- Dinakar Singh's Axon Capital was up 74% in 2020, and he's off to fast start in 2021 — up 7% before the first month has finished.
- Singh, a former Goldman Sachs partner, walked Insider through where he is making his bets in 2021 and why he likes "value-growth" plays like Facebook and Google.
- Still, he's starting to get defensive. "Smart investors are going to need to leave some money on the table over the next 12 months," he said.
- Visit Business Insider's homepage for more stories.
How do you follow a 74% performance in 2020? For Dinakar Singh, founder of $400 million Axon Capital, it has been returning 7% so far in the first month of 2021.
"This is a good time to focus on fundamentals," he said in an interview with Insider. The markets have been overwhelmed by momentum factors, pushing quant and retail investor favorites through the roof, making true alpha hard to find.
"You have to think about not just what will make you money, but what will make you money differently," he said.
"A good idea goes nuts" because of momentum chasers, he said, forcing investors like himself to find great ideas.
Singh, a former Goldman Sachs partner who relaunched his hedge fund two years ago, walked Insider through where he sees opportunities in 2021 and beyond, highlighting companies, sectors, and themes he is high on or avoiding altogether.
Last year was Singh's comeback moment, as he dwarfed the returns of the average manager, which finished the year up just under 12%, according to Hedge Fund Research. He originally founded his fund in 2005 and grew it to more than $13 billion before his performance slumped and investors withdrew. Two years ago, he relaunched, with 17% returns in 2019.
See more:Here are under-the-radar hedge fund managers who crushed 2020, including a new launch from a former Viking Global portfolio manager and a comeback from a one-time Goldman partner
For Singh, 2021 ideas include "value-growth" companies like Facebook and Google, American Express and other travel-linked stocks, and financial companies, while avoiding cyclical stocks like copper and railroad and durable goods companies like Best Buy. He foresees a "reversion" of what happened in the market last year, where parts of the economy soared while others fell into a recession.
"It is simply unprecedented and extraordinary — goods (and particularly durable goods) SURGED at a historic rate, even as spending on everything else (services) plunged at a historic rate. Goods spending rose 8% even as services spending fell 7% — durable goods rose even more — 14%! That type of skew is simply incredible," he wrote to investors at the end of November.
Put differently, he does not expect people to be buying computer monitors and home goods at nearly the rate they were in 2020, while he does expect spending on things like travel, concerts, and dining out to surge when the vaccine reaches most parts of country.
"I can't think of a good reason why leisure travel would be depressed. The next Christmas, it's going to be impossible to get a flight and a warm resort somewhere," he said. Madison Square Garden is set to have the "most densely packed concert schedule in history" in the second half of this year.
Because of this, he is high on American Express — "I could see a world where for a number of years their earnings are higher than ever before" — while continuing to bet on "value-growth" tech companies like Facebook and Google.
Facebook as a value investment would have sounded absurd five years ago, but investors like Singh and Lone Pine Capital's Mala Gaonkar have been arguing that the social media giant should be considered as such. Singh sees constant, but not explosive, growth at a good price without the risk of some of the big pandemic tech bets, like Zoom.
See more: Billionaire Seth Klarman's Baupost returned less than 5% in 2020, failing to break double-digits returns in what's been called the best year for hedge funds since 2009
"If you can buy companies with growing earnings at a not-too-bad price, you're going to do ok."
This is all working toward a more defensive stance over the next six months, he said. "This party is getting into the later hours," he said about the market's surging performance, and you don't want to be the one to clean up after the party is over.
"It wouldn't shock me if you saw a recession in durable goods stocks," he said, but the typical response to a recession won't make sense — an advantage he believes he and other human-run funds have over quants that might be rolling out their playbook from 2008.
Typically, cyclical stocks that are in-demand during a recession include utility companies with constant earnings, but Singh is avoiding these bets because the recovery over the next year will be so uneven compared to the past — and top investors will avoid the temptation to follow the crowd.
"Smart investors are going to need to leave some money on the table over the next 12 months," he said.
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