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Day 1:
Speaker #1:
This very important and some customers are willing to pay more for
it
Source of financing—need credit extended by the distributor
Outsourced logistics and fulfillment
Resellers do not have to hold any inventory—no warehouses
If an order is placed by 5pm then the product is received the next day
with labeling that says it comes from the reseller
Support and expertise
Conferences to help them understand trends
o Realize that price is not everything—service is very important
- Why is a rational oligopoly in the making?
o 4 changes in the industry
Key geographies have consolidated—less competition
US: top 5 players have a 75% share
o Top 3 do the same thing
Mainly sell PCs, printers, and other computer
peripherals
o Next 2 are slightly different
High touch, low velocity
Ship to products directly to the data center
o Servers
Europe
o Top 5 have 62% share
o #2 and #4 in Germany have merged (# 1 market in Europe)
Synnex is no longer a price spoiler
No longer have to build share fast to achieve the scale they need to
compete
The CEO was the CEO at Ingram
He is focused on return on tangible capital (ROTC) and profits now
o Margins are trending up
Lifting the weight off of the shoulders of the industry
o This reduces pricing competition
Focus on ROC in the entire industry
Was previously focused on growth
Didn’t talk about ROC at all
o Synnex is now talking about ROC
o Same is true of Tech Data now
Company wants to achieve a ROC 500bps above the
cost of capital
o Ingram has a chart dedicated to ROC now
Targeting ROC 300-400bps above the cost of capital
Each company is pursuing growth adjacencies with little overlap
Better growth opportunities and better margins
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Ingram
o Data capture and point of sale—bar code scanners
Synnex and Tech Data are not in this market
o Logistics
3rd party logistics
Have inventory but don’t own it—get a fee
for service
50% of all items distributed from Wal-
Mart.com come from an Ingram warehouse
o Apple and Amazon as well
Tech Data
o Mobility
Synnex
o Outsourcing
Call centers
The overlap between the 3 is in the data center market
o Higher margin business
o Really going after other firms’ markets
o These 4 changes can drive mid-teens returns on capital give the changes in the
industry
- Fears of the cloud
o A major headwind to this business in general is customers moving to the cloud
o Cloud computing- distribution of software applications over the internet
Characteristics
Shared servers rather than in-house servers
o Servers are in 3rd party data centers
Virtualization
Cheaper and broader broadband pipes make the move easier
o Big growth expected
35% CAGR through 2013
o 2 impacts on the 2 tier distribution
Software—some companies will shift to the cloud
Others will leverage two tier distribution
Hardware
With the server not on premises anymore, they will not need certain
hardware
There will absolutely be an impact if companies to go to the cloud and
circumvent two tier distribution
However, just like not all IT services got offshored to India
o Not all software/hardware is going to be going to the cloud:
Bandwidth constraints
Mission critical apps
Service disruptions
Legal/compliance
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Customized software
o 68% of their sales will not be impacted by the cloud
Peripherals—monitors, printers
PCs
o At risk at to competition from the cloud is the remaining 32%
Mainly software
- Worst case
o 50% shift to the cloud n 5 years
Very draconian downside scenario
16% of revenue could go away if half of the 32% exposed goes away
Lose $1.1B in revenue
But the other 68% of the business will still grow
If it can still grow at historical growth levels, that would be $1.2B
annually
o Revenue would be about flat
o Company is priced for an Armageddon scenario
- Base Case
o 30% shift to the cloud in 5 years
$3.3B headwind over 5 years
Potential offsets
Cloud is going to need 2 tier distribution as well
o Value of 2 tier is not eliminated
o Cloud-based service providers will need to be able to tap the
SMB market
They will not build out their sales forces
There will be a land grab
First to market will be important
o The reseller will need 2 tier distribution
Will aggregate a 1 stop suite for cloud customers
o 50% of lost sales to the cloud could be offset
Higher end data center products—higher margins
POS bar codes and scanners
Base case is 3% growth per year
- Upside case- 10% shift to the cloud (20% is his actual guess)
o 5% growth projected by IDC for non-cloud IT spending
- None of the range of outcomes is horrible
o 0-5% annual growth even if 50% goes to the cloud
- Valuation
o Significant downside protection and 100% upside
o During a 5 month period in 2008 and 2009 the company traded below tangible book
value (TBV)
Is credit exposure an issue?
