Graham & Doddsville...Alex Sacerdote is the founder and portfolio manager of Whale Rock Capital...

Rolf Heitmeyer

Fall 2015Issue XXV

Jane Siebels,CEO of SiebelsAssetManagement

(Continued on page 34)

Editors:

Brendan DawsonMBA 2016

Scott DeBenedettMBA 2016

Anthony PhilippMBA 2016

Brandon CheongMBA 2017

Eric Laidlow, CFAMBA 2017

Benjamin OstrowMBA 2017

Inside this issue:

Omaha Dinner P. 3

Alex Sacerdote P. 6

Columbia IICMeeting Ideas P. 16

Ed Bosek P. 22

Jane Siebels P. 34

Global Endow-ment Management P. 38

Visit us at:www.grahamanddodd.comwww.csima.info

Graham & DoddsvilleAn investment newsletter from the students of Columbia Business School

Alex Sacerdote of Whale Rock Capital

Global EndowmentManagement (GEM)was founded in 2007and manages $7 billionfor clients includingendowments,

foundations, and other institutional investors. Hugh Wrigley is a co-founder of GEM.Previously, he served as Head of the Private Investments Group at DUMAC and as


Hugh Wrigley

GlobalEndowmentManagement

Alex Sacerdote is the founder and portfolio manager of WhaleRock Capital Management, a $1 billion global long/short equitymanager focused on the technology, media and telecom (TMT)sectors. Prior to founding Whale Rock, Mr. Sacerdote was ananalyst and sector portfolio manager at Fidelity Investments.He began his career in Smith Barney’s TMT investmentbanking group, and also served as VP of Finance at InteractiveImaginations, an internet advertising start up. Alex received hisMBA from Harvard and earned his BA from Hamilton College.Alex currently serves on the Board of Trustees of Hamilton


Alex Sacerdote

Ed Bosek ofBeaconLight

Jane Siebelsof Siebels

AssetManagement

Research

Jane Siebels

James Ferguson Andrew Burns

Ed Bosek is thefounder and managingpartner ofBeaconLight Capital,a $250 million globallong/short equityfund. Before foundingBeaconLight, Ed wasa partner at Atticus


Ed Bosek

Welcome to Graham & Doddsville

(AAPL), Amazon (AMZN), EllieMae (ELLI), and NetEase(NTES). If readers are interest-ed in hearing more of Alex’sviews and perspectives, he willbe presenting at the BostonInvestment Conference onThursday, November 12.

Ed Bosek of BeaconLight Cap-ital shares his perspectives onvariant perception throughidentifying Fundamental, Mean-ingful, and Different (FMD)ideas. Ed discusses his global,generalist strategy, which al-lows his team to identify differ-entiated opportunities to gen-erate alpha on long and shortpositions, and walks throughcurrent ideas including DaqinRailway (601006) in China andBuilders FirstSource (BLDR)in the U.S.

Jane Siebels of Siebels AssetManagement Research discuss-es her unique exposure tocommodities from an early ageand focus on opportunity funds.Jane shares some thoughts onthe outlook for commoditiesand emerging markets, and alsoexplains her open outsourcedresearch platform, anotherhallmark in her attempt to dothings differently.

Hugh Wrigley, James Fer-guson, and Andrew Burnsfrom Global Endowment Man-agement discuss compensationin the investment industry, theimportance of being able toinvest in smaller spaces, andthe risks inherent in transition-ing from analysis to manage-ment.

Lastly, we continue to bringyou pitches from current stu-dents at CBS. CSIMA’s Invest-ment Ideas Club provides CBSstudents the opportunity topractice crafting and deliveringinvestment pitches. In this is-sue, we feature three ideasfrom our classmates NielsenFields ‘17, Justin Hong ‘17, andAlexander Levy ‘17: a specialsituation based paired tradeincorporating a long position inRentech Nitrogen Partners LPand a short position in CVRPartners (RNF, UAN), longTenneco (TEN), and short LasVegas Sands (LVS).

As always, we thank ourinterviewees for contributingtheir time and insights not onlyto us, but to the investmentcommunity as a whole, and wethank you for reading.

- G&Dsville Editors

We are pleased to bring you the25th edition of Graham &Doddsville. This student-led in-vestment publication of Colum-bia Business School (CBS) is co-sponsored by the HeilbrunnCenter for Graham & DoddInvesting and the Columbia Stu-dent Investment ManagementAssociation (CSIMA).

Since our Spring 2015 issue, theHeilbrunn Center hosted thesixth annual “From Graham toBuffett and Beyond” OmahaDinner. This event is held on theeve of the Berkshire HathawayShareholders’ meeting and fea-tures a panel of renownedspeakers.

In this issue, we were fortunateto speak with six investors fromfour firms who provide a rangeof different perspectives andinvestment approaches.

Alex Sacerdote of WhaleRock Capital discusses hisunique approach to technologyfocused investing. His S-curveand competitive advantageframeworks allow for the identi-fication of companies with thepotential to exponentially in-crease their earnings power. Healso shares a number of compel-ling ideas, including Apple

Meredith Trivedi, theHeilbrunn Center Director.Meredith skillfully leads theCenter, cultivating strongrelationships with some ofthe world’s most experi-enced value investors, andcreating numerous learningopportunities for studentsinterested in value invest-ing. The classes sponsoredby the Heilbrunn Centerare among the most heavilydemanded and highly ratedclasses at Columbia Busi-ness School.

Meredith Trivedi with Professor BruceGreenwald at the Value Investing

Program Welcome Reception

Mario Gabelli ’67 shares hisexperiences as a panelist at the May 2015

Omaha Dinner

Professor Bruce Greenwald,the Faculty Co-Director ofthe Heilbrunn Center. TheCenter sponsors the ValueInvesting Program, a rigor-ous academic curriculum forparticularly committed stu-dents that is taught by someof the industry’s best practi-tioners.

Volume I, Issue 2 Page 3

“From Graham to Buffett and Beyond” Omaha Dinner 2015

Panelist Bill Ackman shares his views at the OmahaDinner

Mario Gabelli ’67, Bill Ackman, Tom Russo, and TanoSantos speak on the Omaha Dinner Panel

Board of Overseer Member and Pershing Square CapitalPartner Paul Hilal ’92

Budge & Carol Collins. Budge serves on the HeilbrunnCenter Advisory Board

Former Heilbrunn Center Director and current SpecialIndustry Advisor Louisa Schneider ’06 & Mario Gabelli ’67

Columbia Business School Events:Pershing Square Challenge and Value Investing Program Welcome Reception

Pershing Square Challenge finalists pitch their stock tothe panel of judges

Michael Herman ’16, Bill Ackman, and Damian Creber’16 after the Pershing Square Challenge presentations

Bruce Greenwald speaks with students and alumni at theValue Investing Program Welcome Reception

Students mingle at the Value Investing ProgramWelcome Reception

Pershing Square Challenge judges listen intently to CBSstudent pitches

Volume I, Issue 2 Page 5

A full-day event featuring some of the most well-knowninvestors in the industry, presented by:

The Columbia Student Investment Management Associationand

The Heilbrunn Center for Graham & Dodd Investing

Visit our website for updates: http://www.csima.info

For inquiries contact:Alex Carrington [email protected] Klein [email protected] Lin [email protected]

SAVE THE DATE

19th Annual Columbia Student InvestmentManagement Association Conference

January 29, 2016

some cases they knew as muchor more than even themanagement teams. If you arereally intellectually curious andyou want to spend 90% ofyour time critically thinking,the buyside is where you wantto be.

At the same time, the internetrevolution was just beginning. Idecided to work for aninternet advertising start up inNew York City in 1997 beforegoing to business school. Thecompany, InteractiveImaginations, actuallypioneered the concept of thead network. It gave me adeeper understanding ofinternet based businesses, andthere were a handful of otherpublicly traded internetcompanies like AOL andYahoo that I carefully followedand invested in on my own.

So at business school Itargeted buyside opportunitiesand secured a summerinternship at Fidelity. I wasvery fortunate because Fidelityprovides their interns with atremendous amount ofresponsibility. They said to me,“There is this new thing calledthe Internet. You knowsomething about this. Whydon't you cover e-commercefor the summer?” I was inheaven. I travelled the countryvisiting the roughly teninternet companies that werepublic at the time and met theCEOs and founders. I was ableto attend Amazon’s firstinvestor day and had lunchwith Jeff Bezos. He had thesame laugh back then too! Bymeeting with the companiesand studying them carefully, Icame to the conclusion thatAmazon was going to run thetables and win in e-commercein a big way, and it was only a

matter of time before theyexpanded beyond books.

At the time Amazon was veryout of favor, and I made a 25page presentation to the entireequity department advocatingthat Fidelity buy shares inAmazon. I think half theinvestment team thought I wascrazy because of the highvaluation and losses, but somepeople must have liked theanalysis because I got the jobat Fidelity, and that's how I gotinto the business.

I spent the next six years thereas an analyst and sectorportfolio manager primarilyfocused on technology. It couldnot have been a better trainingground. First, there were somany great investors to engagewith and observe: Danoff,Wymer, Tillinghast with hisunique brand of value, andMyers, who actually started inmy intern class back in 1999. Itwas a very individualistic placewith so many different stylesand processes. I also got somenice time with Peter Lynchwho loved to mentor youngeranalysts. His temperament,curiosity, and love of the craftwere amazing. I've read hisbook several times. You alsoget great exposure tomanagement teams and achance to really master yourindustry and the confidencethat comes with that. Finally,you get the chance to runmoney pretty early on to honeyour skills and investmentstyle.

Ultimately, I decided to go outon my own. Fidelity was reallyabout running large pools ofcapital diversified acrossindustries, and I viewed myselfas a tech specialist. In thetechnology sector, it’s


College and Shady HillSchool, and is active ontheir investmentcommittees.

Graham & Doddsville(G&D): Can you discuss yourbackground and your path toinvesting?

Alex Sacerdote (AS): I’vebeen interested in the stockmarket from an early age. Inthe early ‘80s, my fatherbought each of me and my twosiblings a share of Apple and Iwatched it incessantly and wasdelighted when it split threefor one. Although I was tooyoung to understand that I hadnot tripled my money. In thesecond grade I distinctlyremember doing a report onthe stock market with crudestock charts.

Out of college, I started out asan investment banker in theTech, Media, and TelecomGroup at Smith Barney. It wasa boot camp-like experience inwhich I really learned themechanics of finance. We wereactive with M&A deals, IPOs,and high yield offerings acrossa range of subsectors frommedia, software, and wirelessto semis, so it was greatexposure.

But my initial interactions withbuyside investors led me tobelieve that was the place forme. During our roadshows forIPOs and high yield offerings,we brought our managementteams to a number of buysideinstitutions. The buysideanalysts across the table at thebig firms like Fidelity wereroughly my age, but they weremuch more knowledgeableabout the industry, eventhough I had been working onthe deal for three months. In

Alex Sacerdote(Continued from page 1)

Alex Sacerdote

wealth creation in the internetsector over the past 20 years.By some measures, it is $2trillion in wealth. Astechnology goes deeper anddeeper into society andspreads around the globe,there is a chance this wealthcreation accelerates. I had theopportunity to watch some ofthis play out over the past fewdecades. I started to realizethat there are three commoncharacteristics of great winning

technology stocks thatproduced this wealth.

The first characteristic relatesto the S-curve of technologyadoption. All technologyadoption starts very slowly. Itcan be held back for a varietyof reasons: high price, complexproducts, lack of an ecosystem.At some point, these barriers

are removed, and thetechnology moves on the S-curve from the early adopterphase into the majority phase.At that point a massive waveof demand kicks in, and youcan see three to four years ofincredible unit growth.

Everybody says tech is sounpredictable, but if youunderstand the way S-curveswork, it actually can be quitepredictable during certain timeperiods. You are able tounderstand how fast unitsmight grow over a three tofive year period. In analyzingthe S-curve, it’s important toassess both the slope of thecurve as well as the height ofthe curve.

One example of an S-curvewas flat panel TVs. Flat panelTVs came out in 2000, but theproducts were very expensiveand there was no HD content.However, by 2005, the price ofa 40 inch flat panel TV fell to$1,500. Monday Night Footballand other high quality HDprogramming was available onTVs and the demand justexploded.

We went from 2 million unitsto 50 million units in a fouryear period. It was clear thatonce flat panel TVs hit themainstream, you were going toget this incredible unit growththat you just don't get in anyother part of the economy.

The most famous recent S-curve is the smartphoneadoption cycle. Smartphoneswere actually out in the 1990s,but they were clunky, internetaccess was unreliable andthere were no real apps or anyfeatures we commonlyassociate with smartphonestoday. Apple changed that and


important to be a specialist.The long/short format is greatfor TMT because there arealways winners and losers, andthe ability to short can dampeninherent volatility.

But throughout all theseexperiences and from an earlyage, my father was clearly thebiggest influence on me. Hewas a great role model both asan investor and a human being.He had a wonderful career infinance at Goldman Sachs ashead of Corporate Finance andthen Chairman of the PrivateEquity group. He representedthe old guard. He was a truegentlemen and was known forhis keen intellect, leadership,and mentoring. Not manybankers are known as greatinvestors, but he certainly was.He chaired the credit andinvestment committees therefor more than two decadesand kept them out of a lot oftrouble. He was an electricalengineer from Cornell and wassmart as a whip and couldinstantly get to the heart ofany issue, but he alwaysexhibited humility andgraciousness. The best thingabout my father was that hewas such a great mentor to somany and when he passedaway in 2011, I receivedcountless letters and storiesabout this.

G&D: Identifying S-curves isan important part of yourprocess. Can you talk aboutthat?

AS: It can be tricky to investin the tech sector. There isconstant change, brutalcompetition, price deflationand often high and “bubble"like valuations. At the sametime, it’s clear that there hasbeen massive, large scale

Alex Sacerdote

“It can be tricky to

invest in the tech

sector. There is

constant change,

brutal competition,

price deflation and

often high and

“bubble" like

valuations. At the

same time, it’s clear

that there has been

massive, large scale

wealth creation in the

internet sector over

the past 20 years. ”

might exhibit really strongcompetitive advantages.

G&D: Is it hard to assesscompetitive advantage duringrapid growth? The rapidgrowth may obscure what willeventually be fiercecompetition.

AS: Growth investors willoccasionally find an attractive S-curve, but the important piecereally is competitive advantageand operational abilities.Finding that competitiveadvantage, understanding it,appreciating it before otherpeople, and developing a morein-depth understanding of itsstrength are really important

to us. Just about every e-commerce company Ievaluated in the Fidelity reportin the late 1990s is gone,except for Amazon. Insmartphones, Apple createdhalf a trillion dollars in wealth

but HTC, RIM, Nokia,Motorola, and LG destroyedvalue. Several went bankruptand didn't make a dime out ofthe smartphone S-curve.

Investors have occasionallygrown skeptical of Google’scompetitive advantage. Duringour research of Googleroughly five years ago, we metwith Microsoft's head ofsearch. Despite Microsoftmaking a huge push, it wasclear that even Microsoft’ssearch team realized thetremendous uphill battle theywere fighting. We developed anew appreciation for Googlegiven that Microsoft, one ofthe most valuable companies inthe world, could notsuccessfully enter the market.

We're constantly looking forsimilar stories to illustratecompetitive strengths.Microsoft invested severalbillion dollars for multipleyears to take share in search,and they have 15-20% of theUS desktop search market.Google has 60-70% in the USand 80-90% share in mostother geographies around theworld.

We think they can sustain thisadvantage because of theirmassive scale, significant R&Dbudget, and so many otherpieces throughout the saleschannel. Their ability to addadjacent markets on top ofsearch with Android givesthem a further advantage.

G&D: The last characteristicyou evaluate is valuation?

AS: Right, we don't just investblindly when we think we havefound a winner. We need tosee long term under-appreciated earnings power.


you went from one percentpenetration to 50% in a fiveyear period. This became abillion unit market and this iswell known now but at thattime you’d be shocked at howfew people truly grasped this.

Understanding where atechnology sits along the S-curve and if you are nearingthat inflection point ispowerful. The inflection pointnot only creates incredible unitgrowth, but it also reduces riskbecause one of the biggestdrivers of tech companyfailures is faltering demand ordemand well belowexpectations. It’s very hard forthat to happen in the middle ofan inflection point on the S-curve.

Sometimes understanding the S-curve can help you time yourexit as well. When adoptiongets close to 50%, growth canrapidly decelerate.

