Sunday, 30 August 2015
Last updated 1 day ago
Apr 10 2014 | 9:48am ET
Christopher Tsai, son of the late financier and philanthropist Gerald Tsai, the man who pioneered the performance fund, has finance in his blood—and not just through his famous father. Tsai says his financial acumen may actually have been inherited from his paternal grandmother, an investor in her own right.
The Tsai Capital founder, whose $28 million long/short hedge fund is up 29% since inception in 2011, spoke to FINalternatives senior reporter Mary Campbell recently about his fund, his outlook on emerging markets and the influence his family has had on his investment approach.
You began investing at a very young age?
I actually have an old photo of me sitting at a desk when I was 11 years old and 11 was when I began to really look at companies and I made my first investment around then. I subscribed to Value Line very early on, right from the beginning, and I don't think I've missed an issue since.
You came to the finance world naturally, it runs in your family does it not?
I grew up in a family that had a long history in finance...[M]y father's career is well-known, but even before my father's time, my grandmother, Ruth Tsai, was involved in finance. She was actually the only woman on the Shanghai Stock Exchange during World War II to trade bonds and stocks and commodities including gold...It was exceedingly rare, not only because women back then had very little involvement with financial matters in general but this was during WWII when many people shied away from those types of activities because they were preoccupied with other matters.
Did your grandmother have any influence on your own approach to investment?
Indirectly. She was extremely influential to my father in his career, in his way of thinking...and my father was influential to me.
My grandmother had some advice for my father and he took it very much to heart. In the realm of finance, my grandmother had an expression... 'When the tide goes out, a small boat and a large cruise ship get taken out with it.' And by that she meant, when the market goes down, it doesn't matter what you own, all stocks go down. We can debate the exceptions but I think her general thesis was sound. And my father took that very much to heart in the way he looked at investments and he consequently placed a very strong emphasis on capital preservation and the protection of capital in down markets. That is something that we take very seriously at Tsai Capital and that is something that I learned from my father at a very early age.
And did your father offer you any advice?
My father and I went on a fishing trip once and I remember casting into the wind and my father said, 'You can't do that, you have to position yourself with the wind at your back' and in finance that's very much true because in today's world in particular, when you have so much money being printed by the federal reserve, many short sellers have found it exceedingly difficult to make money, in fact most have lost it on the short side. So when we launched the fund, we said from the beginning that we were going to take a directional approach to our short book and that approach is very much rooted in what I learned early on in my investing career.
What does your short book look like at the moment?
We only have one short position on right now...We've purposefully limited the short book since we've launched and today that one short position is an ETF, ...we're short the emerging markets through an ETF...Most of our portfolio...on the long book is comprised of multinational-based companies with significant exposure to emerging markets, so we find the emerging market ETF to be a natural hedge for us. Moreover, we see some areas of concern within emerging markets as a whole, so we wanted to position ourselves to take advantage of what we think will be further weakness in emerging market stocks in general.
What are some of your concerns about emerging markets?
We're seeing slowing growth in emerging market economies and that's despite positive growth from the United States and Europe which, of course, feeds into the performance of emerging markets—by performance I mean the revenue growth of the underlying companies. We're also seeing a rise in the yield of U.S. dollar-denominated emerging market high-yield corporate bonds and also local currency government bonds and if the yields continue to rise, we could wind up with a new growth relapse. And in fact, a potential to enter another growth recession is very much in the cards in our opinion.
Lastly,...emerging market private sector external debt is very high. This is debt from foreigners in foreign currency. It's about 20% today as a percentage of GDP and that is at the same level as 1997 at the onset of the Asian financial crisis. So we're seeing a number of red flags with respect to emerging markets.
When you launched the hedge fund you said the focus on the long side would be undervalued growth companies, multinational in nature, with exposure to emerging markets. Has that changed?
Not at all. While we’re cautious about emerging markets at the moment, long-term investors like Tsai Capital should have significant exposure to emerging markets. That’s where the growth will be. So the focus of our long book has not changed. We run a more concentrated book than a number of fund managers out there. We believe in concentration as opposed to broad diversification...We believe in putting our assets and client assets in our best ideas. So, we would like to hold a portfolio of between 10 and 15 companies on the long side.
Do you invest according to any overarching themes?
Long-term themes are very much a part of how we look for investments...One theme that really hits us on the head is the growth of the middle class population...We're talking about emerging markets again, but particularly in Asia. The OECD came out with some projections a few years ago, the Asian middle class is expected to rise in population from 525 million in 2009 to 3.3 billion in 2030 and even more striking is that the Asian middle class spending power will increase more than six times, from $5 trillion in 2009 to $33 trillion in 2030. So that's a tremendous amount of spending power. China's going to be at the center of that change but other economies like Indonesia and Malaysia and Vietnam are also going to play a meaningful role.
So we're trying to think about what types of businesses will really benefit from that sea change. And clearly not everybody is going to be able to afford a new car but a lot of people don't use great toothpaste today—local brands, for example, are often not of very good quality and people often don't use detergent in their daily activities, so we want to look at companies that have the distribution, the local knowhow, the brand recognition to really penetrate the increasing purchasing power within that region.
What differentiates Tsai Capital from other long/short funds?
Our short book is...directional and we really differ from most long/short managers in that approach. We've not had the drawdown on the short book as a lot of managers have had and when we do go into a bear market...we intend to use indexes to hedge out the long book without really selling out of those core positions because unlike a lot of managers, we truly take a long-term approach to our core holdings. We don't just want to sell out of them because we think we're moving into a bear market—we'd rather hedge that book with index shorts and that becomes an extremely tax-efficient way to manage the fund.
Our time to shine, I believe, will really come when we have a bear market...
May 27 2015 | 2:15pm ET
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