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Glenview Capital Management - 3-23-11

Glenview Capital Management - 3-23-11

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Published by: waterhouseb on Mar 23, 2011
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07/10/2013

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* Please refer to page 21 for all reference notes found in this report. Please refer to page 22 for important disclosuresregarding the information in this report.
March 23, 2011Dear Investor,This past December marked our tenth anniversary as a firm. It is with great pride that we begin our letter with thefollowing chart showing the most important aspect of investing to our clients. Over the past decade, every one of our products generated:i)
 
Attractive absolute performance;ii)
 
Meaningful outperformance versus hedge fund peers; andiii)
 
Even more significant outperformance versus relevant market benchmarks.
 
Importantly, Glenview and Little Arbor delivered this performance with significantly lower volatilitythan the markets as a whole.
Profits Gained by a “Day 1” Investor in each of Our Products
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It is with great pride that we recognize that each individual who ten years ago chose to invest $1 million intoGlenview vs. the average hedge fund or the US equity markets now has up to $3 million
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of additional capital toinvest in the education of their children, to improve the standard of living for their families and to invest in theircommunities. We are equally pleased that a pension fund or philanthropic endowment or foundation that invested$100 million in Glenview on Day 1 has $230 million to $286 million
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of additional capital today to provideretirement income for their members, to enhance funding for groundbreaking medical research and to promoteeducational quality and social good.On behalf of our entire team at Glenview, we thank you for the opportunity to serve you over the past decade.Armed with the additional knowledge and experience from our first decade, we now turn our attention towardsprotecting and growing your capital over the next year and years.
$301$40$77$122$18$4$46$71($23)$30$15$9$19-$30$0$30$60$90$120$150$180$210$240$270$300$330Fund Relevant peer benchmark (HFRI/Hennessee) S&P HY Market
LITTLE ARBORGLENVIEWCREDITGOJan2001 - Dec2010 Jul2006 - Dec2010 May2004 - Dec2010 Sep2007 - Jan2010
 
LITTLE ARBORGLENVIEWCREDITGOJan2001 - Dec2010 Jul2006 - Dec2010 May2004 - Dec2010 Sep2007 - Jan2010
 
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Executive Summary
i)
 
We continue to generate attractive risk adjusted returns, as all of our products had strong performanceduring the fourth quarter with below average volatility, as indicated in the chart below:
 
Gross Net Q4 Volatility Gross NetGLENVIEW FUNDSGlenview Capital Partners (Cayman), Ltd.
6.93% 5.54% 7.17% 16.72% 14.22%
Glenview Institutional Partners, L.P.
6.92% 5.75% 7.49% 16.61% 15.34%
Glenview Capital Partners, L.P.
6.90% 6.25% 8.24% 16.42% 15.72%
GLENVIEW OPPORTUNITY FUNDSGlenview Offshore Opportunity Fund, Ltd.
11.85% 9.54% 12.51% 28.28% 22.51%
Glenview Capital Opportunity Fund, L.P.
11.89% 9.76% 12.73% 28.77% 23.15%
GCM Opportunity Fund, L.P.
12.39% 10.12% 12.47% 28.73% 23.60%
GCM LITTLE ARBOR FUNDSGCM Little Arbor Partners (Cayman), Ltd.
5.76% 4.63% 4.09% 16.47% 13.17%
GCM Little Arbor Institutional Partners, Ltd.
5.14% 4.17% 4.07% 15.95% 13.26%
GCM Little Arbor Partners, L.P.
5.30% 4.32% 4.04% 15.81% 12.64%
Q4 Performance 2010 Calendar Year Performance
 ii)
 
We remain constructive on the investment environment over the medium term supported by attractivevaluations, excessive corporate liquidity, a growing economy and ample global liquidity.iii)
 
Forward risks are no longer tilted towards deflation / double digit recession but instead include inflationarypressures and the corresponding impact on sovereign creditworthiness.iv)
 
With the recovery in both economy and markets, our ability to find attractive single name shortopportunities is increasing, and our short exposure is shifting away from indices towards individualequities.v)
 
In the Glenview and GO Funds, we continue to withdraw capital from long fixed income strategies andredeploy capital in long equity strategies with superior risk / reward characteristics.vi)
 
With the evolution of risk scenarios that now include inflationary pressures, we have adjusted ouralternative hedge positioning towards protection from rising interest rates as well as mortgage putback liabilities, while harvesting a portion of our sovereign CDS hedges.
* * *Fourth Quarter Discussion 
Our funds performed well and inline with our long-term expectations, driven by the following:i)
 
Broadbased success in our investment portfolio, led by strength in healthcare (Life Technologies,McKesson, Medco and Thermo Fisher Scientific), technology (Flextronics, Xerox and BMC) and specialtyfinancials (Aon and AIG).ii)
 