G&D: You have importantparts of your process beyondthe S-curve. Do you want toexpand on those?

AS: When we find anattractive S-curve, the nextthing we do is search forcompanies benefiting from theS-curve that have strongcompetitive advantages. Techcan be brutally competitive,but, occasionally, a companycan emerge with a nearmonopoly. There are manysubtle factors withintechnology ecosystems thatcreate powerful competitiveadvantages. On the internetit’s about network effects, insoftware it’s about coalescingaround standards like PCoperating systems. So wespend time assessingcompanies within S-curves that

“When you have an S-

curve in combination

with a really strong

competitive

advantage, the

earnings can grow

exponentially...Apple's

earnings per share

went from $0.50 to $9,

Priceline’s earnings

went from $2 to $40,

and Tencent’s went

from $0.12 to $2.58.”

Alex Sacerdote

Former CSIMA Co-President Brian Water-house and current CSIMACo-President DamianCreber ‘16 discuss invest-ments with H. Kevin Byun’07 of Denali Investors

100% penetration amongrecruiters at early adopterslike Microsoft and Google. Andyet most Fortune 500companies were just beginningto adopt it. Our research alsosuggested that they would havepricing power.

We also spent time assessingLinkedIn’s market penetration,which can be a challengingstatistic to calculate. We askedquestions like what is annualemployee turnover, how manybusinesses are there of variousheadcount sizes, whatindustries have a lot ofturnover that are more whitecollar oriented. We came torealize that LinkedIn wasmaybe 3% to 4% penetrated,but it was definitely hitting themainstream.

We determined that there wasprobably $8 per share inearnings power. At the timemany people said, “I likeLinkedIn, but it's soexpensive.” For us, it was abargain. Our price target wasalmost 2.5x what the stockwas trading for based on a 30xmultiple of our $8 estimate ofearnings power. There are alot of reasons we thought itwould still trade at 30x eventhree or four years outbecause if you look at othersubscription or informationdatabase businesses likeFactset or CoStar, they stillhave very high multiples, evenwith low single digit revenuegrowth rates.

G&D: Can you discuss yourdecision making process toexit?

AS: Sometimes share pricesreflect the potential futurescenarios we are envisioningfor a company. The rest of the

world catches onto the storyand it is no longer under-appreciated based on longterm earnings power. Thishappened with LNKD andwithin a year and a half it hitour target. Also, the companylaunched a few new productsthat didn’t receive significantadoption. That, combined withthe rapid share priceappreciation caused us to bemore cautious on our outlook.Another good example isApple (AAPL). We have beenbig Apple bulls for a longperiod of time. In 2012, USsmartphone penetration hit50%. The 50% level starts tomake us nervous. Adoptionwill begin slowing down. Applealso had started to lose sharein 2012. We were hopingAndroid would fragment whichwould hurt the Androidecosystem, but by 2012, it wasclear that Android was here tostay. The idea that Apple couldpotentially fully run the table insmartphone software was nolonger a possibility. And lastly,we were previously well aheadof Wall Street on our EPSexpectations, even 100% insome cases, but the world hadcaught up to us.

So the S-curve was not a greenlight anymore. The competitiveadvantage was very good, butnot getting better and maybegetting slightly worse. Andthird, the under-appreciatedearnings power had becomeappreciated. We exited theposition at that point.

G&D: What is your currentpositioning with regard toApple?

AS: There have been a lot ofdevelopments since our exit.But last year we came back in.The idea that Apple’s value is


When you have an S-curve incombination with a reallystrong competitive advantage,the earnings can growexponentially. This happensmore frequently than youmight think. Apple's earningsper share went from $0.50 to$9, Priceline’s went from $2 to$40, and Tencent’s went from$0.12 to $2.58. If a company isexperiencing strong unitgrowth and a competitiveadvantage prevents pricecompression, the company willgrow revenue rapidly and willbe able to leverage theirexpense structure. That’s whatproduces exponential earningsgrowth. If we have a lot ofconfidence in both the S-curveand the competitive position,we are able to model out thebusiness with a high degree ofconfidence and ensure we arebuying at reasonable long termmultiples.

A great example was LinkedIn(LNKD). They came public in2011. We really liked their S-curve. They have 3 businesses,and the most important one istheir talent managementbusiness. LinkedIn has a fullyupdated database of almostevery single white collarworker in the United Statesand beyond. We realized thiswas a huge game changer.Before recruiters were relyingon two solutions: Monster, aresume database ofunemployed people, and headhunters, a really expensiveoption. It was so superior tothe existing solutions that weknew it would see widespreadadoption.

We attended a number ofhuman resources trade showsand spoke to 50 or 60recruiting companies andfound out that LinkedIn had

Alex Sacerdote

record and some simpleassumptions, it can actually beadditive to the share pricetoday. If you assume Appleachieves 3% market share ofthe car industry, sells units atan average price of $75k, andachieves gross margins in linewith Porsche, this couldactually move the EPS needlein a big way even for acompany of this size.

We think Apple has the trackrecord and scale to besuccessful. Tesla has alreadydemonstrated that the barriersto entry are notinsurmountable. Apple canafford to invest billions in R&Dwithout endangering thecompany, which only a fewcompanies can say.

It's not an important part ofour thesis and we’re notcounting on this but if it kicksin, that could double the P/E ofthe stock from an absurdly lowlevel, roughly 10x. It wouldn’tbe crazy to see it at a P/E of15x or even 18x. The otheraspect is capital allocation,which generally is not a largedriver in our typicalinvestments because wetypically focus on companies intheir growth phase, but withApple as a somewhat maturecompany, it can be a reallygreat way to improve stockperformance. They're doingthe right things there.

G&D: Benedict Evans ofventure capital firmAndreessen Horowitz agreesthat barriers to entry arecoming down and that the carmarket is really the onlymarket that can rival phones interms of total value. However,he points out that autonomousdriving is a negative trend forApple. It means we likely do

not own cars and only usethem in an on demand fashion.That likely reduces the role ofdesign and likely favors Googleover Apple. How do you thinkabout that?

AS: There are still a lot ofunknowns in cars. I think ourvision for Apple’s car is a fourto five year vision whileBenedict’s may be even longer-term. I think we still have along time before autonomousdriving is mainstream, sopeople will be buying cars likethey normally have for sometime and even when they areautonomous people likely willwant their own.

I don't want to give theimpression that I'm superbullish on Apple being a homerun success in the car market.But over the coming years, Ithink other investors will beginto appreciate that there maybe more potential for an Applecar than they previouslyexpected.

G&D: You have mentioned ahandful of frameworks you arelooking for with regard tocompetitive advantage. Arethere any other commonsituations you gravitatetoward?

AS: We like it whencompanies become industrystandards. We alreadymentioned Microsoft, butOracle is another obvious one.Oracle’s position within therelational database hastranslated to an excellentcompetitive position.Everybody has been trained onit, a number of other softwareprograms were integrated withit, and the companies that hadadopted it were reluctant tochange given the mission


in their platform not theirhardware was strengthenedwith the launch of the AppleWatch, the App Store growth,their innovations in payments,and the TV product. None ofthose on their own are bigenough to double the earningsof the company, but if iPhonecan still grow 5% to 10%, theaddition of those four thingsmight get to 20% growth. Andeven if iPhones are flat, theseother segments might have apotential to drive 10% growth.

We remain pretty excitedabout the App Store. Gamingrevenue and app revenue arestarting to become meaningfulfor Apple. It might be justunder 10% of profits, but it’sgrowing significantly faster.That stream of earnings shouldcommand a premium multipleas well. When Tim Cook madethe announcement that theirsales in China wereprogressing well even in theface of the stock market crash,he cited the App Store ashaving record revenues there.

Lastly, many people laugh atthe idea of an Apple car. Theythink it is way out of Apple'srealm, but the fact is, there is alot of change in the car. It isbecoming a supercomputer onfour wheels with millions andmillions of lines of code,hundreds of semiconductorchips, visual graphical userinterfaces, high quality audioand video output, wirelessentry with your phone, andthere is even the driverlesspossibility in the near future.There's no doubt that anApple car is a long way awayand analyzing the potentialvalue of such a business isdifficult. However, Apple isinvesting heavily in the carbusiness and given their track

Alex Sacerdote

Their customers today aregenerally smaller mortgagecompanies, but the Big 6mortgage players like WellsFargo have not yet adopted it.These companies represent200k of the 600k in industryheadcount. To date, they haveused their own systems, butthey are client-server based, sowe think there is a goodchance that Ellie Mae could getone of them to sign up as acustomer. This would be ahuge accelerator to the growthrate. Their current margins are

around 20%. We think theycan double or triple sales andhave 40% operating margins.This is a company we are stillexcited about even though ithas been a successful stock forus so far.

G&D: Can we discussshorting? Do you also use yourS-curve framework inevaluating shorts?

AS: Short ideas can fall at anypoint along the S-curve. Theclassic is the maturingindustry, but you don't want tojust short companies at the topof the S-curve. We would alsolike the company to be losingtheir competitive advantageand have over-estimatedearnings power, which isessentially the opposite ofwhat we look for on the longside. Newspapers were aninteresting example where theindustry had been mature for along period of time, but thenthe internet came along andsignificantly eroded theircompetitive advantage. That’s aclassic short we would lookfor.

We like looking for companieswithout competitiveadvantages as well. Wementioned all the losers in thesmartphone game as well as ine-commerce. Another area istechnology in the early phaseof the S-curve. Thesetechnologies can get reallyoverhyped. Electric cars a fewyears ago were a goodexample. There was acompany called A123 that wasperceived to have an excellentposition. They claimed theyhad proprietary batterytechnology and some highpercentage of cars wouldeventually be electric, so theirearnings power would besignificant. The companyultimately went bankruptbecause the barriers toadoption were still significantand they had no competitiveadvantage in a commoditizedbattery market. There were nogood OEMs using theirtechnology, and there werestill concerns about electriccar range. It was just too earlyin the S-curve ramp.


critical nature of certaindatabases.

Another good example is EllieMae (ELLI), which we feel is inthe process of becoming anindustry standard. Theyprovide a Software as a Serviceoffering for the mortgageindustry. The process of filing amortgage in the US isincredibly paper and timeintensive. There are all kinds ofdifferent players in thisecosystem and layers uponlayers of regulation. Mortgagelenders basically do not havethe technical competencies todesign a technology solutionthat keeps up with theregulations and the paper andtime intensive steps in theindustry. The value propositionis obvious. There are fewermistakes, lower costs, andstreamlined processes savingtime and money. You protectyourself against regulatory andcompliance risks. We thinkEllie Mae will become thecommon cloud for themortgage ecosystem almostlike Bloomberg is for financialprofessionals. There are600,000 mortgageprofessionals in the US.The industry’s S-curve hasrecently started acceleratingfor secular and cyclicalreasons. Underinvestment intechnology by mortgagelenders during the housingdownturn means lenders arebeing forced to adopt EllieMae.

They are growing subscribersat 30% per year, and revenueper subscriber is also growingas subscribers adopt morefeatures and modules. This is arecurring revenue business andwe think Ellie Mae will be hardto displace.

Faculty Co-Director of theHeilbrunn Center TanoSantos welcomes a studentto the Value Investing Pro-gram

Alex Sacerdote

“[Ellie Mae’s] value

proposition is obvious.

There are fewer

mistakes, lower costs,

and streamlined

processes, saving time

and money […]We

think Ellie Mae will

become the common

cloud for the mortgage

ecosystem almost like

Bloomberg is for

financial

professionals.”

have incredible managementteams, so it makes sense for usto spend time with them.

G&D: Have you come acrossany management teams thatyou think are especiallyunderrated?

AS: He is not exactlyunderrated, but I think MarkZuckerberg isunderappreciated as abusinessman. He saw earlier

than anyone else how valuableInstagram and WhatsAppwould be. Both assets havetremendous value. He alsomoved quickly on virtualreality. There are indicationstoday that VR could be amainstream medium. He founda management structureenabling him to focus on thelong term future of technologywhile Sheryl Sandberg andother incredibly talentedprofessional management canfocus on the business. Heseems quite skilled atdelegating and hiring, acting on

strategic M&A, executing andbuilding the culture of thecompany, and he also has thatbroader vision of connectingthe world.

If you compare Facebook toTwitter, so much of thedifference is execution. I thinkFacebook is a better assetbecause frequency of use ishigher and it’s more broadlyadopted, but if you talk toadvertisers, even Facebook’sad systems are more robustthan Twitter’s. Facebook hasan impressive ad platform anddistribution and sales process. Ithink he's done a tremendousjob there.

Another CEO is Jeff Bezos ofAmazon (AMZN). He is notunderrated either but hedeserves even more praisethan he gets. Most CEOs mightaccomplish one great thing,which would’ve been the retailoperation for him. He now hashelped create a secondmassive opportunity withAWS.

I think Amazon's e-commercebusiness is pretty wellunderstood. I think the mainmisunderstanding with regardto Amazon is AWS. I thinkAmazon shareholders know itis an interesting opportunity,but I don’t think they fullyunderstand what they aresitting on.

G&D: Can you explain theAWS opportunity to us?

AS: We think they are aleader in a market thatrepresents $500 billion inannual spending. They arefocused on the public cloud,which we think is the biggestopportunity in all of IT. It willencompass spending on


G&D: Have there beensituations where you werebullish on a company in thebeginning of a growth phase,but transitioned to a shortwhen the thesis played out andother investors continued toextrapolate the great results?

AS: Sure. Certain companieshave incredibly powerful anddurable competitiveadvantages, while othercompanies might have acompetitive advantage thatonly lasts two or three years.This is often the case insemiconductors. One of thefew ways we found to play theflat panel TV S-curve was achip company that made animage processor for the TV.They had 15% share going to30% share in a period whenunits were growing from 2million to 50 million. Theproblem is the Chinese orTaiwanese end up reverseengineering the chip. In thosecases, you have to be really ontop of it to know how long theadvantage can persist.

G&D: It’s clear that WhaleRock travels pretty extensivelyand that management meetingsare a key part of your process.Can you talk about this?

AS: Yes, we do 1,000 face toface meetings a year despitebeing only a team of five. Ithink we travelled somethinglike 250k miles last year. Wego to Asia three or four timesa year. We recently travelledto India to meet with 30private and public Indianinternet companies.

Within our framework, we donot specifically includemanagement quality, but itdoes tend to play out thatthese great companies often

“We think [Amazon’s

AWS division is] a

leader in a market

that represents $500

billion in annual

spending. They are

focused on the public

cloud, which we think

is the biggest

opportunity in all of

IT.”

Alex Sacerdote

similar to Coke and Pepsiexcept there is no Pepsi. Arecent study we reviewedsuggested that 50% ofcustomers use Amazon, 10%use Azure, and Google is notparticularly relevant. Anotherinteresting insight was that thecustomers using Amazon havemuch higher volumes than theaverage customer. The usagedifferential can be 10 to 1, ormore.

The software lock-in is not onthe same level as a Microsoftoperating system, but it'senough to where you don'twant to switch providers. Yourteam is trained on it and theybecome familiar and efficientwith the tools of AWS.

Even if it were a commodity,AWS would be 10 times thesize of the next biggestcompetitor anyway. The scaleof AWS gives it a big advantagein unit costs, but it also allowsAWS to invest significantlymore in R&D. We are hearingthat AWS has some of the bestcomputer scientists in theworld working as part of theirteam. They added 350 featuresthis year. Last year it was 100and what we're hearing isthey're pulling away from thecompetition in terms offeatures and additions.

G&D: What about overallreturns on capital? Bezos hascited the capital intensity ofAWS as one of his worries.

AS: That is a big question thatwe have spent time thinkingabout. We have analyzedserver costs, required datacenter capex, and AWS unitpricing by service. One partthat is challenging to predict ispricing. Within the last 2 years,Google cut price by 50% or

more in an attempt to improvethe competitiveness of GoogleCompute. Amazonimmediately responded with asimilar cut. And they have cutprice essentially every year.But we haven’t seen a bigdramatic move recently, soAWS is growing revenue inline with usage and achievinghigh teens margins, but pricingcould see another significantcut in the future.

Given how impressive themoat is, that switching costswill only increase in the future,and the fact that they arealready making 20% margin, Ithink ROIC will likely be verygood. Moore’s Law should alsohelp them lower the capitalintensity per unit of servercapacity.

