The Godfather

We hosted Tiger Management’s John Townsend at the Grandover Resort in Greensboro yesterday evening, for CFA North Carolina’s Annual Meeting.  Member feedback suggests it was our best yet.  John is an NC native, born and raised in Lumberton, NC with undergraduate and graduate degrees from UNC.  After retiring from Goldman as an Advisory Director in 2002, he joined Julian Robertson last year, as Managing Partner and Chief Operating Officer of Tiger Management, LLC.  John discussed trends Tiger is seeing in the marketplace today in addition to their vision for Tiger 2.0 in the future.

Fundamentals are beginning to matter again. High quality franchises with high and consistent returns on capital are cheap and poised to perform well looking forward.  Low quality small cap stocks are beginning to act how they “should.”  They went straight up for two years not because fundamentals were necessarily better, but because investors realized they weren’t going out of business.  Now that solvency is “assured” and the stocks are priced as ongoing businesses, fundamentals should begin to matter again. You can buy MSFT today at under 10x earnings or gamble on Constant Contact at over 300x trailing earnings.  Not much of a decision in our humble opinion.

This should continue for years and is very productive for long short managers. We sure hope he’s right!  According to John, Julian believes that investing is the exact opposite of baseball. The only way to make money in baseball is to make it to the majors. In other words, even the best player in the minor leagues makes next to nothing.  He says that in investing, you want to be “the best player in the worst league.”  Take gold, as an example.  “All smart people know gold makes no sense at all.  It has no cash flows so it cannot be valued.  I guess we would fall into the “not so smart category.” But Tiger has identified a manager that they consider to be the best in the (bad) industry.  While “gold bugs make money every 20 years,” John tells us that this particular manager has compounded at 60% net of fees for the past decade.  Wow!

We spent quite a bit of time discussing how Tiger identifies talent.  According to John, Julian has seeded about 46 managers over the years, with 40 of them tremendously successful.  A batting average that’s not too shabby, even for baseball.  While most of us come in every day with our “to do” list, checking off boxes until tasks are completed, John explains that Julian’s genius is in his madness.  He doesn’t wear a watch. He doesn’t have a “to do” list. He leaves his mind open and goes wherever the day takes him.  John claims that every bright investor has narcissistic tendencies, but Tiger believes there are three traits that every good manager has in common: 1) you have to be unbelievably smart; 2) you’ve got to be very honest (both traditionally and intellectually), and; 3) you’ve got to be incredibly competitive. Every investor goes through difficult periods. That competitive fire provides the top investors with the will to win. Interestingly, Tiger has developed a test that judges character, honesty, etc. After managers have interviewed with Julian, they sit for this test and results are mapped against the results of other great investors in the world.

By their estimates, if you add up all the assets under management that have “touched” Julian in some way, these managers would comprise roughly $500 billion of the $2 trillion hedge fund industry.  There is no question that Julian Robertson was an early pioneer, but these numbers might qualify him for “Godfather” status.  The book More Money Than God, explores and quantifies Julian’s ability to add alpha over his career.  I look forward to giving it a read.  The game has certainly gotten more difficult over the past three decades but as John explains, there’s always going to be bad stocks. If you’re smart enough and prepared to do the work, there are always ideas to uncover. But you have to do it in a way where you’re liquid enough to manage the risks. While many investors worry about “crowding” in the hedge fund space, I found it very interesting that the correlation between Tiger Funds over the past twelve months is 0.12 despite concerns around “group think” within Tiger.  The data certainly does not supports the thesis.  With most “traditional” asset classes priced to deliver returns, far below expectations and far short of what is required, the “hedge fund” space should continue to grow in the years ahead. Most pensions aren’t at 10-12% in terms of allocation . . . they are at 1-2% invested in hedge funds.

For what it’s worth, Julian’s personal portfolio today is 300%+ gross and -5% net as he is very concerned about a number of trends in the world. I’m sure we share many of his concerns, but we aren’t brave enough to run 300% gross!!  We’ll leave that for “The Godfather.”