Continued steady performance from our corporate fixed income portfolio, driven by a diverse set of namesincluding Cengage, Mueller Water Products, MBIA, Terrestar and Ceridian.
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 iii)
 
Modest positive returns from our US Treasury hedge as the first signs of inflationary pressures emerged,raising yields and reducing bond prices.iv)
 
Offsetting these gains, our short equity portfolio performed approximately inline with the broader equitymarkets in the quarter on a cash on cash basis, producing negative returns.While our portfolio holdings are diversified by industry, end market and growth drivers, we felt that the commonelements of modest valuations, above consensus earnings growth and accelerating productive capital deploymentwould all serve to promote value for our largest equity holdings. It is therefore not a coincidence that of our eightlargest individual equity winners in the quarter, all of them beat consensus earnings for the September quarter, andsix of them were aggressive repurchasers of their own shares. We believe these trends of secular growth, excesscapital deployment and a modest expansion of valuation multiples will continue to drive positive absolute returnsfrom our investment portfolio in 2011 and beyond, and we discuss many of our positions in depth in the “A TenYear View – Looking Back and Looking Forward” section of this letter.
 
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As the quarter progressed and valuations expanded, we were able to broaden our short portfolio to include moresingle names that should be negatively impacted by the coming economic, fiscal and monetary environment:a)
 
We established short positions in a series of REIT equities whose valuations reflect exceedingly low caprates proportional to the exceedingly low interest rate environment. We do not believe that our corecompetency is predicting forward interest rates, but we are exceedingly comfortable betting that over thecourse of the next year, twelve months will pass. As we examine the term structure of interest rates, a 3.3%10-year bond yield is comprised of a one year yield of 25bps, and therefore the subsequent nine yearsaverage 3.65% (of which the last eight years are 4%). For REITs that reflect a 6% cap rate, a 70bps moveover the two years will create 10% multiple compression solely by moving two years forward on the termstructure of interest rates. Should inflation accelerate above expectations, this rate rise would be evenmore pronounced, and the multiple compression more significant. While we don’t expect REITs toimplode, we do believe they will underperform over time.b)
 
We established short positions in cruise lines and other travel related equities that will likely see profitseroded by declining revenue on aging assets combined with inflationary cost pressures including oil.Furthermore, asset intensive travel industries such as hotels are also often valued on cap rates andsusceptible to the same valuation compression as REITS, as described above.c)
 
We broadened our portfolio of shorts in companies that derive a significant portion (or all) of their revenuefrom government sources whose ability to grow such spending is impaired by their own balance sheetconstraints and fiscal deficits. Such companies are likely to see decelerating revenue trends and moreintense pricing and margin pressure as a result of the deteriorating financial health of their government andgovernment related customers.d)
 
In healthcare, we expanded our short positions in companies that we believe will come under more intensepricing and reimbursement pressure as the healthcare reform debate migrates from coverage back towardsbending the cost curve.In general, we still believe that low valuations and strong liquidity make it a challenging market to generate absolutereturns in short equities. However, those conditions are less pronounced than at any time over the past five to sixquarters, and therefore it is natural that our individual short equity portfolio has begun to expand.
Investment Outlook 
The core of our outlook section was written prior to the tragic events in Japan in recent days. Our thoughts andsympathies go out to those families who have suffered loss of life, loss of property and loss of community. As youmight expect, the publishing of our year-end letter took a back seat to our risk management duties as we struggle tounderstand and define the impact of both the natural disaster and the nuclear emergency on economies and markets,and on specific industries and companies. As the outcome of events at the Fukushima nuclear plants continues to beuncertain, we feel it is most instructive to provide our thoughts on the year independent of this event as well as ourinitial thoughts on its impact. Obviously these events are dynamic, and we will provide additional communicationin our next investment letter.Looking back, as we came into 2010, we identified the four legs of the investment stool that we felt were strongenough to produce reasonable investment returns in the equity markets:i)
 
Reasonable equity valuations, particularly reasonable in light of the interest rate environment,ii)
 
Excess corporate liquidity, with $1.4 trillion of cash at non-financial US public companies, an all-time highwhich will serve to support and propel valuations through share repurchase, M&A activity and investmentthat yields greater ROEs than are available through cash interest income (which is near zero),iii)
 
Healthy economy, with developed economies moving forward at approximately a 2% pace with fasteremerging market growth, andiv)
 
Healthy overall liquidity, with interbank spreads and corporate spreads all reasonably tight.Of course, the third and fourth legs of the stool, overall economy and liquidity, were the most vulnerable and subjectto change quickly, since they were each being supported by unprecedented monetary and fiscal stimulus that can not

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