We think half of all computewill be in the public cloudversus 3% today. Bezos drawsthe analogy to the old dayswhen corporations had theirown power plants before weeventually developedcentralized utilities. We thinkAWS could wind up as theequivalent of a centralizedutility with 50% to 70% marketshare around the entire world.We are convinced this is goingto be an extremely valuablebusiness. The stock is gettingcredit for it now but we stillthink people are missing howbig the opportunity is and howthoroughly Amazon willdominate it. It’s a largeposition for us now and itcontinues to amaze me howone company has been able toposition itself so well for twoof the largest businessopportunities of ourgeneration in e-commerce andthe public cloud.

G&D: You have an interesting(Continued on page 14)

servers, storage, networking,systems management, relatedservices, and several otherareas that aren’t even fullydeveloped yet.

The FAA recently completed alarge transformational dealwith Amazon. They will bespending $100 million per yearwith Amazon, and that will noteven be their entire IT budget.That's about 50 basis points oftheir budget. That gives someindication of the scale of theopportunity. It’s not hard toenvision a majority of globalcompanies spending 50 bps ofsales on AWS. Even with allthe discussion of cloud activityand the movement to thecloud over the last six orseven years, the amount ofcompute that's done on AWSis 2% to 3% of the world'scompute. It’s really just gettingto the mainstream now.

We think the S-curve has thepotential to last 20 years.These big shifts in enterpriseIT happen once every twodecades with mainframes inthe ‘60s and ‘70s, client serverin the ‘90s up until now, andthe public cloud will be thenext one.

On competitive advantage,most investors think that thepublic cloud is a commoditybusiness. The reality is thatAWS is pretty sticky due tothe whole software layer ontop, 10 different flavors ofstorage, systems managementcontainers, all kinds ofsoftware that increasesswitching costs.

They're the biggest player andthey are out-investing thecompetition. We have spokento a couple hundred users ofAWS and they say that this is

Alex Sacerdote

company, for years. It has avery high quality managementteam. The CEO, William Ding,owns 50% of the company. Hedoes not spend time talkingwith sell-side analysts, he isvery focused, and he hasessentially built the Activisionof China. The company hasgrown their net income from$50 million to $700 million inPC gaming. Their PC gaming

revenue is an attractive base ofrecurring revenue supportedby long duration franchisegames. The value propositionto the customer is verycompelling. It works out toroughly 2 cents per hour ofgame play.

NetEase was early toappreciate the potential ofmobile gaming. Two years ago,they started developing mobilegames and thinking of ways totake their great IP from PCs tomobile. They recently launcheda mobile game, FantasyWestward Journey Mobile. Wehave been tracking it actively.Our interns on the ground inChina have been visitingInternet cafes and we havedifferent ways to track appstore activity. Our researchsuggests it is the number onegame in China. We think itwill generate about $1 billionin revenue. To put thatrevenue figure in context, thecompany generated around$2.6 billion in revenue lastyear, so it is a very meaningfulcontributor. They have severalother mobile games in thepipeline that could deliveradditional upside.NetEase has appreciated in thelast six months, but we stillthink this is the bestopportunity for playing themobile gaming S-curve.

G&D: And the console gamingopportunities?

AS: Everybody thought mobilewould kill the console. That isnot happening at all. Theconsole has remained strongdue to the connection to theinternet and the ability togenerate recurring revenuethrough downloadable content.The popularity of certainconsole games has continuedto increase massively. Themargins have generallyincreased as downloadablecontent has high incrementalmargins without any marginshared with retailers.

We see it as a big renaissance(Continued on page 15)

thesis on gaming. Would youlike to discuss that?

AS: We own companiesrelated to traditional consolevideo games as well ascompanies benefiting from themobile S-curve. On one of ourtrips to China two years ago, Inoticed a teenager on thesubway who had a really bigphone and was playing a reallyintense game. It started tobecome clear to me thatmobile gaming wouldeventually be huge. It has beenvery hard for companies toeffectively monetize mobilegames. The screen sizes weremuch smaller and the graphicspower in mobile CPUs weremuch weaker so the onlygames that succeeded in anyway were very casual games.The casual games tended tohave relatively short lives,posing additional difficulties toeffective monetization.

What we are now seeing isvery positive for mobile gamingmonetization. With biggerscreen sizes and bettergraphics, you can have gameswith richer stories that requirea much larger developmentteam. These developmentsfavor scale players. On top ofthat, these PC games havemillions of players to the pointthat it is similar to a socialnetwork. Virtual goods can bepurchased for low price pointsbut the user base is so large itcan be meaningful revenue. AJapanese gaming company,GungHo, launched a game thatgenerates over $1 billion inrevenue. It’s been going fortwo or three years now, andthere are no signs of it goingaway.

We have followed NetEase(NTES), a Chinese video game

Alex Sacerdote

Students enrolled in Ap-plied Security Analysis at-tend the Pershing SquareChallenge Finals

“Some stock picking

can be trained or

learned but there may

be an innate aspect to

it — an inherent

savviness,

contrarianism, and

creativity in thinking. I

view it as a willingness,

if not a passion, to

challenge the status

quo or vehemently

argue other

viewpoints, coupled

with a flexibility and

openness to adjust to

new facts.”

thinking. I view it as awillingness, if not a passion, tochallenge the status quo orvehemently argue otherviewpoints, coupled with aflexibility and openness toadjust to new facts andinformation. You have to lovelearning and really get excitedwhen you gain conviction in atheory. You have to be asponge for information andready to learn from anyone oranything.

Munger talks about howWarren Buffett is a learningmachine with his constantreading. At Whale Rock wetalk about this concept of thelearning machine and how wecan become better learnersindividually and as a team. It’snot how many brain cells youhave, it’s how the synapses firetogether and this is why wefocus a lot on effectivecommunication within theteam. We spend a lot of timecollecting data, but much moreimportant is developinginsights from it and building itinto our collective thinking.

Also, for those interested ininvesting, there are a lot ofreally helpful books that youcan read. My favorite forgrowth investing is CommonStocks and Uncommon Profits byPhilip Fisher. It is essentiallythe Bible of growth Investing.Philip Fisher was doing this inthe 1950s and almosteverything he says in that bookis true today. In the book, heoutlines 15 elements of a greatgrowth stock. When I read thebook, I was amazed at howsimilar it was to our processfor conducting research.

The Gorilla Game by GeoffreyMoore is the best book ontech investing. A lot of what

we do at Whale Rock can befound in this book. And finally,I can't leave out The Tao JonesAverages: a Guide To Whole-Brained Investing by BennetGoodspeed. The thesis of thebook is that Wall Street andacademia favor and attract leftbrain thinkers who are good atlinear thinking and can crankthrough problem setsquickly. But to really spot biginflections and change (wherethe real money is made),especially in technology, it’soften the domain of the rightbrain which is more spatial andintuitive. Right brainers canconnect dots from seeminglydisparate sources to put thewhole picture together.

I also encourage students toinvest on their own. It doesn'thave to be a lot of money, butif you do it on your ownaccount, you will learn a greatdeal.

Lastly, if you are trying toenter the business, make sureyou have two or three reportson companies you really likewith supporting models and awell-articulated thesis. It’simportant to demonstrate thatyou can really do the research.

G&D: Thanks so much foryour time, Alex.

for the gaming industry. Theconsole market is now morelucrative and mobile is openingup a potential new market forthem. We are looking forcompanies with great IP thatcan now use that IP in otherways that might not beappreciated. We thinkElectronic Arts (EA) has donea fantastic job with FIFA andNFL Ultimate Team.

G&D: Do you have any advicefor Columbia students lookingto enter the investmentmanagement industry?

AS: I think you have to be inthe business for the rightreasons. It's really important tobe very curious and have apassion for investing becausethere are so many people outthere competing with you. It’sreally important to love whatyou are doing.

In this business, it's not aboutsheer brain power, SATscores, or an MBA from aleading business school. Thosefactors help and of course arenice to have, but they do notguarantee success by anystretch. I've worked closelywith scores of investors acrossroles and across strategies inmy career, and really a smallpercentage are truly gifted andable to generate alpha overlong periods of time. I'vethought a lot about whatcharacteristics these peoplehave in common which I thinkmay be important for youryounger readers to consider ifbuyside public markets are theright path for them.

Some stock picking can betrained or learned but theremay be an innate aspect to it— an inherent savviness,contrarianism, and creativity in

Alex Sacerdote

Merger Arbitrage with Special Situation Spin-OffLong RNF/Short UAN

Nielsen Fields, [email protected]

Nielsen is a first year MBAstudent at Columbia BusinessSchool. Prior to CBS, Nielsenwas a Co-Portfolio Managerand Senior Analyst at SummitGlobal Management, a longbiased hedge fund.

Nielsen Fields ‘17

Executive Summary Rentech Nitrogen (RNF), a publicly traded variable rate fertilizer MLP, is selling its East Dubuque, IL facility to

competitor CVR Partners (UAN). RNF holders will receive 1.04 shares of UAN, $2.57 in cash, an estimated$0.23 of incremental distributions, and continued ownership of the Pasadena, TX facility which will be eithersold or spun-off prior to close of the transaction.

The market, pricing RNF shares at $12.00, fails to recognize positive incremental value through the distribu-tion disparity between RNF and UAN while also ignoring additional value accretive to RNF shareholdersthrough the sale or spin-off of the Pasadena facility – an ammonium sulfate producing facility likely worth be-tween $0.77 and $2.25 per RNF share.

By going long RNF shares and shorting the necessary number of UAN shares (1.04 per RNF Share) the inves-tor can create a net position for roughly $2.00. At close, the investor will receive UAN shares in the amountto cover the short, $2.57 in cash, net incremental distributions per share of $0.15, and any value createdthrough the sale or spin-off of the Pasadena facility worth a probability weighted value of $1.43. In total, theinvestor accrues $4.14 in cash on a $2.00 net investment.

Relevant Statistics

Deal RationaleParent Rentech (RTK) a Forced Seller

Rentech is transitioning from an alternative energy business to a wood fiber business Leverage grew substantially with debt, financed by GSO Credit Partners, to fund wood fiber expansion RTK needed to monetize RNF ownership to pay down debt and fund rising wood fiber expansion costs New CEO focusing entire organization on wood fiber business versus operating two disparate businesses

CVR Partners a Motivated Buyer CVR Partners input is petroleum coke vs Rentech Nitrogen’s input of natural gas CVR Partners’ facility is located in Coffeyville, KS while Rentech Nitrogen’s facility located East Dubuque, IL Combining these assets diversifies both input costs and facility locations and offsets turnaround years RNF facility ideally situated in the heart of corn belt, with barge access and adjacent land for future expansion

Pasadena Facility Excluded But a Lynchpin Pasadena has been a troubled asset since RNF purchased the business in 2012, CVR Partners has no interest 2015 is the first year under RNF ownership that Pasadena is expected to generate positive EBITDA S-4 lists Pasadena equity value at just 30% of RNF’s original purchase plus associated capex

Why is there still an arbitrage opportunity?Liquidity Impediments

The trade has a gross exposure 11x greater than net exposure RNF average daily value traded is $2m while UAN average daily value traded is $2.5m Both are limiting factors in arbitrage funds’ ability to build a meaningfully sized net position

Master Limited Partnership Structure Investors have to be willing to file a k-1 due to the MLP structure of RNF Excludes some institutional investors and reduces total capital able to arbitrage opportunity

Investors Fail to Realize Pasadena Piece 65% and 84% of RNF and UAN free float respectively is held by retail investors Bloomberg deal premium at ~5% (Pasadena sale cited in notes) → Quants not seeing deal economics properly

RNF UANPrice $12.00 $9.63Shares Outstanding 39m 73m% Free Float 40% 46%Majority Owner Rentech (RTK) Icahn Ent (IEP)Liquidity StatisticsAvg Daily Volume 145k Shares 230k sharesAvg Daily Value ~$2,000,000 ~2,500,00050% of Volume $1,000,000 $1,250,000Pricing Prior to Deal AnnouncementDay Prior Price $10.30 $10.6930 Day VWAP $13.56 $12.40

The Offer

UAN Price $9.63

UAN Shares/RNF Share 1.04

Value in Shares $10.02

Cash Per Share $2.57

Total Offer Value $12.59

Unrecognized Value

Net Expected Distributions $.15

Pasadena Expected Value $1.43

Total Additional Value $1.58

Issue XXV

Merger Arbitrage with Special Situation Spin-Off (Continued)Pasadena Asset ValueDue to parent company Rentech’s decision to explore strategic alternatives for RNF and the subsequent belief that thePasadena facility would be either sold or disposed of, the company performed an impairment test in Q2 2015. Manage-ment concluded the Pasadena facility’s carrying value was no longer recoverable and wrote down associated assets by$101.8m to their estimated value. A value based on indications of interest received from potential buyers. The remain-ing $73.7m of equity value listed in the recently filed S-4 represents the best estimate of Pasadena’s fair value, equatingto $1.9 per share.Alternatively one could value Pasadena based on facility EBITDA, which management projects to be $10m in 2015. Infact I believe this to be conservative guidance. Year to date EBTIDA totaled $5.4m and when questioned whether thelower second half balance of $4.6m was seasonally related or other, the CEO answered, “I think it's prudence fromtrying to get a number right for once on that plant.” At a range between 4x and 7x EBITDA, Pasadena would be worthbetween ~$1.00 and ~$1.80 per share. Likewise a free cash flow based DCF model yields values between ~$0.80 and~$1.50 per share (seen in the tables below).

Alternative View & Key RisksThe key risk with the investment is the transaction not closing. If prices of both RNF and UAN revert back to the pre-deal closing prices, the expected downside is $2.80. One could also take the viewpoint that the market does in factrecognize the value of Pasadena but believes the probability of the transaction closing is just under 60%. Even at animplied 60% chance of close, the probability weighted upside/downside ratio is still ~2.2x.The probability of close is far higher than the market’s expecta-tions solely based on the majority ownership of both companies,each having agreed to the deal. Additionally, UAN is acquiringthe facility for $2,300 per gross ammonia ton, a similar price torecent new builds in the region near the end of their consecutiontimeline. In buying the facility UAN avoids a risky four yearconstruction runway and benefits from immediate cash flows.For an additional valuation point, CHS recently purchased 8.9%of CF Industries’ North American production at a price >$4,000per gross ammonia ton. UAN is by no means overpaying for theassets (see figure below: Cost per Gross Ammonia Ton). Mean-while RNF is a forced seller at the $2,300 per gross ammonia tondue to its need to pay down debt and fund growing wood fiberexpansion costs.Finally, the likelihood that regulation will be an impediment tothis deal closing is de minimis given that on a combined basisproduction is just 3% of North American nitrogen fertilizer de-manded.

Pasadena Value Based on EV/EBITDA

EV/EBITDA

$1.41 4.00x 4.75x 5.50x 6.25x 7.00x

EBITD

A

$7.50 $0.77 $0.92 $1.06 $1.21 $1.35

$8.75 $0.90 $1.07 $1.24 $1.41 $1.57

$10.00 $1.03 $1.22 $1.41 $1.61 $1.80

$11.25 $1.16 $1.37 $1.59 $1.81 $2.02

$12.50 $1.29 $1.53 $1.77 $2.01 $2.25

Pasadena Value Based on DCF

Growth Rate

$1.05 (1.5%) (0.75%) 0.0% 0.75% 1.5%

Discount R

ate

11.50% $0.79 $0.85 $0.91 $0.98 $1.06

10.75% $0.84 $0.90 $0.97 $1.06 $1.15

10.00% $0.90 $0.97 $1.05 $1.14 $1.25

9.25% $0.96 $1.04 $1.13 $1.24 $1.37

8.50% $1.03 $1.12 $1.23 $1.36 $1.52

Upside/Downside Ratio Calculation

Downside Shares Price Prior Price G/(L)

RNF Shares 1.00 $12.00 $10.30 -$1.70

UAN Shares (1.04) $9.63 $10.69 -$1.10

Total Downside -$2.80

Probability of Break-Up 40%

Probability Weighted Downside -$1.12

Upside DPU Pasadena Cash

RNF Shares 1.00 $0.15 $1.43 $2.57

UAN Shares (1.04)

Total Upside $4.14

Probability of Deal Close 60%

Probability Weighted Upside $2.49

Upside/Downside Ratio 2.22x

Tenneco Inc. (NYSE: TEN) - Long

Justin [email protected]

Thesis

Tenneco's share price has declined recently due to concerns over a slowdownin China, cyclical depression in the mining/agricultural end markets, and mostrecently, a large disruption at a major customer (Volkswagen). However, theseissues do not impact the secular tailwind from increasing global automotiveemissions standards. Tenneco has #1/#2 global market share in components andsystems that help reduce emissions and will benefit both from increased per-vehicle content adds and robust volumes as OEMs increasingly seek supplierswith scale. Lastly, the Street is also discounting the accretive potential ofTenneco's recently announced accelerated share repurchase program. My targetprice of $61.00 represents ~36% upside from the current share price.

