Polen Capital Management, an investment management firm, published its “Polen Global Emerging Markets Growth Fund” second-quarter 2021 investor letter – a copy of which can be downloaded here. The Polen Global Emerging Markets Growth Composite Portfolio (the “Portfolio”) was largely flat for the quarter, returning 0.17% gross of fees. This trailed the MSCI Emerging Markets Index (the “Index”) return of 2.29%. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Polen Capital Management, the fund mentioned Tencent Music Entertainment Group (NYSE: TME) and discussed its stance on the firm. Tencent Music Entertainment Group is a Nanshan, Shenzhen-based music company with an $11.6 billion market capitalization. TME delivered a -63.67% return since the beginning of the year, while its 12-month returns are down by -52.02%. The stock closed at $7.13 per share on October 1, 2021.
Here is what Polen Capital Management has to say about Tencent Music Entertainment Group in its Q2 2021 investor letter:
“One holding that experienced significant share price dislocation was Tencent Music, which performed favorably for most of the quarter, before being caught up in the well-publicized forced deleveraging of one large shareholder in late March. In just three days the share price of Tencent Music fell by 50%. As far as we can gather, no fundamental news flow was associated with this decline. We believe its sell-off was driven by the same aggressive selling pressure that forced similar drops to the share prices of companies such as Baidu, Vipshop, Discovery Communications, and Viacom.
Our underlying view of the company’s prospects are unchanged. With the valuation halved, we considered this non-fundamentally driven fire-sale as an opportunity to buy more of a great asset at an attractive price, and accordingly, added to our position. We were pleased to observe that Tencent Music management likely reached a similar conclusion, as it quickly reacted with a $1 billion USD buyback program.
Tencent Music can be thought of as the Spotify of China with a few differences. The main difference is the bargaining power dynamic. Tencent Music is the dominant audio streaming platform in China with over 600 million monthly users, and roughly 80% market share in terms of listeners. In the West, three big record labels—Warner Music, Sony Music, and Universal Music—control almost all of the recording artists. In China, the market is much more fragmented with a few scaled Chinese artist record labels, and the share of Warner, Sony, and Universal in China remains low. For us, this means that Tencent Music is a critical partner for any record label (or artist) that wants to reach music fans in China. Seemingly, this is a value chain that favours Tencent Music in China in a way that we think is materially more attractive than it is for Spotify’s/Apple Music’s/Amazon Music’s businesses in other parts of the world. Tencent Music is highly profitable with net margins of approximately 14% versus Spotify, which has been loss making since 2015.”
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 35 hedge fund portfolios at the end of the first half of 2021, compared to 63 funds in the previous quarter. Tencent Music Entertainment Group (NYSE: TME) delivered a -54.56% 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.