Write offs are 1% of gross profits over time
Only a small uptick in 2008 and 2009
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
The Human Side of Investing, or the Difference Between Theory and Practice
Howard Marks- Oaktree Capital Management
o There are old investors and bold investors. But there are not that
many old and bold investors
o Question from Marcelo Lima- If he likes inefficient markets, then why he is Oaktree not
more involved in the equity markets
They are not active in mainstream equity markets
But they do have funds for emerging market equities and Japanese
equities
Just don’t invest in developed world equities
o How does he think about dollar depreciation risk in the long term, especially when it
comes to illiquid investments?
Clients are looking to Oaktree for dollar-based returns
Don’t have superior knowledge about dollar depreciation
So, the best thing to do is try to generate high returns
Clients are fully equipped to do their own hedging
Oaktree offers dollar returns and they can hedge if they want
o Question from Ryan Morris of Meson Capital- Does he ever pay attention to external
issues that are not intrinsic to the market but can still affect the market?
The answer is no
His son is investing now
For years the 1st thing Howard says to him when he brings up an
investment idea is who doesn’t already know that?
o Meaning, why is this not priced into the market already?
For example, trade barriers are likely to go up around the world
But who doesn’t know that?
Is that priced in or not?
He doesn’t know anything about the future or exogenous events that
nobody else knows
o Can’t add value there
In high yield, the formula is simple:
o Buy ones that will not default and avoid those that will
o Will look at macro factors on individual investments when
assessing the level of risk but does not go beyond that
o He says Oaktree does not raise or lower cash based on market timing but has more cash
now? Is there a contradiction there?
Likes people to point out his contradictions
They never say: we are worried about the market and we are adding 10% cash
What they say is that there is a lot to sell and to little buy so cash levels
float up
o Their actions are the result of active portfolio management
Not a conscious decision to hold cash
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Speaker #3
o Gujarat State Fertilizer and Chemicals (GSFC for short; Bombay Exchange:
GSFC.NS)
Large producer of complex fertilizers
Lowest cost producer
Advantageous port position
Entrenched distribution
Debt free
Most fertilizer
companies have a
lot of debt
Most of the market
cap is in cash
State-owned company
But has great
corporate
governance
Great steward of capital, fundamentals, financial strength and relative valuation
Looks like a commodity company but it is a great business
Earnings have tripled from 2007 to 2011
No earnings smoothing
Do not care about pleasing the street
Cash has grown substantially from $48M to $370M (2007-2011)
Why do they have so much cash?
o Really have a bazooka in a gun fight
Competitors don’t have the financial strength to compete
o Reinvestment opportunities have been and will be fantastic
Indian crop yields need to go up
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Buy companies when they do not see permanent loss of capital, a margin
of safety and a potential upside greater than 0%
Inflation and interest rates.- Thinks that rates have overshot on the upside
Inflation is not driven by rapid growth of money or the general price
level
Change in relative prices is happening
o Food prices are going up—Indians are getting wealthy at a
phenomenal rate
Eating more meat and thus more grains
Increase in food prices is structural
Supply infrastructure is exploding due to the price
increases
A supply boom is 3 years away
Federal government is using a loose fiscal policy
o Due to democratic set up, reforms have been slow
Only thing that the bank can do is reign in demand
because supply response is slow
India will grow 7-8% in the next decade
o 13% nominal growth if there is 5-6% inflation
o Things are good in India and the outlook is good
o Tight money is not a bad thing
Prevents capital misallocations
Doesn’t want the Indian banking system to
become insolvent in a few years due to too loose
monetary policy
- Does GSFC export its fertilizer?
o Not, it does not export but they do import some goods
Speaker #4
- Q&A
o Given his real estate background, does he have plans to invest in CMBS? Can they take
advantage of future dislocations in that market?
Would not invest in companies that manage real estate
They can do that themselves
Saw how REITs managed their properties and do not want to run their
company that way
Thought that the financial crisis would create opportunities
o But it didn’t happen- too much capital and cap rates are too low
o Leverage is so prevalent these days
You need leverage to make great returns
o Can he give some examples of companies they invest in with exposure to Brazil?
Don’t invest in companies in Brazil
Most obvious company is Coca Cola (KO)
They wouldn’t look at KO because you can see a Coke sign everywhere
when you travel the world
But, AXP is a good example
Emerging countries will use more credit cards in the future
Do not do much in commodities
o Does he have opinions on the housing market?