Business DescriptionTenneco is a global Tier 1 auto parts supplier that serves both automobile OEMs and the repair and replacementaftermarket. The company operates in two divisions: Clean Air (emissions control) and Ride Performance(stability, comfort, and safety). Revenue and EBIT split between Clean Air and Ride Performance, excluding low-margin substrate sales, are roughly 60%/40% and 63%/37%. Aftermarket sales are about 15% of total sales. Thecompany has 90 manufacturing centers and 15 R&D centers located on every continent. As of FY14, Tenneco had~70 different OEM customers and is well diversified for a Tier 1 auto supplier, with only two customers repre-senting over 10% of revenues (Ford at 15% and GM at 13%).

Investment Merits Increasingly Stringent Emissions Standards and Enforcement: Government regulations in both

developed and developing markets require automotive OEMs to substantially reduce vehicle tailpipe emis-sions. Tenneco will benefit directly from this secular trend as it has global #1/#2 market share positions inthe growing market for emissions reduction products. In addition to rising standards, an underappreciatedaspect of the secular story is the increase in enforcement of these standards. For example, in Europe, vehiclemanufacturers will be required to meet emissions levels in real world conditions, as opposed to simulatedconditions, beginning in September 2017. In China, compliance with emissions standards is currently low(~45%) but is expected to increase dramatically in the coming years. Stricter enforcement will put even morepressure on auto OEMs to seek components and systems that help them to achieve mandated targets.

Significant Per-Vehicle Content Add Opportunity: I project Tenneco's organic revenues to grow at afaster rate than underlying growth in vehicle unit volumes due to increasing per-vehicle content additions.The power of Tenneco's content add story is seen in its most recent quarterly results - when global demandfor commercial and off-highway vehicles were down 25% Y/Y, Tenneco's sales to this sector were only downby 4% Y/Y. Tenneco was able to offset the vehicle volume decline with significant per-vehicle added content.

Continued Trend of Vehicle Platform Standardization: Light vehicle platforms such as Volkswagen'sMQB and GM's Delta platforms that support well over 1mm+ units are expected to grow from 51% to 56%of global OE production from 2014 to 2019. Thus, OEMs are increasingly seeking suppliers with the scale tosupply components for extremely large volumes on a global basis. Tenneco stands to benefit from this trendas one of the two largest and globally diversified suppliers of critical emissions reduction components.

Ride Performance and Countercyclical Aftermarket Exposure: Tenneco's Ride Performance busi-ness, (40% of total revenues), is a solid business in itself. Similar to the Clean Air business, Ride Performanceoffers OEMs the scale and ability to supply to massive standardized vehicle platforms and also enjoys modestsecular tailwinds due to the increasing need for technologies that advance fuel efficiency (efficient braking andhandling) and vehicle safety (roll-over protection systems). In addition, ~37% of Ride Performance's revenuesare from the aftermarket and its brands command #1 market share in most global markets. Aftermarketparts generally command higher margins than OE parts, and exhibit more consistent demand which offsetssome of the cyclicality of Tenneco's OE businesses.

Accelerated Share Repurchase Program: Management recently expressed frustration over Tenneco'svaluation and accelerated its 3-year $350mm share repurchase program to conclude a year early - by the endof 2016 ($175mm per year). The repurchases will boost EPS in the near term and provided that shares con-tinue to be undervalued, I believe management has the willingness to continue the repurchase program be-yond 2016. Tenneco currently has the balance sheet and FCF generation to support this.

Opportunity in Adjacent Markets: Tenneco is working to translate its emissions reduction technologyto adjacent markets including locomotive, marine, and stationary motor applications. In fact, Tenneco re-cently became the first company to receive Chinese approval to sell marine SCR systems for diesel-poweredChinese-flagged vessels. Tenneco is also developing turnkey aftermarket emissions treatment systems forlarge locomotive engines. As emissions regulations for these adjacent markets are also becoming increasingly

Justin is a first year MBAstudent at Columbia BusinessSchool. Prior to CBS, Justin wasan Associate in the High YieldBonds group at Oaktree CapitalManagement. He is currently aschool-year intern at a familyinvestment office.

Trading StatisticsPrice as of 09/30/15 close: $44.77

DSO as of 09/30/15: 61.4

Market Capitalization ($mm): $2,747

Cash and Equivalents: $250

Total Debt: $1,230

Enterprise Value: $3,798

P/E (FY15E EPS): 10.5x

EV/EBITDA (FY15E EBITDA): 4.85x

52-Week High: $61.73

52-Week Low: $39.13

Avg. 3-Mo Daily Volume (mm): 0.717

Justin Hong ‘17

Issue XXV

Tenneco Inc. (Continued from previous page)

stringent, I expect this to be a small but rapidly growing market opportunity for Tenneco.

Investment Risks and Mitigants The Auto OE Parts Sector is Highly Competitive and Cyclical: The automotive parts sector has histori-

cally experienced cyclical downturns. Although we are currently in a healthy part of the auto OEM cycle, it isdifficult to predict when the cycle will turn. However, Tenneco’s secular emissions tailwind will remain intactdespite the cyclicality. Tenneco also has the balance sheet and cost structure to withstand the next cyclical down-turn. Management has done an excellent job of reducing leverage (currently ~1.3x net debt / EBITDA) since therecession, and cost rationalization programs have been successful at reducing overhead and administrative costs.

The Mining and Agricultural Markets are in a Cyclical Downturn: The mining and agricultural end mar-kets are both seeing cyclical depressions in equipment demand. However, the secular emissions story is still intactin these markets, and Tenneco stands to benefit once the cycle turns. Also, Tenneco has mitigated the cyclicaldownturn in the off-highway market by offsetting unit volume declines with per-vehicle content adds.

China Slowdown (and Other Macro Risks): Concern over a slowdown in China's economic growth is cur-rently spooking the markets. However a slowdown in the Chinese economy is not expected to slow the increas-ingly stringent emissions regulations that are being introduced there. In fact, Chinese President Xi Jinping recentlyannounced that China's slowing growth will not deter much needed reforms, including reducing pollution fromvehicle emissions. Tenneco’s reported topline has also been pressured recently due to the strengthening USD, buton a constant-currency basis, revenue growth is still expected to be in the mid single-digits going forward.

Volkswagen Emissions Cheating Scandal: As Volkswagen is Tenneco's third largest customer, Volkswagen’srecent emissions cheating scandal has weighed on valuation. However, I believe this is a large overreaction fromthe market. Tenneco's revenue exposure to Volkswagen's North American diesel engine business is just $7mm,only ~0.08% of total revenues. Revenue from the entire affected global MQB platform totals $310mm, or roughly4% of total revenues. The Volkswagen scandal will be a very short-term issue for Tenneco, and in fact I see thisevent as a long-term positive as it highlights how difficult it is for OEMs to meet emissions standards, and howserious regulators are in enforcing them.

Variant Perception Recap The Street is currently preoccupied with potential macro/cyclical/temporary issues and is temporarily forgetting

about Tenneco’s underlying and long-term secular emissions story. Historical valuation multiples and comparables analyses suggest Tenneco should trade in the high range of compa-

rable auto parts suppliers. The Street is currently lumping Tenneco within the broader universe of cyclical andlower value-add auto parts suppliers. I expect Tenneco’s valuation multiples to mean-revert to more appropriatemultiples as temporary headwinds subside and Tenneco continues to deliver solid organic growth.

The Street is ignoring the impact of Tenneco's accelerated share repurchase program. Given the current underval-uation of shares, I expect the repurchases to be immediately accretive. In addition, if the undervaluation persists, Iexpect continued repurchases beyond FY16, given the company's strong FCF generation and low leverage.

Valuation

EV/EBITDA ValuationBase Case Continued Repurchases

Current Current Upside FY18 Upside CAGR FY18 Upside CAGRShare Price $44.77 $59.47 32.8% $91.07 103.4% 24.2% $94.62 111.3% 25.6%Shares Out 61.36 61.36 54.74 48.99Mkt Cap 2,747 3,649 4,985 4,635Debt 1,230 1,230 1,230 1,230Minority Interest 71 71 71 71Cash (250) (250) (771) (421)EV 3,798 4,700 5,516 5,516EBITDA 783 783 919 17.3% 5.0% 919 17.3% 5.0%EV/EBITDA 4.85x 6.00x 6.00x 6.00x

P/E ValuationBase Case Continued Repurchases

Current Current Upside FY18 Upside CAGR FY18 Upside CAGRShare Price $44.77 $59.88 33.8% $79.22 76.9% 19.0% $91.00 103.3% 24.1%Shares Out 61.36 61.36 54.74 48.99EPS $4.28 $4.28 $5.66 32.3% 8.9% $6.50 52.0% 13.6%P/E 10.5x 14.0x 14.0x 14.0x

Method Price Commentary

DCF $63.50 My best estimate of a conservative intrinsic value.EV/EBITDA $59.47

P/E $59.88

Sum of the Parts $61.13

Target Price $61.00

EV/EBITDA is an effective way to compare multiples between different industries. I believe

auto parts suppliers should generally trade at around 5x - 6x, and that Tenneco deserves to be

valued at the higher end of this range.Given competitor multiples and relative quality of Tenneco's business, I believe a 14x P/E

multiple is conservatively appropriate. In addition, this implies a ~7% current earnings yield,

which I believe is also appropriate for this business.More a confirmatory exercise as I don't believe the businesses would be separted, but if they

were, the Clean Air division would command a higher multiple than Ride Performance.

Las Vegas Sands Corp. (NYSE: LVS) - ShortPrice Target: $30

Alexander S. J. Levy, [email protected]

Executive SummaryLVS previously thrived on rapid Macau gambling growth. That story is no longer intact as the Chinese economyslows, a corruption crackdown hits spending, and the industry faces margin pressure from oversupply. The compa-ny’s traditionally reliable non-Macau cash generators face headwinds, and less likely but still real tail risks loom.Despite these challenges, consensus is betting on stabilization/recovery instead of on more realistic mean rever-sion away from boom times, creating an attractive short opportunity with ~35% downside to my $30 price target.

Optimistic Consensus/Valuation: Despite major headwinds, consensus remains bullish, with estimates callingfor 2016 EBITDA stabilization (+6% growth at SCL) and +7% growth in 2017. Only one sell-side analyst has a sellvs. 11 buys. The avg. target price is ~$54. Short interest is only 6.9% of float, suggesting buy-side positioning is nottoo bearish. On optimistic consensus numbers, LVS trades at ~11x 2015/2016 EBITDA, but trades at an expensive~12x/13x 2015/2016 EBITDA on my more achievable estimates (12%/20% below consensus in 2015/2016). Adjust-ing for non-attributable earnings from Sands China, LVS is even more expensive at ~14x/15x 2015/2016 EBITDA.

Dividend/Buybacks at Risk: LVS currently pays a 5.5% dividend yield on top of a remaining ~$1.7b in buybackauthorizations. However, the dividend, let alone the buybacks, are not covered by cash flow through at least 2017on my estimates, creating risk of a cut longer term.

Why This Opportunity Exists: The China growth narrative, in general and related to Macau, is alluring – itworked for 10+ years. Today, both the sell-side and LVS’ shareholders are betting that the current slowdown is ablip and that growth resumes in short order. Forecasting is anchored by years of profitability and growth, makingcontemplating a lasting downside shift difficult. Dividends/buybacks, although not covered, pay investors to wait,while the company is optimistic even as competitors admit caution.

Why Short LVS and Not SCL: 1) US market procedures and protections; 2) Most of LVS’ leverage sits in theUSco entity (6.4x net debt to TTM EBITDA vs. 0.5x at SCL and 1.5x consolidated), raising LVS’ vulnerability tolower intercompany cash flows from Macau/Singapore.

Company DescriptionLVS is a US-based gaming and lodging company that operates integrated resorts with hotel, gaming, entertainment,and retail components in Las Vegas, Pennsylvania, Singapore, and Macau. In 2014, 13% of revenue and 8% of prop-erty EBITDA were earned in the US, with 22% and 32% respectively earned in Singapore and 65% and 60% respec-tively earned in Macau. LVS operates in Macau via a 70.1% stake in Sands China Ltd. (SCL, publicly listed in HongKong as 1928.HK). Sheldon Adelson is the controlling shareholder (54% stake), chairman, and CEO.

Investment Case: ShortLVS’ Macau earnings are driven by 3 factors: visitorcount, gross gaming revenue (GGR), and non-gamingspend (shopping & hotel). I expect all to be pressuredas demand slows and competition intensifies.

1) Visitor count already falling & unlikely toresume steady growth near-term Slowing Chinese economic growth, a corruptioncrackdown, and visa restrictions have weighed onMacau visitor count, with entries falling 3.5% YoYYTD. 67% of Macau visitors are from mainland China. Macau has proposed capping the number of Chinesevisitors at current levels (~21m/year) to preserve resident quality of life. Improved travel infrastructure is unlikely to materialize over the next few years. The Macau-HK bridge slated for2016 could take until 2017+ to finish as costs rise. A light rail project in Macau may not be ready until 2017/2018. Proposed expanded smoking ban could scare away customers, given ~25% of China smokes. Bulls argue that Macau has a long penetration runway given 34% of people in the US gamble, but only 1.5% inChina have visited Macau. However, a much larger 8.7% of people in Guangdong (province closest to Macau) havevisited. Furthermore, China’s GDP/capita is ~$7k vs. $53k in the US, meaning income levels must meaningfullyincrease (not easy with slowing growth) before people can afford to visit.

Alexander is a first year MBAstudent at Columbia BusinessSchool. Prior to CBS, he was anequity research associate atMorgan Stanley covering coal,steel, and iron ore equities.Alexander graduated fromDuke University with a degreein political science and is aCFA® charterholder.

Editors’ Note: LVS share priceas of September 18, 2015 asoriginally presented.

Alexander Levy ‘17

Issue XXV

Las Vegas Sands Corp. (Continued from previous page) Chinese consumption patterns mean that avg. hotel stay length is unlikely to grow. Visits to Macau are high frequencybut short duration (1.2 nights on avg. vs. 3.6 nights in Vegas). High minimum table stakes mean gamblers often exhaustfunds quickly. In China, annual vacation entitlement is only 5 days for people with <10 years of work and 10 days forpeople with 10-20 years, limiting time off. During public holidays, people often go home instead of abroad.

2) Gross gaming rev. (GGR) under pressure from corruption crackdown and shift to mass market An ongoing Chinese corruption crackdown has had a chilling effect on Macau VIP gambling. Mix is shifting towards thelower spending mass market. Enforcement is also targeting junkets, which recruit high rollers. LVS will have trouble making up for lost VIP business as mass market has a lower GGR/capita: $232 avg. in Vegas vs.$1,399 in Macau. In addition, bulls point to 40% mass market gaming margins vs. 10% VIP, but LVS already gets ~74% ofMacau gaming profits from mass market.

3) Explosive gaming/lodging supply growth (despite slowing demand) will likely pressure margins Casinos are rapidly expanding gaming and hotel capacity over the next 2-3 years. There are six integrated resort &two hotel projects under way. If these materialize, the number of rooms will grow by 47% vs. 2014 while the number oftables and slot will rise by 53% and 75%, respectively. Even the most optimistic demand scenarios are insufficient toabsorb this new capacity, and I see total hotel occupancy in Macau falling from 86.5% in 2014 to ~60% by 2016, and onlyrecovering to ~70% by 2018. Hotels are ~15% of LVS’ Macau profits. Gaming licenses require casino projects to advance and remain operational regardless of conditions. As oversupplygrows, margins will come under pressure as competition intensifies to fill resorts. Gaming/lodging is a competitive, highfixed cost, capital intensive industry. Once the capital is in the ground, owners are incented to fill capacity by competingon price to take advantage of high fixed cost leverage. Amidst oversupply, LVS may need to increase discounting/advertising/promotions to fill rooms. Wages are growing by5-10% annually as unemployment is sub-2%. For reference, Vegas EBITDA margins are ~20% vs. ~30-35% in Macau. Regional competitors in Korea & Philippines are adding new casinos to attract Chinese tourists, while Japan could doso before the 2020 Tokyo Olympics. The number of Chinese visitors to Korea has grown by 5x vs. 2009, and Korea iscloser to Beijing/Shanghai than Macau. Non-Macau avg. minimum table stakes are lower ($270 in Macau vs. $50 in Singa-pore, $20 in Korea/Vegas), increasing mass appeal.

