Hedge fund wisdom, cut to the bone

November 1, 2013 7:20 pm

Hedge fund wisdom, cut to the bone

By Merryn Somerset Webb

Successful hedgies share top tips in the name of philanthropy

Iflew from Scotland to London with my children on Thursday. Everyone was in a remarkably good mood – possibly because they were either flying on or working for British Airways rather than Ryanair – and the captain asked us in to see the flight deck. It went well. No one pressed any buttons they weren’t supposed to and everyone was polite to the pilots. But I was not altogether thrilled to be reminded just how complicated a cockpit is – so many buttons, so much risk.Thank goodness, I thought to myself, that I work in a relatively simple business. Then I dropped the children off and went to the Sohn Conference, where I was reminded why so many people think finance is more complicated than flying a plane.

The Sohn is an annual event, once US-only but now in the UK, at which the super well paid of the UK get to show their compassionate side. The conference is designed to raise money for the treatment and cure of paediatric cancer. The tickets cost £1,000 each and everyone who’s anyone in hedge fund land straps on their most expensive status symbol – a ludicrous luxury watch in most cases, an “I’ve visited the flight deck” sticker in mine – and heads off to be seen.

The lure, as you might guess is not the charity itself, but the fact that over the afternoon a series of well known and particularly successful fund managers take to the podium to tell you which stocks they love and which they hate. Much of it was complicated and one or two of the interesting ideas might not work for ordinary investors. But here is a few of the simple and interesting ones.

First, Julian Sinclair of Talisman Global Asset Management, who like most of the managers was advertised as a contrarian investor, a man who “can see through the emotional noise to the value”. He tipped Tata Motors on the basis that some 80 per cent of its value is made up of Jaguar Land Rover. He figures the brand value of that business alone is $17bn – not much less than the entire market cap of Tata. Look at it like that and the current price gives you the luxury car business very cheaply, particularly given that there is scope for profit margin expansion and that the firm is just coming to the end of an expensive cycle of investment – so its cash flow should now improve dramatically. In effect you get the Indian commercial vehicle business that makes up the rest of the firm for free, which sounds nice.

Also telling a simple story was Chris Hohn. If you have read anything about the head of the sweetly named Children’s Investment Fund you will know that he is now the largest investor in the Royal Mail apart from the UK government. That was a good call (for him if not the taxpayer) – the shares are up around 60 per cent or more since the initial public offering. Mr Hohn loves privatisations. “Governments are just about the worst owners of companies you can find,” he reminded us. When companies move into private hands they “always transform” and offer their investors “huge financial upside”. So he tipped Australian railway company Aurizon. He got the largest allocation of stock in this from the state when it was sold off in 2010 and it “continues transformation” thanks to contract repricing, the “releveraging of the company” and the “voluntary and involuntary” departure of thousands of employees. We are to think of it as a cheap infrastructure play in the “early stages of a massive turnaround”. Mr Hohn also tipped EADS, maker of Airbus airliners. It is also recently privatised, is cheap and has huge potential in a duopoly business with firm barriers to entry.

Other convincing tips from speakers included credit rating company Experian (strong growth, a beneficiary of “big data” and again a business with almost insurmountable barriers to entry); Sampo, owner of 21 per cent of Nordea, the leading Scandinavian banking franchise; and one of my favourites, oil distribution services group DCC, which is successfully consolidating a fragmented industry with lots of acquisitions.

However, I know that some of you like to buy markets and not individual stocks. Good news then, in that I think the most gripping talk of the day came from Andrew Weiss of Weiss Asset Management. He told us to buy Korea. You have heard this before – David Stevenson wrote about it in Adventurous Investor in May – but to reappraise: amazing infrastructure, fantastic education system and lots of potential cheap labour from enterprise zones bordering North Korea.

Of course, rapid economic growth is entirely irrelevant to stock market returns: high levels of investment and low levels of regard for shareholders mean that high growth economies almost always have low growth stock markets. So what might make Korea different? First it is not starting from too high a price; second, much of the investment is done; and third, there are huge changes to corporate governance under way. These days, corrupt corporate heads actually go to jail and if regulations on the way through now pass, South Korea will soon have the “best shareholder rights in the world”. There is also a huge wave of money on its way in from the national pension service, and nothing moves a market like money.

You can buy into this story in a complicated way – getting what Weiss calls a “double discount” by picking up ultra-cheap preference shares (Hyundai’s are trading on a p/e of 3.1 times) – or a potentially less lucrative but more simple way with a Korean exchange traded fund but, either way, it is worth considering. I’ll be acting on some of the tips from the conference myself in the next few weeks but if you want an even simpler takeaway from the Sohn conference it is this: register to become a bone marrow donor. Slipped into the programme, before the audience had time to head for the door with their BlackBerrys, was a short talk explaining that it does not take that long, will not hurt that much if you turn out to be a match for someone and will show your compassionate side even more than paying £1,000 to attend a conference.