Housing market—they were careful not to be anywhere near it in 2006 and 2007
Liked what Prem Watsa said would happen with housing
Liked what he did with CDS
Housing will bottom at some point
Then there will be the need to build some new houses
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Speaker #5
- Now he has all of the time in the world after not having to present in years before
- He has no idea what the future holds and the present lacks clarity
o Looks to find something in the rubble that looks attractive
o Looking for cheap stocks is like trying to ski down Aspen in the summer
- We blew it after the crisis
o People are complacent
o People claim to look for safety but they are seeking risk
o People believe in the government to stop bubbles
Romick does not believe that people who didn’t see bubbles in the past will be
able to stop them this time
- Hard to have confidence in the US governments numbers
o GAO report said that the government’s financial statements have material weaknesses
If they say there isn’t inflation, that is only because they don’t eat or drive
Government is talking its book
Believe there is much more inflation than is being reported
o Government is increasingly hiring more people though
- We have a debt problem
o Mandatory spending keeps on increasing relative to GDP
o Only 16% of the budget was on the table to cut in the newest Obama budget
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Grow faster?
o This is a myth based on Russell 1000 and 2000 data
Large caps stocks have grown faster since 1995
Large caps have more exposure to foreign
revenue
More likely to be bought?
o FPA is basically short M&A
o FPA is positioned for inflation
Largest sector is energy
Have a big position in an insurance broker
Subprime whole loans at $.45 on the dollar
Private REIT in farmland
- CVS Caremark (CVS)
o Likes the trends in pharmacies
o Lots of growth in the old age
population
o Pharmacy utilization should be up
o Medicare market is growing fast
32M people will get
coverage in 2014 – if it
happens
Free option—
could be a 20%
bump to the number of prescriptions that CVS already writes
o Drugs are 10% of health care spending
Patient adherence to prescription regimens saves money
o CVS and Walgreens (WAG) are both best positioned
7100+ stores
Great footprint and opportunity to gain shares from independents
Independent share is down to 20% and has halved in the last decade
o Is mail order a real threat?
Small affect over time—only 19% of the market consistently
o Lots of drugs coming off of patents
Generics come on and it is beneficial to CVS
Better margins—peak in 2012 since they make better margins on
generics
Now self-distribute generics and can capture the margin there
o People care about private label versus branded when you can taste the product
But people don’t care as much when you can’t taste them
Production problems and JNJ recalls are helping private label sales
Higher gross margins but lower price on these products
Could increase operating income by 3.5%
Tesco has 50% private label products
CVS has a lot on runway on this front
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
ROC: 49%
High margins
Optionality
Real estate assets
6.3% dividend yield
Has been public since 1992
Has a name brand auditor
Has lots of cash and some investment properties
Has not de-worsified in recent years
o Current market cap is 3.26B Hong Kong Dollars
Effective multiple of 2.6x trailing EBIT
Upside of 50-100% , supported by the dividend
- Value investing is the best means to preserve capital and provide adequate growth over the long
term
o Let thoughtfulness and patience be the driving philosophy
- Q&A
o When it comes to CVS, what is your the appraisal of the current management?
Acquisitions are not likely because they have already bought what they could buy
New systems are going to help the company drive inventory out
Can reduce the number of SKUs and stock outs
o You see out of stock positions at CVS and not at WAG
Very high marks for management
o What do you think of Goldlion’s corporate governance?
China is the wild west
There have never been insider dealings with this company
Has been public for 20 years
The paper trail and history give him comfort
o Inflation calculations have changed over time. Also, what does P/E 100 years ago have to
do with today’s?
There are appropriate changes to CPI that should be made overtime
Doesn’t buy that the high inflation numbers put out by John Williams of
ShadowStats are accurate
The problem with the Shiller P/E chart is that the data on the might not be great
going way back
o Isn’t it true that Goldlion has been leasing a lot over the last few years?
They are not a retailer
Even if you adjust ROC for leases, it is still very high
50% is ridiculous
o Very large ROC even if you incorporate leases
Only own the stock in small funds due to the small float and the inability to
accumulate shares
If you want to invest in China, there are no guarantees
But there is a margin of safety
He is trying to swing for a bigger hit; not just looking for a compounder
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
If you can buy the asset at a large enough discount, you can make money
o For Caremark, are there other headwinds?
Drug prices are going to be transparent
Corporate customers will see the price of drugs
o May demand lower prices
o He has no idea how to handicap that
Caremark had been losing share but the new management team looks set
up for success
o FPA is hedging out industry risk
Thinks they are going to stabilize and gain market share
o Winning lower margin but large accounts
Insurers will be getting into the business
Especially on the specialty pharmacy side
o In terms of rising interest rates, what would be the catalyst?
