The fund’s short side tends to be more tactical, with more frequent trading. Positions are typically covered in anywhere from five months to two or three years from when they’re established. With change happening so quickly in the first quarter of 2020, however, that happened within the span of a few weeks for some transactions.
Building On Creative Destruction
Rubin says the concept of “creative destruction”—the manner in which the market creates and destroys business opportunities—is a major driver of his team’s investment decisions. “On the long side, that belief drives us to look for companies and industries that benefit from innovation and creating the business opportunities of tomorrow. On the short side, we are looking for companies where change is destroying a competitive advantage as well as their ability to earn profits.”
During the market mayhem earlier this year, Rubin added to several of the fund’s existing holdings, including Amazon, Mastercard, Twitter, Twilio, Disney, Exact Sciences, Illumina and Intuitive Surgical. He also established several new high growth positions to the long side of the portfolio, including medical device company DexCom, Uber, Snap Inc., Pinterest, Lockheed Martin, RingCentral, Bill.com, Apollo Global Management and KKR.
With the exception of aerospace defense contractor Lockheed Martin and asset managers Apollo and KKR, these new holdings are relatively new businesses. That fact doesn’t dissuade Rubin, who believes they have enormous market opportunities, highly profitable business models and substantial cash reserves. They are also leading the way in their respective areas of expertise. Bill.com, for example, is a leader in automation and back office software for small and midsize businesses, and it recently reported 50% year-over-year revenue growth. Yet despite its leadership position, it has penetrated only 1% of its potential market. Uber is the global leader in ride sharing and is expanding its footprint in food delivery. Shopify provides software tools that enable retail merchants of all sizes to display and sell their products across numerous sales channels.
“As a result of these changes to the portfolio, we believe that the long book is positioned well to weather any further downturns while also generating substantial returns as the virus dissipates,” Rubin says.
He has transitioned some of the short side from pandemic casualty plays to what he calls “core shorts” in industries he believes will continue to be under enormous pressure even after the pandemic subsides. These include traditional advertising agencies, media firms that are ill-prepared for the digital age, leveraged telecommunications firms, and companies in the travel and entertainment industries whose financial positions will make it difficult for them to move past the crisis.
Despite the good times for the fund brought on by bad news, Rubin is relatively optimistic about the future. “Six months or a year from now the stock market is likely to be higher, if not much higher, than it is now. The economy will come roaring out of this because the coronavirus is not a structural problem with the economy or any one industry. But we still think people need to manage the downside. We could still see a retest of the lows.”