4) Non-gaming spend not immune from slowdown and vulnerable to non-Macau competition Mass market customers have a lower ability to pay for high priced lodging/food/luxury goods than VIP visitors. LVS’ strategy to increase non-gaming revenue relies on large retail complexes (~12% of LVS’ Macau profits). A slowingChinese economy and corruption crackdown could lower sales, which drive ~30-40% of rent income. While sales atLVS malls have been resilient, jewelry sales in Hong Kong are -15% YoY YTD while clothing sales are -5% YoY YTD. LVS’ strategy to increase reliance on non-gaming revenues (hotel, food, shopping) strays from gaming, which has acompetitive moat (Macau is the only part of China with legal gambling). In comparison, the market for China’s non-gaming tourism dollars is quite competitive, with new destinations such as Disneyland Shanghai opening up.

5) Singapore & Penn. casinos, usually reliable cash flow generators, are facing headwinds many overlook YTD, the Singapore Dollar has appreciated by ~14% vs. the Malaysian Ringgit and ~9% vs. Indonesian Rupiah, disad-vantaging gamblers from these countries, while at the same time weakening vs. the USD by ~5% (negative for earningstranslation). Slowing Chinese growth could affect the Singapore economy (~17% of local GDP from exports to China). New casinos in the Northeast (PA, NJ) could take market share from Sands Bethlehem.

6) Downside optionality: Political/tax tail risks threaten terminal value LVS’ Macau gambling subconcession expires on June 26, 2022. Unless it is ex-tended, all casinos transfer to the government without compensation. In addition,the cap on the number of gaming licenses in Singapore expires in 2017. LVS has two significant tax arrangements with Macau that expire at the end of2018, which could subject SCL to a 12% tax on dividend distributions.

ValuationMy $30 price target is derived from a DCF valuation cross checkedagainst a sum-of-the-parts valuation model. My EBITDA estimates are12%/20% below consensus in 2015/2016, respectively, as I anticipatefurther deterioration in the market on both demand declines and mar-gin compression from increased competition. Note that my terminalyear assumes a generous 15% ROIC, meaning that a more severe struc-tural impairment of the Macau story could lead to further downside. Forvaluation purposes, it is important to properly adjust out non-attributable earnings/cash/debt related to the non-controlling interest inSCL. Some may not make this adjustment, flattering LVS’ valuation.

Downside Catalysts1) Opening of competing Studio City casino on October 27, 2015; 2) Negative sell-side estimate revisions and/or down-grades; 3) Continued declines in Macau quarterly revenues/earnings; 4) Further weakness in Macau’s monthly GGR/visitor statistics; 5) Stronger USD and/or weaker RMB; 6) Expanded smoking ban; 7) Loss of preferential tax treatment;8) Changes to gambling subconcession; 9) Dividend cut.

Upside Risks1) China relents on anti-corruption drive; 2) Chinese stimulus; 3) Macau relents on smoking ban and/or visitor caps; 4)New hotel/gaming supply delayed; 5) Macau infrastructure projects accelerated; 6) Aggressive share repurchases.

Ed Bosek

Ed Bosek(Continued from page 1)

decided that I wanted to getmy MBA. I didn’t want to goback to school later for agraduate degree, so the idea ofgetting an MBA in conjunctionwith my undergraduate degreewas very attractive. I hadstarted school early and wasyoung for my class so, if Icompleted the Wharton MBAsubmatriculation program, Icould still graduate on

schedule. I was lucky enoughto be accepted and graduatedwith an MBA at 22.

For most of my early life Inever really left the UnitedStates or the East coast and, infact, really only knew this 90mile corridor around StatenIsland. To broaden myhorizons, I decided to do anMBA internship in Europe andworked at Deutsche Bank inLondon. After the internship, Ireceived a full-time offer fromDeutsche Bank and I accepted.However, I quickly realizedthat investment banking wasnot my calling so I started tolook around for otheropportunities in London.

I began learning more aboutthe hedge fund business, whichwas nowhere near what it istoday—there were only ahandful of household names. Iwanted to join a place calledAtticus Capital, which was nota widely known firm at thatpoint. I think it's reallyimportant to realize that, whenyou are making decisions about

where you want to work, youshould spend a lot of timethinking and focusing on whoyou are going to work with.The hedge fund industry, inessence, is a group of smallbusinesses run byentrepreneurs where eachmanaging partner does thingsdifferently. Generally speaking,the whole organization is reallya reflection of how the personrunning it wants it to operate.When I met Tim Barakett, thefounder of Atticus, within 10minutes I was thinking, "Okay,I want to work for him."

G&D: What about TimBarakett made you want towork there?

EB: I joined the AtticusEuropean fund when theirAUM was about $250 milliondollars, around the same sizeas BeaconLight is today, andoverall, Atticus managedapproximately $1 billiondollars. Tim had incrediblecharisma and a focused energythat just blew me away. I wasalso interviewing at biggerplaces that were probablymore like investment banks interms of culture. Atticus wasmore appealing as I would bethe fourth person on theEuropean team. I took a weekoff in between investmentbanking and joining Atticus. Itwas just four of us sitting in aroom in London pickingstocks. Looking back now, Irealize that success in life isnot only just about how goodyou are, but also how good theopportunity set is. We wereemerging from the fallout ofthe tech bust and there washeightened tension in theMiddle East, so the market wasvery depressed. It was Augustof 2003 and it was a reallyattractive entry point for


Capital.

Graham & Doddsville(G&D): Could you start off bytelling us about yourbackground?

Ed Bosek (EB): I was raisedin Staten Island and went toRegis High School inManhattan. I think mybackground ties into what I’mdoing today as I learned earlyon to have a differentiatedview and pursue my own pathfor success. In my formativeyears, I chose to do somethingvery different from everyoneelse in the neighborhood.While my friends went to thelocal high school, I, by choice,commuted two hours eachway to the Upper East Side toattend Regis, an all-scholarship,Jesuit prep school. The Regisexperience gave me a differentperspective on life and taughtme how to think for myself.

I was accepted to theUniversity of Pennsylvania and,at that point, I wanted to be adoctor. Growing up in StatenIsland, I wasn’t really exposedto investing as a career option.After arriving at Penn, I wassurrounded by Whartonstudents, who brought anintellectual rigor to finance andeconomics that I hadn’t seenbefore. I became intrigued byinvesting and started takingsome economics classes inaddition to my pre-medcoursework.

At the end of my freshmanyear, I transferred to a dualdegree program with theCollege and Wharton, in orderto receive both a pre-med andWharton degree. Towards theend of my sophomore year,which coincided with theheight of the Internet bubble, I

“I learned early on to

have a differentiated

view and pursue my

own path for success.”

Ed Bosek

value investor and Tim is moreof a quality—and in some waysmomentum—investor and helikes really great stories. Iwould pitch things that Davidloved, and Tim would hatethem. Then I would pitchthings that Tim loved andDavid would hate them. Whenyou're confronted with twostarkly different ways ofthinking about investing, itforces you to examine anddevelop your own investmentphilosophy.Most investors’ philosophiescan be boiled down to a set of

rules. How well you follow andhone those rules over time isreally what determines yourinvestment acumen. It’simportant to keep in mind thatyou have to maintain someflexibility around those rules.People can have very differentrules and be very successfulinvestors. You have to matchyour rules to your personalityin order to avoid behavioralbiases or other problems thatdetract from your process.

In order to be consistent withboth Tim and David, I beganrefining my own investmentphilosophy, which is thefoundation of what we employ

today at BeaconLight. I wouldsearch for ideas that wouldlook cheap to David, so they'dbe great value investments, andthat, simultaneously, had agreat story, which I knewwould be really appealing toTim. That really was how Istarted doing things at Atticus,and it's carried on over the lastdecade to how I see the worldat BeaconLight. For us, it’sabout finding interestingopportunities where we seebusinesses very differently thanthe market, often on multiplelevels.

G&D: When did you decideto leave Atticus?

EB: I decided to leave in early2009. When you’re managing$10, $15, or $20 billion inessentially one fund, it's quitehard to be differentiated andcreate alpha. In addition, whenyou’re that big, it's also difficultto be nimble and generatealpha on the short side which Ibelieve is a critical componentof managing capital throughevery market cycle. To giveyou some perspective, if you’re$20 billion, your minimumposition size is probably half abillion dollars.

My investment philosophytranslates extremely well tothe short side because weemploy the exact sameprocess both long and short. Alot of investors’ approaches toevaluating companies don’tfunction well on the short side,so they need different long andshort strategies. I have basedour philosophy on conductingdeep, fundamental researchwhere we see things differentlyand can be proven right.Whether you're long or short,it's really the same type ofanalysis, I believe. If you were


stocks.

Fast forwarding a few years, bythe end of 2007, Atticus’ assetshad soared to $22 billiondollars, of which $13 billionwas due to performance.There was still a smallinvestment staff, all of whomwere generalists, outside ofthe occasional specialist. I wasfortunate to be able tocontribute to the firm’ssuccess.

The performance run atAtticus came after a transitionin investment strategy. Atticushad a risk arbitrage and event-driven bias, but there was adearth of opportunity in riskarbitrage in 2003 because rateswere really low and every dealwas getting done in cash. Thefund evolved to be moredirectional and concentrated.

By 2004 I became involved insome activist situations beforeactivism took center stage inmarkets. It was an amazingexperience to see so much at avery young age. I worked fortwo portfolio managers atAtticus: David Slager, who ranthe European fund, and TimBarakett, who ran the U.S.fund. What made theopportunity at Atticus soextraordinary was that bothPMs were willing to back youas an analyst if you were willingto do the work and conveyconviction in an investment.Whether you were 22 or 42, itdidn't really matter. That wasreally empowering as a younginvestor.

At the end of 2004, theEuropean team moved back toNew York and we became oneteam. We were still two funds,but we were all workingtogether. David is more of a

“Most investors’

philosophies can be

boiled down to a set of

rules. How well you

follow and hone those

rules over time is really

what determines your

investment acumen.”

Ed Bosek

for my own idea generationand all the analysis. Delegatingpart of the investment processto my team, while alsoremaining highly involved, wasone of the bigger learningcurves.

G&D: Do you have anyexposure to emergingmarkets?

EB: We have had very littleexposure to emerging marketsas we only consider stocksthat we can take a medium-sized, 3% or 4% position in.Today that’s $10 million a dayin average daily volume. Thereare 6,000 stocks in the worldthat trade about that much—2,500 are in the U.S. and about

1,500 are in China. The rest ofthe world pales in comparisonwhich limits our exposure tothose regions. I think theEuropean country with themost names with that level ofliquidity is Germany and theyhave less than 100 companieswe could consider.

When you start thinking aboutthe emerging markets, Brazilhas less than 30 companiesthat trade enough for us toinvest. So, we're a bitconstrained around theemerging markets; however,

we are doing a lot of work inChina and we can talk aboutthis in greater detail. We thinkthere is an enormousopportunity on the long sideright now given the level ofgovernment stimulus andmarket dislocation.Internationally our exposurehas largely been WesternEurope and other developedmarkets. We've had emergingmarket positions here andthere, but they tend to be sortof one-off.

G&D: What was the fund-raising process like, especiallycoming out of the crisis?

EB: I think we have a veryunique history as a firm. Peoplelook at us today and say,"Now, you have a five or sixyear track record. You're stillrelatively small. You have goodpedigree. Why do you exist?"Hedge fund managers whohave been around this longwould have either quit orwould be managing morecapital, and we don't makesense to some people in thatcontext.

I was, in some ways, reallylucky that my entire careerwas incredibly accelerated. Igraduated with an MBA at 22and was a partner at one ofthe world's biggest hedge fundsat 26. I was given a remarkableopportunity and, as a result,learned a lot of the lessonsthat others maybe never learnin their careers, such as beingtoo big in a position orinvesting in illiquid assets. Iexperienced disruption postthe financial crisis at a time inmy life where it might haveseemed more ideal to stay thecourse. If Atticus had beenstructured differently and werestill around today, I would have


to have the sameconcentration on the long sidethat we used at Atticus,balanced by a rigorous shortbook that’s all alpha-driven,over time you could reallyreduce volatility. Quite simply,you wouldn't have drawdownsthat long-biased funds haveand, by being concentrated,you could still compoundcapital if you’re right. That wasand continues to be themission at BeaconLight.Ultimately, I left Atticus inearly 2009, and I launched inJanuary of 2010.

G&D: Did your investmentphilosophy at BeaconLightchange over time?

EB: Not really, but ourexecution has been fine tuned.We launched BeaconLightwhen I was 29 with just $50million of total capital, aportion of which was internal,so we were a very small fund.To date, we have grown in acontrolled fashion because,regardless of size, we havewanted to maintain adisciplined investment processthat is focused on deepresearch.

Given that I had a long biasduring my tenure at Atticus, Iwas extremely focused onhaving a balanced portfolio atBeaconLight. I certainlyexperienced growing pains anda learning curve as any investorwould. Investing is a journey tounderstanding yourself. Tounderstand who you are as aninvestor, you have to exposeyourself to grow and improveand, ultimately, to figure outhow your strategy works best.For me, the biggest area forgrowth was working with andleveraging a team of analysts.At Atticus, I was responsible

“I was given a

remarkable

opportunity and, as a

result, learned a lot of

the lessons that

others maybe never

learn in their

careers.”

Ed Bosek

spread can be. We think wehave a lot of running roombetween here and that point.We’ve been fortunate enoughto take the long view on assetgrowth while putting togetherwhat we think is a world classteam. I think if you do that andperform, the capital will follow.It is easy to grow your assetsahead of your business and nothave longevity. For the long-term, I think it’s important todo things your way.

G&D: Are any other formerAtticus folks who started fundsstill around?

EB: None of the spinouts fromthat vintage are around today.But you have to remember, Iwas young and some of those

managers were a bit furtheralong in their careers. I don'tthink that the fact that theyshut down is a reflection ofthem not being good, butprobably more a function ofwhere they were in theircareers. There are someincredibly talented people inthat pool.

A lot of people think being ahedge fund manager is reallyglamorous, but it’s not. It ishard work, particularly in along/short equity structurewith one portfolio manager: itall comes down to you gettingthings right. If you love doingit, the hard work is well worthit, but it can be very stressful,so it's not for everyone. I think

it makes perfect sense forpeople that have been partnersat massively successful funds towant to do something elsewith their time.

G&D: You mentioned earlierthat it’s key to see somethingdifferently than how marketsees it. What does that meanfor you?

EB: We look for opportunitiesthat are “FMD.” That’s ourown jargon for “fundamental,meaningful, and different.”“Fundamental” really has to dowith the underlying drivers ofthe business. It’s about theearnings being different fromconsensus expectations—notthe multiples being different.“Meaningful,” for us, is aboutthe magnitude of thedifference. We’re not lookingfor a company that could beatearnings by 5% this quarter; weare looking for companieswhere next year its earningscould be 100% to 200% higheron the long side. On the shortside we want to find a businessthat is going to be worthlessbut where everyone elsethinks they're going to make alot of money over the long-term. That is really what we’rethinking about when we'rethinking “different.”

Then the question is how doesthat happen? We are globalgeneralists and think the bestway to invest is to generateideas as a generalist. We lookfor things that don't seem tomake sense, and then as we dothe work, it’s important thatwe become experts. To takereally concentrated, conviction-weighted positions, you needto be an expert to trulyunderstand the investment. Ithink edge is differencemultiplied by conviction. It's


been perfectly happy being apartner there.

Given the initial trajectory ofmy career, I made theconscious decision to takethings very slowly withBeaconLight. When we werelaunching in the end of 2009the environment was awful.There were some formerAtticus investors, who mighthave partnered with us, butgiven our fund was going torun 30% net exposure, and not100% net, it didn't really makesense to talk to theseinvestors, even though theywere familiar with me. For us,it was about raising enoughcapital so we could run ourprocess the way we wanted torun it. I was lucky enough thatI could take the long view inbuilding the firm’s culture andprocess. Specifically, one of thereasons we turned down someseed offers was the seeds’emphasis on raising substantialcapital by the end of one ortwo years which we weren’tready to do. The fundraisingmarket was tough, which wascertainly a headwind, but wedidn't really have ambitions tobe very big upfront. As wewalk through some of thosemarket liquidity statistics, itmeans that equity funds andhedge funds with our strategyprobably should never be thatlarge. We firmly believe that$2 billion of capital is themaximum size where we canstill generate the type of alphawe'd like to create.