2 catalysts
If we actually get inflation
o Could be hard to see with high unemployment and low capacity
utilization
o We could also import inflation in commodities
o Bernanke mentioned inflation 86 times in his most recent
presentation and deflation only twice
o One day the inflation will be here without much warning
Lenders goes on a buyer’s strike
o Will lenders want to get paid in the same dollars they are lending
money in?
o Lenders may want a higher rate of interest, even without
inflation
Speaker #6
Morguard has been able to maintain its results in good times and bad
o Can operate better in down markets
Cheap price with a management that knows how to deploy capital
o Question from Peter Brotchie of Union Trust Mortgage Corporation: If they do not spin the
properties off, is there a lot of maintenance CAPEX in the pipeline, based on the age of the
properties?
No, they have a normal CAPEX program and Guy does not expect a large ramp in
CAPEX in the coming years
o How accessible has the management team? Can they be influenced?
Not amenable to activism
Management has been buying back stock at the right times and making deals at the
right price
Has already been selling properties to MRT without pressure
Slowly embarking on this strategy
When you are aligned with good owner-operators, you don’t need to be an activist
o Alex Rubalcava of Rubalcava Capital Management: How did he value the asset management
business? Has the CEO sold or bought shares?
There is no exact science to valuing a business
Pretax income multiplied by 12x
o Did not look that closely at comps because the company is so cheap
CEO has bought shares in 2008 and 2009 in the $30 range
Has never sold a share
Through the company buying back shares and buying shares on his own, he
has taken his stake from 20% to 50%
o How old is the CEO and does he have kids in the business?
Daughter works for the company in the US
He is in his mid-60s
No kid who is an executive or who is highly paid
No evidence of nepotism
o What is the variant perception here? Why is the stock being ignored?
He is not aware of what he is missing
Market is looking at:
Illiquidity- can buy a few millions of dollars in it
Business is a bit obscure
o Owned portfolio dwarfs the numbers of those of the property
management business
Shares a conference call with the REIT—95% of questions go to the REIT
o Very low profile company
Does not need to be promotional
Pays a low dividend
Speaker # 7
If you can’t borrow them (exchange A shares for B shares), just go long the B
shares
This is a good opportunity even if you can short the A shares
- Research the country: Israel
o Often finds very interesting opportunities there
o Israel has a well-managed economy and barely felt the economic crisis
Has the most NASDAQ listed companies and start-up companies outside of the
US
o Shareholder protection and rule of law are present
o Favorable business environment
o Highest rates of entrepreneurship among women
o Higher life expectancy than that of the UK, Germany and US
o Discovered a huge offshore natural gas field
Will wean Israel off of foreign energy sources
o Most well regarded research universities in the world
Speaker # 8:
- D3 Funds
o Concentrated portfolio
o Large block stakes
o Look for undervalued growth micro caps
o Private equity- like model
o Take 10% stakes
o Busted growth companies
o Not activism—constructive engagement
Want to be partners in unlocking value
o Almost all of the money in D3 comes from individuals and families
Have a multiyear lock up but investors stick around after it expires
o Avoid leverage
o Most of his own net worth is in the funds
o During the 12 years beginning in 1999, the firm has compounded after fees at 11.4%
- The macro backdrop matters
o Painful lessons learned in the recent crisis
o Sailed through the 2000-2002 correction
Actually gained over the 3 year period
o The 2008-09 period was payback time
Had to rethink how to preserve capital
Cheap stocks got cheaper
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
- RadiSys (RSYS)
o Leading provider of hardware and software embedded computing systems for next
generation IP networks that enable telecom, medical and military/aerospace customers
o A game changing acquisition and
management change happened
today
Acquired Continuous
Computing for $105M
Current CEO will become
Vice Chairman of
combined board
Acquired CEO will be
combined CEO
Opportunity to reduce
customer concentration
and to improve margins as the acquired company has much higher margins
o Priorities
Succession planning
Rational, analytical and outward looking process for capital allocation
Cost reduction
Focus on operations
- Q&A
o What is the preferred way of aligning management and shareholder interests?
