John Muresianu taught modern history for six years before switching to the financial world in 1984 when he became a currency analyst and trader. His background in history profoundly contributed to his investment approach as he began to focus on the equity markets after joining Fidelity Investments in Boston in 1986. At Fidelity, he managed three funds very successfully, Fidelity Utilities Fund (from January 1993 to August 1997), Fidelity American Trust (from December 1997 to May 2002) and Fidelity Fifty (from January 1999 to May 2002). Between 1998 and 2002, only 9 of 1923 diversified U.S. equity funds beat the S&P500 each calendar year and Fidelity American Trust had the best cumulative record among these 9. The key to John Muresianu’s success was a few strategic decisions, typically two a year, which, for instance, caused him to enter and exit early from both internet and genomics stocks in the 1997-1999 period, switch from large cap to small cap in 2000 and, also in 2000, switch from technology and finance to gold and energy. Seeking to utilize all the tools available to translate his views into his investment portfolio, he decided last Spring to launch his own long-short equity hedge fund which began trading on October 1st, 2002 with over $100 million. John Muresianu spoke with HFN publisher, Antoine Bernheim, in January 2003.
Profile of John Muresianu
Born: June 27, 1953 in Washington, DC
Education: Harvard AB (1974); Ph.D (1982)
Family: Married; four children (23, 18, 7 and 4)
Last vacation: Cape Cod
Last book read: I keep re-reading Aesop’s Fables
Favorite quote: "Less is more"
How he best describes himself: "A stock-picker with an unusual career path, a micro-macro guy"
Q. Could you describe your investment philosophy?
A. We apply fundamental valuation and technical analysis over three time horizons, secular, cyclical and seasonal to four levels of decisions, individual stocks, sectors, stock classes and market exposure. We focus on the customization of metrics: for each company we try to identify the two or three lines in the financial statements which really matter and the drivers for these lines. For one company, it might be a commodity price driven by the supply and demand model for the commodity and the key to that may be, for instance, some technological change. Similarly, on valuation, I found that the metrics on a particular company can change over time: for example, dividend yield was a good tool for a utility until deregulation when it became irrelevant. On the technical side, I try to find the technical tools that work best with a particular security. I find that each stock has its own rhythm and if you can find the unique technical pattern that characterizes an individual stock, you have an edge over someone who just uses off-the shelf cookie-cutter techniques.
Q. Could you describe and illustrate how you use historical references to come to strategic decisions?
A. In deciding in the fourth quarter of 1997 whether or not Amazon, AOL or Yahoo were shorts as most experts thought, I went back over eighty years of data looking at secular technological trends, such as radio, automobile, electricity, to find common patterns as well as the most relevant analog. The pattern and the analog chosen was that of AOL and RCA in the 1920s which worked beautifully both on the long and the short side. In looking at past analogs, I look not only at the price performance of the stock but also at fundamentals and valuation. Looking for analogs brings together the disciplines of valuation and technical analysis such as understanding the growth rate of the stock in relationship to the penetration of the new technology. Another example is the genomics group in mid-1999 to 2000 which was analogous to the biotech group in 1990 or the decision to go short drugs in 2000 as I anticipated a gradual repeat over the next few years of the kind of political onslaught on the drug companies that we see every decade or so, as we did with Hillary Clinton in the early 1990s. There are many analogs which create opportunities on a regular basis, although they may be less dramatic than the internet. On the equity market today, my thesis has been, for three years now, that there is only one great analog in the last 100 years for the five year, 200% rise in the Dow in the late 1990s and that is the 1920s. Not only a move of that magnitude and duration only occurred in the 1920s, but today’s context of inflation vs. deflation is much more analogous to the 1920s than the 1973-74 period which most experts find relevant to the current period. Moreover, the cultural context is also reminiscent of the 1920s, with the decline in ethical standards similar to that described by Benjamin Graham in the 1934 edition of the Securities Analysis.
Q. How you go from the macro to the micro?
A. Usually, I go from the micro to the macro. Most of my ideas and value-added have come from micro stock analysis. I did not go to Amazon and Yahoo by thinking about the internet and its implications. I got to the internet theme by doing due diligence on H&R Block, a tax preparation company that took some of its excess cash to diversify and buy Compuserve. That work led me to AOL. It was doing micro work on Perkin Elmer and Affymetrics that led me to the genomics theme.
Q. What is your process for picking individual long and short equity positions?
A. There is a multiplicity of sources of ideas and they differ on the long and the short side. The best long ideas have been generated through conversations with enthusiastic consumers of products or services whose broad appeal was underestimated by experts and further research about the companies that make those products or provide those services. On the short side, the best ideas have come from reading footnotes in the financial statements and finding out serious problems with the rosy picture for companies that other people think are great stocks. Once the idea is generated, the process of doing fundamental valuation, technical analysis and gather multiple perspectives on the securities is more mundane. We look for moves of at least 50%, often 100% to 500% and our time horizon tends to be longer than most, up to three to five years.
Q. Could you describe the typical structure of your portfolio?
A. Currently, the fund is structured around nine thematic bets – four short and five long. The short themes are finance, technology, blue chips, and niche cyclicals. The long themes are gold, energy, utilities, special situation technology, and undervalued consumer brands. Each theme consists of a basket of 5-30 stocks. The biggest long position is now just under 4%. The biggest short is just over 2%. We do not use financial leverage, so that our gross exposure is less than 100%. Gross shorts are capped at 50% and net short exposure at 30%.
Q. How do you reconcile all the levels of analysis you examine, secular, cyclical and seasonal?
A. Whenever I look at a stock, I look at all three time horizons. The more those time horizons are sending the same message, the fatter the pitch. September 2000 offers a perfect example of how the secular, cyclical and seasonal came together. Seasonality was very positive for tech in the fourth quarter and that is why most people were bullish and stocks had run up in anticipation of that. Cyclically, we had the impact of the Fed tightening on capital spending and tech spending in particular causing cash flow and capital expenditures to decline. The secular cycle had also turned negative as a result of the maturation of the penetration of the technology. The short-term overbought conditions layered on top of secular and cyclical downturns made that period a sweet spot. I don’t magically reconcile these time horizons but I try to focus on the greatest opportunities when the secular, cyclical and seasonal come together.
Q. What is your approach to cutting losses when a position or a theme goes against you?
A. If the fundamentals are disappointing, we eliminate the position. We cut losses and reassess as appropriate. We have gone all cash after a period of losses as our tolerance for losses is limited. We build our positions incrementally. Sometimes, the increment is ten basis points, sometimes it is one hundred. We approach risk from multiple angles, fundamental, technical and we customize stop levels for all the securities but the stops are indicative as opposed to mechanical.
Q. Can you describe how your organization functions?
A. We have nine professionals – four investment analysts, a trader, a risk manager, a chief financial officer, a chief operating officer, and myself. We meet twice a day, between 7:30 and 8:00 am and again at 4:30 pm. We try to focus the analytical team on two stocks, a potential long and a potential short so as to balance optimism and pessimism. There are daily write-ups which try to cover all disciplines, fundamental, valuation and technical on each of the stocks or themes. Each analyst has been given a $1 million portfolio and they have full discretion within that. These are used to train them and also to isolate instantly the best ideas and bring them to my attention.
Q. What are your goals for the future?
A. We currently manage $150 million and are planning to close when the fund gets to $500 million. The long-term goal is to have the best 20 year record among all the long-short US equity funds and to have an institution that survives its current principals. I would like to establish an investment firm that is recognized as a great place to work and a true meritocracy which rewards investment professionals for their accomplishments.