Our average long has out-performed our average shortsince we launched—that’swhat we call alpha spread.With our approach toinvesting, there is probably adirect correlation between sizeand how strong that alpha

“A lot of people think

being a hedge fund

manager is really

glamorous, but it’s not.

It is hard work.”

Ed Bosek

from a performanceperspective generally took alot of the structural risks tothe highest level they could—in a rising market this lookreally impressive. Throughcycles, however, I'm not surethis is sustainable. You needsome of the structuralelements to allow really goodstock picking to show through.No matter how good yourstock picking is, if you don'thave enough of it, it gets sortof washed away. You need thecombination of the two. A lotof gross exposure funds runwhat we would call “lazygross,” where they're justhedging and, by definition, notlooking to create alpha. I thinkthe alpha portion of pickingindividual assets differently isthe piece that doesn't scale.Structural advantages can scale.It's one of the reasons we areso cautious about getting toobig and have limits around howmuch capital we can run.

The last few years have testedinvestors, particularly if you’veerred on the side of caution asmultiples have just gone in onedirection in certain parts of theworld like the United States.Now, in other parts of theworld, largely emergingmarkets, multiples have onlygone in the other direction. Itcan be hard to discern if yourstocks are really workingbecause you're really smart orif it is just money flows thatare chasing certain things. Ithink the more clearlydelineated your roles andprocesses, the more you knowif you're doing things how youwant to. Returns are veryimportant but how peopledefine the concept of risk-adjusted returns is reallyimportant to understand in thisindustry.

There tends to be areductionism in looking atperformance down to netresults. The average investortends to invest in the strongestpast returns and get the worstforward returns. That's been afunction of markets for as longas they’ve been around. As amanager you try to pick thebest things you can that are

going to go up if they’re longsor down if they’re shorts, inalmost any environment,thereby setting up a structurewhere your alpha can shinethrough whether the marketsare up or down.

Upward markets have cloudedwhether hedge funds areputting up great returns. Butthis year the hedge fundindustry in general has donereally well because markets aredown while the hedge fundindustry is up. If you've beenblaming lack of relativeperformance on rising markets,well, this should be the yearwhere you get to tell people,"Look, the markets aren't upand we're creating absolutereturns." This should be thetime to remind allocatorsabout performance.

G&D: How do you go aboutfinding these FMD situations?


really easy to think you seesomething differently but nothave conviction. It's also easyin some cases to haveconviction but not be different.The combination of the twocreates really excitinginvestments where you canhave substantial returns. Giventhe way our portfolio isstructured, we don't useleverage or take a lot of grossexposure; so for us, it's allconcentration risks. Our topfive positions are 50%+ of ourlong book and we have similartypes of concentration on theshort side. Our grossexposure in some cases is halfof the industry norm and thatmakes our life really hard interms of generating highreturns, as stock picking iscritical. But I think it also putsus in a position to see things insome cases very clearlybecause we don't get swungaround by markets as much.

G&D: Can you talk about thechallenge in pickingidiosyncratic ideas in a bullmarket like the one we'veexperienced, particularly in thecontext of out-performing thebenchmark where correlationsare high?

EB: Investing is hard. Thereare a few ways to beat thebenchmark. For example, youcan take structural risks, youcan use leverage, you can usebeta, you can reduce liquidity,or you can use stock-pickingskills to create alpha. That is,per unit of risk that you take,you're better than thebenchmark.

In the last five years, almostevery asset class has gone up,so it's been next to impossibleto catch benchmarks. Thoseinvestors who have done best

“The average investor

tends to invest in the

strongest past returns

and get the worst

forward returns. That's

been a function of

markets for as long as

they’ve been around.”

Ed Bosek

We’re on the lookout forthose turning points andanswering questions aroundcomplexity and/or change.

G&D: Can you give anexample of a key question?

EB: If you want to come upwith differentiated ideas, youhave to accept that the workyou're doing has to beseparated from the urgency ofneeding an idea today. Forexample, we've been spending40% to 50% of our time onunderstanding China this year.There might be a lot of firmswhere a portfolio manager

wouldn't want his analystsspending that kind of mismatchof time versus investing; butwe are prepared to do thework and be patient.

An example of how ourquestioning process worksmight be energy. Currently, weno longer have a very big shortposition in energy, but lastAugust we were quite active.The genesis of the idea actuallycame from the work we haddone on a long idea from 2012on Flotek Industries (FTK).They make chemicals calledsurfactants, which you put intooil wells when you're frackingthem. It essentially makes

water slippery, and enablesmore oil to be extracted fromthe ground. They were sayingthat if a company invested 1%or 2% on the cost of the well,they'd get 30% more oil out ofthe well. We concluded,"Wow! That sounds prettygood. I bet people would wantto buy that product."

As we conducted the diligenceto verify that, we started torealize there were customerswho were seeing lots of otherproducts and techniques todrive even more efficiency indrilling. Our idea is that U.S.onshore drilling is, in someways, a closed system, whereevery dollar generated goesback into the ground, and eachdollar that goes back into theground generates more barrelsof oil due to investments inefficiency. To take this idea astep further, each barrel of oilcoming out of the ground, wasalso generating a higher profitmargin as producers gainedefficiency, which would thendrive exponential growth incapital available to re-investinto this closed cycle.

At a high level, it was clear thatthe marginal cost of oil in theworld was falling prettydramatically. For us, it wasabout asking this originalquestion about one company'sproducts and being able to tieit to a broader trend. Westarted to see this realexplosion in U.S. production in2014. We had done the worktwo years earlier to clarifyhow this could happen. As ithappened, it conformed towhat we thought we wouldsee and we started to shortpretty broadly across theindustry.

G&D: Are you still short(Continued on page 28)

Are there any commoncharacteristics among them?

EB: We've generally foundthat the really greatinvestments come down toone or two drivers that tell astory differently than peoplethink. Part of it is experienceand seeing different things overthe last 13 or 14 years play outacross different geographies. Ifyou can identify what haspotential to be those drivers,formulate a really goodquestion around those drivers,and then just focus onanswering that one question,you can really reduce thenoise.

We typically find thatspecialists or people whoclosely follow businesses orindustries get things wrongwhen there is substantialchange. Maybe they have staleframeworks, i.e., some thingshave worked for a long timebut something really new ishappening. Sometimes having afresh perspective helps you seechanges more clearly. Anotherexample is when there’s anelement of complexity notnecessarily specific to theindustry. It might be thatthere’s a tech specialist whohas a macro issue affecting abusiness or a legal issueaffecting a business. That mightbe an opportunity for ageneralist to come in and say,“We’ve seen this in othersectors, so we actually havesome expertise here.” Changeand complexity often leadmarkets to get things wrongand hence create anopportunity.

Markets are pretty good atextrapolating trends that are inplace and pretty bad atidentifying inflection points.

“Markets are pretty

good at extrapolating

trends that are in

place and pretty bad

at identifying inflec-

tion points. We’re on

the lookout for those

turning points.”

Pershing Square finalistspresent their investmentthesis to the judges

Ed Bosek

G&D: Did you look at theother potential angles maybewhere low oil prices are aninput cost and somebodymight benefit from that?

EB: We have to some degree.But when commodities are aninput, often it's the samecommodity for everyone else,so if economics get muchbetter in an industry, it justgets better for everyone.You'd need to find a company

that has a real franchise thatcan hold pricing while theirinput costs are going down.We haven't found many ofthose. Certainly last year whenoil first started going down,there was a rush to buyanything that uses oil. Three orfour months later, peoplerealized that all of theircompetitors used oil and allthe stocks did poorly afterthat.

We're currently long acompany that benefits fromlower oil prices, but isconsidered an energy MLP andas a result, is just getting solddown every day while the

business has only improved.You realize it’s going tocontinue until the wholesector has found the bottom.The people who own thatstock probably own otherenergy names and are probablygetting redeemed so they can'thave one name left in theirbooks.

If you were to get back to that,you'd say, "Okay, we think thebusiness is getting much better.What's the recognition point?When will people care or startto see what we see?" We thinkthat's a really good way to stayhonest about your investmenttheses. Being firm aboutrecognition points on theshort side has led to a fairamount of success in the lastfew years. You could say, "Thisis a bad business, and it's oneor two multiple points moreexpensive than it should be, soI'm going to be short it." Thattype of investment lacks arecognition point and is not forBeaconLight.

G&D: What questions are youasking in China and how areyou approaching thatopportunity?

EB: We think really greattheses have drivers that pushon misperceived levers such asindustry consolidation; achange in incentives; a changein behavior; a new product; orlarge acquisitions whichchanges competitive dynamics.We consider these leverswhen evaluating the financialstatements. Next in ourprocess, we ask ourselves whythere is a misperception. Ithink many of these factors arerelevant now in China. Theeconomy is slowing down in away that's concerning andthere is confusion from a


today? What are the questionsyou're asking?

EB: When crude oil was at$100, we were prettyconvinced we were reallydifferent. Next we ask “what isthe risk/reward?” Usually, ifyou think you really seesomething differently, andyou're wrong, you don't gethurt that badly becausenobody else is betting on it. Ifyou're right, you can do verywell. In this case, we sawasymmetry in companies thatprovided services or, in somecases, owned some resourcesin the oil industry.

Today, the debate is what thenear-term low is going to be—not so much what the long-term price will be. If I wereforced to do something, Iwould probably still be leaninga little short. We have one realposition left in the energyspace. We don't want to be inthe position of fighting trends.If money's flowing in, how areyou going to know you'reright? After we establish ourthesis, we think aboutsomething called a recognitionpoint. If we see a thesis verydifferently, it’s important toknow when people will beforced to see what we see.We are going through therecognition point right now inenergy and we'll probably becovering this last short soon.

The benefit of being a globalgeneralist is that we're notforced to do anything. We justneed to find the best ideasfrom a wide universe. You'renever going to catch the top tothe bottom in names. You haveto accept that and just hopethe next thing you find isbetter than what remains inwhat you've left behind.

“Really great theses

have drivers that push

on misperceived levers

such as industry

consolidation; a

change in incentives; a

change in behavior; a

new product; or large

acquisitions which

changes competitive

dynamics.”

Ed Bosek

There are hundreds ofcompanies exposed to thesedynamics. I think you want tobe and you can be very choosybecause there's a lot going onand people are not superfocused on it. We think it'simportant you do the worktoday so you can be preparedwhen things start to really playout.

One example is the largestcargo railroad in the worldcalled Daqin Railway (SHSE:601006). Prices have been setfor almost 20 years by theNDRC, the national regulator.The NDRC allowed Daqin toincrease prices last year for thefirst time and then allowed

them this February to liftprices again. In August, theNDRC allowed Daqin todetermine the prices so, forthe first time ever, they couldhave some flexibility in settingprices, and they’re already a30% EBITDA margin business.

China is structurally short railcapacity and needs more of it,so a lot of cargo is sent bytruck, which is rail’s maincompetition. Daqin isessentially sold out and truckscost roughly three times theamount that Daqin’s rail

services costs and are not aviable alternative. Daqin hasestablished a pricing teamwithin the organization toanalyze pricing since they thinktheir customers are incrediblyinelastic which would justifyfurther price hikes. There'ssome "we need to do what'sgood for the country in theshort-term," but in the long-term, there's an incredibleability to raise prices. If therewere free market prices here,we think this year's earningsare going to be around RMB1.10, so just about eight timesearnings. Daqin is net cash, andpays a big dividend. We thinkthose earnings could go toRMB 3.00 if they were to havebroadly liberalized free marketprices which would implysignificant upside.

G&D: China has builttremendous over capacity overthe past 20 years. Are anyvolumes at risk due to over-building in China?

EB: They carry some cargo,but the bulk of where theymake their money is carryingcoal, which we view as anongoing expense for theeconomy. Long-term, Chinawould obviously like to useless coal rather than more, butthey use three billion tonscurrently. Daqin carries 400million tons on their main lineand we reckon theiraddressable market is 1.5billion tons, leaving a lot ofroom for demand for coal tocontract before they’re reallyimpacted.

G&D: Any other situationsyou've been excited about?

EB: There's a Hong Kong-listed state-owned enterprisecalled China Resource


macro level within China.

I think people who doubtedChina for the past ten yearswill continue to doubt it, andpeople who have loved Chinafor the past ten years probablystill love it. It's somewhatproblematic to know exactlywhat's going on, but at thecompany level, it's actually a biteasier. Two of the mostpowerful drivers with the mostlevers for an investment thesisthat we've ever witnessed arederegulation anddemutualization.

At Atticus, my biggestcontribution was buyingfinancial exchange operatorsaround the world. The theseswere relativelystraightforward. Exchangeswere transitioning from beingowned by their customers totheir shareholders that, inturn, really drove a change inbehavior, particularly aroundcost allocation and investmentin the cost base. This led topotential for mergers, whichwould also dramatically changecost structures. In some of theexchanges that we owned,margins were 10% andultimately skyrocketed to 60%.

China is still a commandeconomy where there are a lotof regulated areas and amarket where 70% of themarket cap is owned orcontrolled by the state. Wethink that we're starting to seea demutualization of a lot ofthose companies against abackdrop of uncertaineconomic outlook, which iscertainly leading to confusionand a lack of fundamentalanalysis. In China we’re zeroingin on companies where thereis both deregulation anddemutualization.

“Two of the most

powerful drivers with

the most levers for an

investment thesis that

we've ever witnessed

are deregulation and

demutualization.”

Harvey Sawikin

line? Probably not. But this isan example where we seesomething playing outdifferently from what youmight initially expect. Forexample, a Chinese SOE isgoing to buy some assets fromminority holders. You mightassume they're going tounderpay but to see thatthey're actually rewardingminority shareholders andgoing to start doing things thatare improving the asset in adramatic way is really eye-opening.

Those are some of the bestideas I think we ever find.Because we are generalists andwe're turning over a lot ofstones, we have enough to bewell versed in a wide array ofnames. Some of the greatesttheses for us are things that,when you start digging in, arecompletely different than thegeneral, widely heldperception.

Daqin is a monopoly railinfrastructure and CRE is avaluable company with beerassets and are just twoexamples of opportunitieswhere the upside could bemeaningful as demutualizationand deregulations takes place.

G&D: How do you thinkabout sizing these positions?

EB: Given we are aconcentrated fund, the top50% of our book is in fivenames and if we can find anadditional one or two greatideas in China over the nextfew years, that would be a winfor us. These aren'topportunities that will be up amere 30% or 40%—we thinkthey have tremendous upside.But let’s face it, China is scary,and it is a bit path-dependent.

One other benefit for us isthat we do work on individualChinese companies.Sometimes the data you getaround what's going on in theeconomy and specificcompanies is worse thanmacro data as far as quality ofdata. But sometimes it's muchbetter and can give you a clearsense for the situation acompany’s facing.

In Daqin, you get really goodvolumes of the coal beingtransported in different areas.It's more timely and, in someways, directionally much moreaccurate and interesting thanmacro data. By following theaction in Daqin we have agood window into otherinvestments in China. We'vecertainly exported some of theinformation that we've foundaround how bad some trendsin China are into the rest ofour short book globally. As ageneralist, the goal is to iscross-pollinate—and ideallysee things with a varyingperception and build on it.

As we research ideas, we willuse smaller positions inopportunities that are reallyexciting as a way to put a stakein the ground, forcing us tofocus and do even more work.The wind in China could blowa different direction and theycould stop the SOE reform.They've tended to be prettygood about long-term thinkingin China, but we have to keepan eye on that.

I'd much rather be spendingour time there where nobodyelse is looking. People think I'mcrazy when I talk about it andthe deregulation anddemutualization are actuallyhappening. There's just a lotless competition around the


Enterprises (SEHK: 291) whichis 50% owned by ChinaResource Holdings. CRE own50% of the biggest beercompany in the world, calledCR Snow, or China ResourceSnow, while the other 50% isowned by SAB Miller (LSE:SAB), one of the world’s bestbeer operators who has avested interest in how thecompany is run. The beerindustry in China is reallyinteresting as it's the lowestpriced beer in the world. CRSnow has about 25% marketshare. They make 11% EBITDAmargins, while SAB's globalbusiness makes high 30s. Theythink that over the next five orsix years they can reach paritywith SAB’s global margins,which will be partly due toindustry consolidation.