Good idea to ask people what incentives light up the scoreboard for them
No one size fits all
All companies and people are different
Start with the people on the compensation committee to have one-on-one
discussions about how to motivate people
Agnostic about the mix
But it has to be linked to performance
o Growth in EPS and total shareholder return
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Speaker #9
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Day #2
Speaker #1
Speaker #2
On Values…
Claude Leveille- Courant Investment Management
He thinks about bringing on new partners like Buffett thinks about issuing
Berkshire stock
Better to not dilute the quality of the current group
BP plc (BP) was an early test
Thought it was a great investment after the oil spill
Was initially worried about the liberal bend of his partners
o Thought they might not like to see that he was investing in BP
He then invested 10% of the partnerships in BP stock
His investors then wanted to by BP shares themselves when they found
out he was buying
o Thinking rationally in investing
Favorite biases
Wishful thinking
Confirmation bias
Herd instinct
Self-serving bias
Incentive-cause bias
Over-influence of authority
- Investment process
o Pay a lot of attention to the price paid
o Stay within a circle of competence
o Eliminate a lot of stock right off the bat if:
The business is not understandable
There is no rule of law in the geography
Economics are driven by commodity prices
The company operates in a technological area in which the rate of change is very
high
o Winnow down the portfolio to about 10-12 stocks
o Analyze the business and not the stock
Doesn’t worry about P/E ratio or 52 week high/low
o Look for critical issues that will drive yes/no for the investment decision
Time is a constraint
o Use a checklist to make sure he doesn’t miss anything
Questions
Does he understand the business?
Is there a solid moat?
Does management control the economics?
How long is the history of the economics and the current ROE?
- Track record
o Has compounded at 7.4% since 2001
o Was only down 9% in 2008 when the S&P was down 37%
What was he doing before the crisis?
Sitting on his hands
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
o US Treasuries
o Gold
Very weary on inflation but believes gold is a red herring
o Euro
People are going for slightly more yield standing and risking that a number of
countries could try to leave the euro
Purchasing power parity (PPP) with the dollar is about 1.10 and is trading at
about 1.43
- What is he buying
o South Korean equities
A few sound companies with high ROEs, families as majority the majority
shareholder, and long term shareholders
Average valuation and returns
1x TBV, 6-7x EPS, 15%+ ROE
Food products and retail
Thinks that the won is discounted 25% based on PPP
Thinks the country represents a phenomenal story
15%-20% of his portfolio is in South Korean equities
o Bermuda P&C insures
P&C market is very soft
Is buying these companies at $.65 on the dollar
Looks at it them like corporate bonds
o US large cap stocks
He likes healthcare companies specifically
Companies that have amazing franchises and high ROE selling are at 9-
11x earnings
These businesses are not going anywhere
These low multiples haven’t been seen 10 or 15+ years
Intends to hold the shares for a long time
o Is still keeping about 25% in cash
Wants to be able to respond to new opportunities
- Q&A
o He says his core skill set is protecting capital. But yet, he investing in BP. Is he
overstating how much he is a value investor?
Referring to the BP investment ---which does not look like its fits his investment
strategy—he thought the market had overreacted
It is important to protect capital in bad years
There is a huge difference between multiplying by zero and protecting wealth
Thinks he can protect capital and generate high returns
The idea that higher risk leads to higher returns is insane
He likes defensible businesses that he can get at a great price
o What is he doing to protect against inflation?
It is very difficult to protect against inflation
He is buying really good businesses with high ROEs
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Speaker #3
US Treasury has put in $155B into the firms and now have a senior
preferred that pays a 10% dividend
Community banks were huge holders of the preferreds
$2.6B of preferreds issued in 2008 did not even pay a dividend before
97% of value was wiped out
Regulators actually encouraged banks to buy these preferreds to protect
against losses
o Were considered part of core capital
The preferred market was the last bastion of capital for banks and after the
conservatorship, the entire preferred market fell apart
o Misconceptions about the GSEs
They must be abolished
Full nationalization or privatization are the only answers
They are black holes
They caused the financial crisis
They cannot be fixed
GSEs are generating record net interest margins
10% dividend on government preferred is unduly punitive
o TARP banks only paid 5%
o Thinks that if the GSEs were 100% privatized, rates would go up so much that the
housing market would be destroyed
But $6 trillion would be added to national debt if they got 100% nationalized
So, we are basically stuck
o Investment thesis
A public-private compromise is necessary
The GSEs can recapitalize themselves over time
A privatized structure with a reinsurance program structured behind private
capital is an attractive option
Treasury is leaning towards a modified status quo
o What has the Treasury been discussing and doing?
