presented whatwe thought was broad based and clear evidence of a bottoming of economic activity over the summer, today’sobservations and anecdotes are by no means clear. Set forth below is a sample of the conflicting cross currents thatare being reported by market participants regarding present economic conditions:
Industry Upbeat Commentary Cautious CommentaryHousingLowe’s:
We’re encouraged by the signsof stabilization we’re seeing in ourbusiness, and we're confident we’re well-positioned to capture additional marketshare.
DR Horton:
There are still a number of headwinds in front of us operationally in thebusiness so we are still very cautious as we look forward to next year in terms of really what themarket is going to bring to us. We think we’revery well positioned within the industry but untilthe unemployment rate starts to drop and thereare jobs created, then we're going to have atough time.
I think the consumer is in abetter place and more confident.
Customers continue to tell usthey’re concerned about their own finances andunemployment.

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