Recently China ResourceHoldings made a bid for allCRE’s non-beer assets. It wasequivalent to roughly 80% or85% of the entire market capof CRE before this bid. TheSOE basically gave a gift tominority shareholders andbought the assets that nobodywanted, nearly giving full creditfor the entire stock price. Thathas been approved now andwill be paid out in October.They've also said that afterthey pay that, they're going tobuy 20% of the market cap,which is 40% of the free floatat a price that's also abovetoday's stub value. So, they'redoing things that are actuallyquite friendly towardinternational investors. Andthen they've essentially saidthat they're now going toconsolidate the industry and inthe next five years try to getto SAB Miller margins. Inwhich case, we think EBITDAcan increase by 5x in the nextfive years. Will it be a straight

Ed Bosek

Harvey SawikinEd Bosek

balance. You never want to betoo cautious where you miss agreat opportunity and it runsaway from you.

We focus on key driversmoving in directions that wethink we see clearly. If the datais tracking 1% or 2% differentthan we'd expect, it's generallynot enough to scare us. But,for example, if Daqin’s pricesare going down when I thinkthey’re supposed to go up,then that's a big delta, or if CRSnow is engaging in a pricewar, while we're expectingrational price discipline andmargin expansion, those are

the types of fact patterns thatwould immediately set offalarm bells for us.

Sometimes the differencebetween a really great year ora really great track record andnot such a good year or trackrecord is how quickly yourecognize your mistakes.Certainly not adding todetractors can make adramatic difference. I knowsome investors that think theycan have a 40% batting average,but if they press their winnersand avoid taking big losers,

they can still have a greatperformance.

G&D: Given the high valuationlevels in the U.S., how are youfinding these situations thathave such meaningfuldifferentiation and upside?

EB: We wrote earlier in oneof our quarterly letters thisyear that we couldn't find anylong ideas. We looked aroundthe world and couldn't findanything terribly compelling.We were starting to see someof the trends in China, but itwas really difficult: investorswere very bullish. The U.S.market at the low hascorrected over 10%—that’sone index. Then the questionis “how do the components ofthat index do?” There's been alot of damage under thesurface this year, so whileoverall the market's down alittle bit and earnings for theyear are probably flat to downslightly, the multiple hasn'tmoved very much. There iscertainly a segment of stocksthat have been massively de-rated. We are not in the gameof looking to catch fallingknives, but there has been afair amount of correctionaround valuation in large partsof the market that I think canbe easily missed if you observejust the indices broadly.

G&D: Could you tell us aboutan idea in the U.S.?

EB: This year a position thatwe are intrigued by is acompany called BuildersFirstSource (BLDR). We thinkthe U.S. housing market hasroutinely disappointedinvestors over the last threeor four years ashopes for a recovery havebeen dashed. In cyclical


margin in some regionsinternationally and we cancreate edge.

G&D: When you're buildingconviction and looking forrecognition points, can youtalk about when the wind doesshift or how you think aboutrevisiting your thesis in thatcontext?

EB: We ask ourselves thefollowing questions. Do we seethings differently? Are wefundamental, meaningful, anddifferent? Is there a recognitionpoint? Can we reallyunderstand the things thatmatter? What are the trends inthe business? If we want to belong in something, they shouldbe getting better. If we areshort something, fundamentalsneed to be getting worse.What are the expectations?Then, what's the risk/reward?Embedded in our decision-making is staying on top ofwhat's happening in a business.Given that in some ways we'relooking for the story to drivevalue, rather than waiting forvalue that will ultimately beunlocked, it's really importantthat the story is on track. Westay on top of our businessesand make sure we have highconviction in what we think isgoing to happen is actuallyplaying out.

I've generally found thatsometimes when you’rewaiting to be proven right, youactually can build convictionand have a higher battingaverage, and often the marketdoesn't see it until much later.There's a sweet spot of beingearly, but not too early. If thefundamental thesis is happeningand there's proof of concept,but the market is not yettuned in, there’s a delicate

“I'd much rather be

spending our time

there where nobody

else is looking...There's

just a lot less

competition around

the margin in some

regions internationally

and we can create

edge.”


could be worth $50 or $60.A number of things are comingtogether to drive the value inthe shares, including highervolumes and cost-cutting.Previously, it was also arelatively small company with aprivate equity owner, so thefree float was limited and itwas under the radar. Followingthe merger, they did a placingwhich has increased theliquidity and now it's nearly a$2 billion market cap companyattracting coverage. Therunway is still long for thecombined entity and the fullstory will play out in the next18 months or so.

We’re upbeat on theprospects as we think it’strading at an 11% or 12% freecash flow yield before anyrecovery. Looking at the sellside consensus recentlyindicates there is upside tonumbers and as soon as weturn the calendar, it looks likethe shares are trading on 6.5xearnings. We are, in someways, early to a story that notmany people understand andthere will be discovery value aspeople see what's going onhere.

G&D: How do you thinkabout the recognition point forthis idea?

EB: I think the recognitionpoint is when the deal closesand they start delivering on thecost synergies and the storybecomes more widelybroadcasted. Their equityplacing coincided with themarket selloff in late August soI'm not sure many investorswere looking at brand-new,fresh ideas when their bookswere getting hit. Sometimesyou get lucky and get to takeadvantage of these market

dislocations when there is agreat story you stumble upon.

G&D: Could you talk abouthow your approach translatesto shorting?

EB: One of the shorts inenergy was Helmerich & Payne(HP) which is an oil servicescompany involved in horizontaldrilling. In the last down cyclefor oil services, horizontaldrilling was still in the earlydays of penetration, so theywere essentially immune fromthe pull-back. This time, theyhave not been insulated andthere's been a serious pull-back in utilization. We thoughtthat others might realize therewould be a downdraft inutilization but would assumethat pricing would bemaintained at its former levelbecause it did in the previouscycle. However, from ourstandpoint, we thoughtutilization would decline andwhile a recovery in utilizationmay ensue, there wouldactually be a price-down. Weremained negative as peoplehave been very excited about arecovery that will nevermaterialize and as they figurethat out EBITDA differs vastlyon multiples to replacementcosts. We think the best wayto think about H&P now is toconsider them in anoversupplied machinerymarket and, therefore, theirprice-to-book should looksimilar to vertical rigs goingforward.

That's a prime example ofseeing something differently. Inthis case, there was a clearrecognition point around whenpricing would change. We dida lot of work aroundhorizontal rigs, and the trendswere obviously terrible, as


markets like housing, in someways, the longer thedisappointment lasts, the moreattractive the opportunitybecomes, as investors becomemore cynical.

You're starting to see a lot ofthe evidence of a housingrecovery materializing. Thelabor market has improved,financing has become moreaccessible, and mortgages arestill affordable. Householdformation is starting to growas demographics have becomea tailwind. There's also a needto add housing inventory and,while some parts are over-supplied, we're pretty bullishabout activity. That alonewouldn't be enough for us totake a position, but we'reaware of the change in trendsand monitoring the situationfor investment opportunities.

Builders FirstSource is alumber distributor in anindustry where there has beenserious consolidation. Thisyear, there have been twomergers between essentiallyfour of the top five players thathave created two dominantplayers that have takenappropriate measures to offsetsome of the competition. Thecompany that Builders wasable to buy was a Fidelityprivate equity investmentwhich never really cut costsduring the downturn, sothere's a big margin gapbetween the two companies.We think today by factoring incost-cutting efforts, the stockis worth about $20. We werepaying $12 or $13 to buy thestock, and the stock is stillaround $12 today. We think ina mid-cycle, the stock, usingseven or eight timesEBITDA—peers trade at tentimes EBITDA—the stock


for students looking to get intothe industry?

EB: The further you go in yourcareer, the more the pathmakes sense retrospectively:you can connect the dots. Themore you can understandyourself and take this time—Ithink business school is anamazing time to learn—tomeet people and really soulsearch and learn aboutyourself, the better. The moreyou can know who you are,the more you can figure outwhat you want to do. To me,that's probably the mostimportant thing. People cometo me all the time and ask mefor advice, for example, whatjob they should take. I askthem the question, "What doyou want to do?" Very fewpeople know the answer tothat. I think an MBA programis a great time to learn moreabout yourself. Once you dothat you can more easilynavigate the industry and find astrategy that fits.

G&D: This has been reallygreat. Thank you.

they were 45% utilized andgetting worse. Expectations inthe near-term in cyclicals arehard because they weredepressed and people werehoping for rebound. We couldthen gauge the risk/rewardclearly. Using all of theseelements in our analysis isexactly the same whether weare making decisions from thelong side or the short side.

I think the real place that we’rea bit different on the short sidevs. the long side is that we aretighter on the recognitionpoints for shorts, which tend

to be within three to sixmonths. Sometimes on thelong side we can wait a bitlonger. In shorting it’s muchharder to underwrite yourdownside which is somethingcrucial to keep in mind.

G&D: If you were to sum upyour strategy, what would itbe?

EB: If I were to sum up whatwe're trying to do in twowords, it's to be “different”and “right.” If we can do both,we will perform. We canensure that we're different butit's harder to ensure that we'reright. That's why we spend agreat deal of time on ourresearch and use the sameapproach on both our longsand shorts.

G&D: Do you have any advice

“The more you can

know who you are, the

more you can figure

out what you want to

do.”

Stanford tuition when he hadpaid state taxes all those years.I graduated with a degree inFinance. After focusing onfinance at University of Iowa, Iwent to the ThunderbirdSchool of Management for ayear before receiving a RotaryFellowship to study at St.Gallen in Switzerland.

In the gap year before startingin the program at St. Gallen, Iwent to Chicago to work withUBS. I spent time working ontheir Forex Money Marketdesk, conducting credit analysisfor some of their lendingoperations, and even helping toset up their futures seat inChicago. It was greatexperience.

At St. Gallen, I tried to focuson an area where no one else

was focused. I conducted longwave economic analysis on theart market. Long waveeconomic analysis intrigued mebecause it was an interestingcombination of both theinterests of my mother andfather. My father was of courseinvolved in markets, and mymother was a psychologist.Long wave economic analysisincorporates an element ofgenerational psychology. Istudied the impact of longterm macroeconomic trends

on art movements, such asImpressionism or Modernism. Iessentially was assessing thecorrelation between the two.My analysis suggested that artmovements were impacted bybroader macroeconomictrends. The qualitativeexplanation is that when youhave difficult economic times,everyone is fearful and worriedabout the economy. It helpspeople understand whatthey're really made of, and itbrings out creativity. You seethis trend with majorinventions as well as in artmovements. On the otherhand, when everyone is eatinghigh on the hog, as everyonesays in the Midwest, creativitydeclines.

G&D: When did you first getinvolved in the moneymanagement industry?

JS: After St Gallen, I went toNorway with my fiancé. Istarted working at Storebrand,a Norwegian reinsurancecompany. I was 24 at the time,and they gave me a $100million global equity portfolioand a $25 million venturecapital portfolio. It was reallysink or swim – I had to figurethis out on my own. Mygeneral approach was toidentify industries that wouldhave attractive and improvingfundamentals for the next 10years. Then I studiedeverything I could about theindustries and the companieswithin the industries.Interestingly, that's what I stilldo to this day.

The venture capital experiencewas fantastic because I wasinvolved as an early stageinvestor in Magellan Navigationas well as IMAX. AfterStorebrand, I worked at UBS


Research, has alwaysinvested differently. Heropen outsourcedinvestment research firmis the latest iteration ofinvesting differently,although elements of thisresearch platform havedriven her outperformancefor the last 15 years. Shehas recently made theresearch platform availablefor any investor to use.

Graham & Doddsville(G&D): Can you discuss yourbackground and your path toinvesting?

Jane Siebels (JS): I grew upin Iowa. My father was a graindealer. I literally started takinggrain prices at the age of 5.You can imagine thefrustration of the traders onthe phone with me! My fatheralways said you have to knowsomething that no one elseknows, and I have relied onthat advice throughout mycareer. For trading grains, thatmeant literally flying up andcounting corn fields, soybeanfields, and how the crops werelooking across the wholeregion. I had received mypilot’s license at age 16 so Icould do that with my father. Itwas a wonderful introductionto the markets. Another earlyinfluence was my family’sencouragement to always havea job. For me, this meant I wasalways mowing lawns, cleaninghouses, lifeguarding, and thosesorts of activities. This wasalso influential because youlearn a lot about businesscommon sense.

After high school, I wasaccepted at Stanford, but Iended up attending theUniversity of Iowa. My fatherwasn’t excited about paying

“My father always said

you have to know

something that no one

else knows, and I have

relied on that advice

throughout my

career.”

Jane Siebels

Jane Siebels(Continued from page 1)

appreciated the opportunityand decided to invest in mylong/short tech focused hedgefund. I actually didn't have oneat the time, so we took theLatin American fund off theshelf and changed the name.

Our fund was long emergingmarket tech companies andshort developed market techcompanies. In 1999, it was likestanding in front of a train, butwe did reasonably well. On theshort side, we pursued astrategy focused on companieswith expiring lockups whichhelped. Despite painfulperformance, Sir John stuckwith the strategy and actuallyadded several times to thefund. He even added to hisshorts and ended up with apretty significant short positionessentially at the peak inMarch. So we ended up doingquite well, and eventuallyclosed the fund in 2002 as theanomaly went away.

G&D: Did you manage anyevergreen funds that hadindefinite lives? Or have youalways been focused onopportunity specific funds?

JS: No, I have focused onopportunity specific fundsthroughout my career. Goingback to the theme of doingthings differently, I’ve tried toset up funds targeted atspecific anomalies. I feelstrongly that investors shouldbe able to understand howtheir money is invested, and itis more easily accomplishedwith opportunity specific funds.When the anomalies wentaway, I closed the funds and Ireturned the money. In everyinstance, I returned investorscapital above the high watermark.

I also generally focused onattracting families and high networth individuals to build myinvestor base. Wealthy familieshave the advantage of thinkinglong term. From what I cansee, they are basically the onlyinvestors that can be long-term. Due to demographics,regulation, or benchmarking, itis difficult for other investorsand institutions to think longterm.

Benchmarking is an interestingissue. When Sir John firststarted investing, the MSCIWorld did not even exist. Ifyou went back andretroactively calculated theperformance, Sir Johnunderperformed the MSCIWorld for his first 10 years inbusiness. In today’s world, hemight not even be around! It’srare for a manager tounderperform for 10 years andremain in business, but heobviously turned out to be anexcellent investor. I think thathighlights that benchmarkingcould very well be negativelyimpacting the ability formanagers to think long term.

G&D: What otheropportunities did you pursue?

JS: In 2000, we launchedSiebels US Relative Value totake advantage of thedispersion in valuationsbetween small cap value andlarge cap growth. We closedthat fund in 2003 when theopportunity went away.

In 2002, I saw that there wasan opportunity withcommodities. We were 20years into a bear market. Atthat point, most commoditieswere trading below the cost ofproduction. Yet we sawtremendous demand growth in


as the Head of EquityManagement in Europe beforeheading back to the US to becloser to family.

G&D: When did you connectwith Sir John Templeton?

JS: Around the time I returnedto the US, I interviewed withSir John. I was able to get theposition, so I started managing$3.5 billion in separateaccounts as well as a LatinAmerican fund and a personalhedge fund for Sir John. In1996, I approached Sir Johnabout starting a hedge fund.Since my performance on thepersonal hedge fund was sogood, he was willing to backme. I added 6 other families tothe investor base.

I started an emerging marketlong/short hedge fund. I wasagain motivated to focus onareas where no one else wasfocused, and because everyoneassumed there was no borrowavailable, there was no oneelse shorting emerging marketequities. We actually found afew different sources ofborrow and were positionedquite nicely for some of theemerging markets turmoil in1997 and 1998. Unfortunately,we were still hit on some ofour long exposure, but wewere able to outperform otherfunds during the time period.

In May 1999, I mentioned toSir John that emerging markettech stocks were trading atsingle digit P/E multiples eventhough they were growingrapidly. Meanwhile, developedmarket tech stocks weretrading at triple digit P/Es. Ithought capturing the eventualnormalization of this spreadrepresented an opportunity.Sir John immediately

Jane Siebels

research arm of Green CayPrivate Client. We started thisin 2000 because I was sitting inthe Bahamas and thinkingabout how to do thisdifferently.