Reducing the market share to 40% in 5-7 years
Raising prices on GSE guarantees
If they do not take extreme actions, the optionality in the preferreds remains and
extends out to perpetuity
The government preferred is preventing the company from recapitalization
All are reportable losses are from the government dividend
They are drawing down more money from the Treasury to pay the
dividend on the preferred
o That is just crazy
o Are they well enough reserved?
Net charge offs have been less than their provisions
Total realized losses are less than their reserves
FHFA estimates of how much loss the GSEs would require—how much they
would draw down from the Treasury— have been much higher than actual losses
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
o Suggested recap #1
Cut senior preferred dividend to 5%
Restore publicly traded preferred dividend
Would cost less than $3B per year combined
Would reopen the doors to letting the public markets back in
Would restore the capital in regional banks
Where could the preferreds trade?
o If they traded at a 10% yield, the preferreds could trade 80-90
cents
o Suggested recap #2
Equitize the senior preferred and publicly traded preferreds as pari passu
obligations
Where could these trade in this scenario?
Base case 1: all serious delinquencies default
Base case 2: based on cumulative default curves provided by the
companies
Bad case: All high LTV loans default
o Only case in which they are not adequately reserved
What could Akanthos make?
Assuming 40-50% market share
Not expected to pay net income taxes for a long time
Earnings power:
o Fannie: about $15B per year
o Freddie: about $13B per year
If you add 8-10x multiples
90% to 160% upside
o Risks
Political
Principle reduction
Nationalization
Forced wind down
Market
Decline in housing prices
Interest rate or credit shock
Idiosyncratic risks
Accounting risks
Derivative mis-hedging
o Summary
Extreme solutions of 100% nationalization or privatization are not likely
Modified status quo and a regulated public/private model is the best solution
A recapitalized, tightly run Fannie and Freddie could become very profitable
- Q&A
o What CUSIP are they advocating?
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Nobody likes TARP banks and hedge funds and thus they received less
favorable treatment
The government would not and could hurt the mom and pop retail
investors on GM debt
Thinks a similar situation could play out here as some major holders of
GSE preferreds are community banks
o Can you share other themes they are investing based on?
The inflation issue worries him quite a bit
Thinks in option-like payoffs
o Gold, farmland and real estate have already left the station
He doesn’t even know how to value gold
These assets are already full priced
The Hong Kong dollar is the only fully convertible and liquid currency that is
hard pegged to the dollar
His suggestion is to open up an account at an HSBC bank and buy Hong
Kong dollars
You can earn zero here or zero there—so you might as well hold Hong
Kong dollars
o Hong Kong and China have major asset inflation and they are
letting Bernanke run their momentary policy
As such, they are likely to de-peg and the Honk Kong
dollars could really appreciate
This is a very asymmetric bet
o Could the GSE equity sliver be worth anything?
In a rosy scenario is yes
But remember how much capital is on top of that equity
Combined market cap right now is around $8B
Total value of preferred right now are only $2B
o Even though they are higher up in the capital structure
Would be short the equity versus the preferreds
Does not make any sense
Speaker #4
- The firm is made of stock pickers and has $1.3B under management
- Almost everybody in the research department is partner in the firm
- Has had low correlation with other hedge funds
- Are always looking for value with optionality
- How did they start investing globally?
o Started investing globally in 2002
o Investment management industry was moving in this direction
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
o The slides mentioned that the firm owns shares of Sanofi Aventis (SNY), is that really a
great company? Also, headlines say that Coal India is raising prices to pay higher wages.
What do they think of that?
Sanofi has a significant position in the industry and he thinks there is a lot of
value there
Market is overlooking long term earnings power just because of a few
down years
Has more recurring revenue than other pharma companies
o Trading at 7-8x earnings despite that
It is true that Coal India has been paying higher wages
However, with the company’s low cost coal, there is some room there for
higher wages
o Coal India has had a number of negative headlines? What do you make of those?
All expansion plans were halted right after the IPO by an environmental regulator
In general, they do not think that the government and regulators could
stop expansion because India has a power shortage
If they shut down India Coal’s expansion then India would have to
import expensive coal
Big wage hikes come with high price hikes
o Do they look at relative valuations between Brazilian drug store companies?
They think the one they own can grow the store base faster
They don’t look at relative valuations although they thought it was cheaper than
the competitors
o How do they get comfortable investing all over emerging markets, especially off the
beaten path ones?
Some people used to shut down when they heard that investment managers
wanted to invest in Vietnam
Were lucky to start investing when valuations were very low
Have developed a competence little by little since then
Got comfortable slowly and carefully