Worm Capital LLC, an investment management firm, published its “Longleaf Partners Small-Cap Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. A portfolio quarterly return of -15.18% net of fees, was recorded by the Worm Capital’s long/short equity growth strategy for the second half of 2021, and -1.49% for its long-only equity strategy, while its benchmark, the S&P 500 Index, by comparison returned 15.25% over the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Worm Capital, the fund mentioned Tencent Music Entertainment Group (NYSE: TME), and discussed its stance on the firm. Tencent Music Entertainment Group is a Nanshan, Shenzhen, China-based music company that currently has a $17.7 billion market capitalization. TME delivered a -45.63% return since the beginning of the year, while its 12-month returns are down by -34.71%. The stock closed at $10.46 per share on August 06, 2021.
Here is what Worm Capital has to say about Tencent Music Entertainment Group in its Q2 2021 investor letter:
“Another position we mostly exited over the quarter was Tencent Music (TME). We’ve long admired Tencent Music—China’s largest music streaming company—because of its similarities to SPOT and its dominant status in the audio industry. It’s a company with roughly 840 million users with 72 million paid users (growing at ~30% YoY).We like the multiple monetization opportunities it presents, from live virtual events to audiobooks to premium membership. At its core, it’s a healthy, growing business.
Unfortunately, the market is filled with curveballs. During Q2, TME and many other Chinese technology firms (IQ, VIPS, etc.) got swept up in the liquidation of Archegos Capital, which severely impacted their share prices. (There were also increased regulatory concerns coming from the Chinese government.) Both factors have made investing in Chinese equities more complicated, at least in the short-term. TME was a relatively small position for us, but we decided to exit the equity position in May (although we kept our LEAPs) to focus capital elsewhere until we can get more clarity on the situation. In general, much like March 2020, when we lose visibility on a position, we like to reduce our exposure, which limits our risk.”
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Based on our calculations, Tencent Music Entertainment Group (NYSE: TME) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. TME was in 63 hedge fund portfolios at the end of the first quarter of 2021, compared to 26 funds in the fourth quarter of 2020. Tencent Music Entertainment Group (NYSE: TME) delivered a -34.91% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