I realized that I could have anarmy of 500 analysts and yet Istill may not have the analystwith the right language skills,with the right industrybackground, or with the rightlocal knowledge. At the sametime, I read about a companythat designed logos forcorporations based on internetcompetitions. They published amandate, reviewed

submissions, chose the finalists,and awarded the winners withcash prizes. I thought we coulddo that for qualitative analysis.That's when Siebels AssetManagement Research wasstarted. For example, if wewanted to do a report on TataMotors, we would advertisethe qualitative researchopportunity in India, onrelevant industry sites, andmessage boards. Prospectiveanalysts register with us andcan submit their researchrelated to the opportunity. Welook for original research and

of course avoid any insiderinformation. We typically focuson qualitative information, butwe do require a replacementvalue calculation because wethink it is the ultimate valuemetric.

We now have 2,500 peopleregistered with us around theworld. We previously used theresearch internally at ourhedge funds and we still use itinternally for our privateclients. However, our internalportfolio for the private clientsis only 10 stocks with less than20% turnover, so we felt itwould be an interestingopportunity to offer theresearch to other investmentfirms.

We have found the advantageof local expertise to be quitepowerful. There are multipleexamples of local knowledgehelping identify and clarifyreally significant stock specificissues. For example, in India,one real estate companyactually had empty sites withcustomers demanding theirdeposits back. It was clear thatwasn’t an attractive investmentopportunity!

We try to structurecompensation to incentivizehigh quality work. Analystsaccumulate points based onthe quality of their work, andthe point totals place them inone of 3 levels of seniority.Compensation doubles witheach increase in level ofseniority.

G&D: Has the research led toany actionable ideas recently?

JS: One industry study werecently finished was anevaluation of the cruiseindustry. It has been a tough


China and other emergingmarkets. The fund was longcommodities and short realestate. I believed thatincreasing commodity priceswould trigger higher interestrates, which would negativelyimpact real estate values. Itwas a very nice setup for thefund and we did well. Weeventually sold the SiebelsHard Asset Fund in 2013 as westarted to see the peak incommodities.

G&D: Which commoditieswere you most worried aboutin 2013?

JS: We worried about prettymuch every commodity acrossthe board. Commodity priceswere well above productioncosts, and that dynamic wasbringing so much supply intothe market. The commoditypricing and supply/demanddynamics had reversedsignificantly since we startedthe fund. With somecommodities, China accountedfor more than 70% of demand,and with China’sdemographics, we were veryworried about the long termsustainability of that demand.So with a negative view oncommodities and our realestate thesis having played outearlier, we decided in 2013that it would be appropriate tosell the fund along with thehedge fund business.

G&D: What are you focusedon today?

JS: I manage Green CayPrivate Client. We work withhigh net worth families to helpthem think long term abouthow to grow and protect theirwealth. One area I’m reallyexcited about is Siebels AssetManagement Research, the

“We have found the

advantage of local

expertise to be quite

powerful. There are

multiple examples of

local knowledge

helping identify and

clarify really significant

stock specific issues.”

Jane Siebels

JS: India has problems thatChina does not have. One isthe tremendous bureaucracy.No matter what governmentgets elected, there are certainlimitations to the pace ofreform. I think thatbureaucracy is leading toanother growth roadblock inIndia. Yes, if you look at thenumbers, if you look at thepotential, it should definitelybecome the next greatcommodity importer, but Ithink it will take time. I alsodon’t think the culturaltendencies in India tendtoward consumerism to thedegree they do in China. Thathas likely been a driver ofconsumption in China that youmight not see in India.

G&D: Do you have aperspective on the stability ofparticular countries inemerging markets? Will therebe another Asian crisis, andwhere might it occur?

JS: That's a great question.One benefit of this cycle is thatless emerging market debt isdollar denominated ascompared to 1997 and 1998.You still have some, but it isnot on the same magnitude. Iwould definitely avoidcountries with current accountdeficits or high US dollar debtas a percentage of GDP.

Another interesting emergingmarket out there at themoment is China. I thinkChinese government debt inrenminbi could be a veryattractive investment. I thinkthe skepticism around therenminbi devaluation isoverdone. I think there is ahigh probability that therenminbi comes into the SDR,which I expect will stabilize thecurrency. Inclusion into the

SDR is certainly not beingpriced as a high probabilitytoday. I might then short someof the countries that havefunded a lot of their growthwith US dollar denominateddebt.

G&D: Do you have any advicefor Columbia studentspursuing a career in investmentmanagement?

JS: A big one is “Do itdifferently.” I have mentionedthis several times throughoutthe interview because it hasbeen an important themethroughout my life. Also, notonly do you have to do thingsdifferently, but you have to dothings passionately. The moneyis not worth it. You need to bepassionate. You need to lovewhat you do. Usually, if youreally get in touch withyourself and follow yourpassion, you will be differentthan anybody else becausethere's only one of you.

G&D: Thanks so much for theinterview, Jane.

industry. Everyone has beenperpetually disappointed. Wegathered information thatsuggests the dynamics of theindustry could finally beimproving. The long awaitedrestructuring may finally beoccurring, and there is anopportunity for furtherconsolidation in the industry.Additionally, with oil pricesdown and new routes likeCuba and parts of Asia openingup, we think the cruiseindustry is a pretty interestingplace to invest. I will hold offfrom mentioning any specificcompanies, but I think thelarger companies with stablebalance sheets will be able totake advantage of thisopportunity.

G&D: Given your pastexperience, we would love tohear your thoughts oncommodities today. There hasbeen plenty of debate, bothbullish and bearish. How doyou think it's going to play out?

JS: I think we are getting closeto a bottom, but not yet there.In a typical commodity cycle,price has to bounce aroundthe bottom for a long time inorder for excess supply to betaken out. We are only justnow seeing some supply takenout of certain markets. Ironore, oil, even some of theprecious metals are in theearly phase of supply exiting.When we see companiesexiting industries, closingassets, or really just having atough time, that can be aninteresting signal. But I thinkwe're just starting to scratchthat surface at the moment.

G&D: Is India going to be thenext China in terms of demandfor commodities?

Jane Siebels

backgrounds and then launchinto a discussion on the historyof Global EndowmentManagement?

Hugh Wrigley (HW): AsDirector of Investments, Icoordinate the activities ofGEM’s public and privateinvestment teams. Previously, Iled the private investmentteam at Duke University underThruston Morton, our founderand then CIO of DukeUniversity’s endowment. Welaunched GEM in 2007 as aninvestment firm that wouldinvest in the long-term, value-oriented style of the leadinguniversity endowments, but onbehalf of smaller endowmentsand foundations who lacked adedicated investment office. Bypooling their assets, ourinvestors could invest like thelargest endowments withoutthe inefficiencies and conflictsthat frequently arise inseparately managed accountstructures.

We sought to create astructure that allowed us toinvest as similarly as possibleto the large endowments—theYales, the Dukes, the MITs,and Notre Dames of theworld. Philosophically,investing a large endowmentmeans searching for externalmanagers across asset classes,globally, while maintaining anopportunistic mindset. At theend of the day, we arebottoms-up value investorslooking to invest with the bestmanagers, evaluating the leastefficient asset classes we canfind, and taking a long-termview. The main tenets havebeen consistent over time.

Campbell Wilson* (CW): Iwas also on the investmentteam at Duke before joining

GEM in 2007. Before joiningDuke, I was a student at UNCChapel Hill, which is where Ifirst fell in love with investing. Iended up writing anindependent study aboutBuffett, Graham, Soros, andothers. During school Iworked an unpaid internship ata local investment advisor, justto get my foot in the door, andI realized that there werethese endowments, includingDuke's, right down the roadthat had several billion dollarsinvested with the bestmanagers in the world. Theyhave an analyst program wherethey hire people to join a smallteam right out of college,where you could interact andlearn from some of the bestinvestors in the world. It wasan absolute dream job for meand something I am still doingtoday.

James Ferguson (JF): I am abit of a late bloomer in termsof doing this full-time. I havealways been interested inpublic investing and grew upsitting around the table withmy dad and brother, talkingabout stocks. I graduated fromDuke in 2006 and then workedfor a private real estatedevelopment firm that spunout of Trammell Crow in thelate ‘80s. I was there for sixyears, but during that time,nights and weekends, I wasreading annual reports, lookingat manager filings, and thengoing to the BerkshireHathaway meetings with mydad.

I came to the conclusion that Ishouldn’t spend 20 hours aweek doing that in my freetime—that I should really do itfull-time—so I began a dialoguewith the GEM team inCharlotte, and then we


a Vice President in theMergers and StrategicAdvisory Group atGoldman, Sachs & Co. Hegraduated with an L.L.B.(honors) and a B. Comm.from the University ofMelbourne.

Campbell Wilson, CFA isthe founder of Old WellPartners, the first “GEMCub,” which will beprimarily focused on thedirect investment strategydeployed at GEM.Campbell joined GEM inJune 2007 and headed thepublic investments team.Campbell is a member ofValue Investors Club andhe is on the Board ofDirectors at KIPPCharlotte, a free, open-enrollment, collegepreparatory public schoolserving underservedcommunities. He receivedhis B.A. of Economics andPolitical Science fromUniversity of NorthCarolina at Chapel Hill.

James Ferguson, CFAjoined GEM in 2012 as anAssociate. Previously,James was a MarketingPrincipal for ChildressKlein Properties. Jamesreceived an MBA withdistinction from WakeForest University School ofBusiness and a B.A. inEconomics from DukeUniversity.

Andrew Burns, CFA joinedGEM in 2008 as an Analystafter graduating fromDuke University with aB.S. in Economics.Graham & Doddsville(G&D): Could we start offtalking about your individual

Hugh Wrigley

Global Endowment Management(Continued from page 1)

James Ferguson

Andrew Burns

closely together. We havewhole-team meetings and lookat investments together, sothat we can really understandand debate the merits ofinvesting publicly or privatelyin different asset classes. Infact, unlike many of ourendowment brethren, we donot set allocation targets forprivate investments. We seek a

constant competition forcapital between public andprivate opportunities.

G&D: Can you talk aboutinfluences from the experienceat DUMAC on GEM, certainparts of the DNA that havetransferred over, for example,the way you structured theteam or lessons taken fromyour time at DUMAC that youhave built on?

HW: DUMAC was an earlyinvestor in hedge funds,venture capital and privateequity, so great managerrelationships have carried overto GEM and have been reallyimportant. At GEM, we’vecontinued to nurture thatcreativity gene we developedat DUMAC. Early on at GEM,we started investing directlywith a portion of ourportfolio—something weweren’t doing at DUMAC in

the early 2000s. About 20% ofour portfolio is investeddirectly today, with theremaining 80% invested withmanagers. We have tried tohave even more collaborationbetween the public and privateteams. As I mentioned, wedon’t have a specific budget forprivate investments anymore.A lot of endowments will say,“We are going to invest X inpublic equity and Y in privateequity.” We say, “We want Xin equity,” and the teams worktogether to find the bestopportunities. Otherwise,though, there are a lot ofsimilarities. We have alwaysbeen focused on small early-stage managers and are reallylooking for investmentpartnerships day-to-day, notbig asset managers.

G&D: How would you definesmall managers?

JF: The median assets undermanagement in our publicportfolio is about $720 million.

G&D: Including public equityand hedge funds?

JF: Yes, public equity andhedge funds. Some are as smallas $50 million where we aremost of the assets and we arefine with that. In almost everystrategy, smaller is better.There are a few exceptions,but we like small because, atthe end of the day, we aretrying to invest in mispricedsecurities, and, generally, thoseare found in smaller spaces.

G&D: Could you talk moreabout how you approachallocation?

AB: We divide publicinvestments into twocomponents. There’s public


reconnected at one of theBerkshire meetings. I joinedGEM’s public team in 2012 andspend time on both ourexternal and internal publicinvestments.

Andrew Burns (AB): Jamesand I work closely together onthe public investment team,focusing on both public equityand hedge fund investments. Igraduated from Duke in 2008and, attracted by GEM’s team,investment philosophy, andopen-minded culture, joinedthe firm right out of school.GEM has been an incrediblelearning experience for me.The strong culture allows us tofully embrace Charlie Munger’smantra about making sure thatyou go to bed smarter thanyou were when you woke up;we are constantly trying toimprove ourselves and ourprocesses. We are excitedabout both the foundation thatwe’ve built thus far and thechance to continue improvingeach and every year.

G&D: Could you tell us aboutthe structure of theorganization? How are youdivided up? How many peoplework on the various teams andhow do you cover the globe?

HW: We have 16 people onthe total investment team, ledby our CIO Mike Smith. Wecurrently have fiveprofessionals on the public sideand six on the private side.The public team is responsiblefor our public equity and hedgefunds, including public credit.The private team is responsiblefor things like private equity,venture capital, real estate,private oil and gaspartnerships. Everyone has ahome base, on one team orthe other, but we work really

Global Endowment Management

“In almost every

strategy, smaller is

better… we are trying

to invest in mispriced

securities, and,

generally, those are

found in smaller

spaces.”

opportunity, we want them tohave the ability to invest there.Ultimately, our goal is to investwith managers who cangenerate the best risk-adjustedreturns, and we believe thathaving the ability to investacross the capital structureprovides them with the mostopportunities.

G&D: Can you talk aboutyour process of vettingmanagers, particularly if theyare on the smaller side andmaybe have recently launchedand don’t have much of a trackrecord?

JF: We are really trying tounderwrite two things: processand temperament. Arguably,temperament is more difficultto underwrite than process.You can go through theprocess and drill down intoexamples; you can read theannual reports and then comeback with very pointedquestions, but thetemperament piece is muchmore difficult. So manymanagers say they are long-term and think about things ona multi-year basis, but we findthat how they define long-termvaries significantly.

For example, you don’t knowhow they will react during adifficult period where, on amark-to-market basis, they aredown 50%. It is one thing to

say the underlying businesseshaven’t changed and themultiples have, but it isanother thing to reactaccordingly. Ideally, we wouldget to know them overmultiple years and really seehow they behave when theyare put in successful anddifficult situations andeverywhere in between. Inpractice, we end up spending alot of time on references,looking for people who canspeak to how the managerhandled a variety of differentsituations.

G&D: How important is theiridea generation process to youwhen you are thinking aboutwhat they are looking at?

AB: The importance of ideageneration varies case by case,depending on a manager’sstrategy. For example, aninvestor focused on large capstocks probably doesn’trequire idea generation as animportant edge. For us, in thatcase, it’s more important tounderstand the investor’stemperament and underwritetheir understanding of abusiness—its competitiveposition, return on investedcapital, reinvestmentopportunities, etc. On theother hand, if a manager islooking at micro-cap stocks inAsia, idea generation—flippingover as many rocks as possibleto source investment ideas—might be the single mostimportant factor indetermining that investor’ssuccess.

G&D: Continuing on thisnotion of process, how do youfilter down what managers areworth spending more time on?

JF: We have a broad filter and(Continued on page 41)

equity, which we think of aspredominantly long-biased, andhedge funds, which areprimarily funds with either lownet exposures or a lowexpected correlation to globalequity markets over the longterm.

Credit has historically had anopportunistic (i.e., notconstant) place in ourportfolio. We never have to doanything in credit: just becausesomething is relativelyattractive in the credit worlddoesn’t matter to us unless itis attractive on an absolutebasis. Our credit investmentscompete with our equityinvestments from a returnperspective, which typicallymeans we usually stay awayfrom performing credits andlook to add distressed creditinvestments whenopportunities arise.

For example, we made anumber of distressed creditinvestments during and afterthe global financial crisis in2008 when we thought wecould make equity-like returnsin investments with superiordownside protection by natureof investing higher in thecapital structure. We investeda fair amount of our portfoliointo distressed mortgage-backed securities andcorporate credits. Today,however, we have almost noexposure to credit in theportfolio. We would hope tosize that back up again whenanother distressed cycle hits.

JF: Long-term, equity orientedfunds are the core of ourpublic portfolio, but we likethe managers to haveflexibility. If our managers arelooking at a business and atranche of debt is the best

“Credit has historically

had an opportunistic

(i.e. not constant)

place in our portfolio.

We never have to do

anything in credit…”


ultimately more importantthan where someone went toschool.

G&D: Can you talk about howyou balance having a long-termpartnership with managerswith moving in and out ofcertain strategies in yourportfolio?

CW: The credit example wetalked about is one of the fewwhere we think that we haveto be opportunistic, movingmoney in and out, dependingon the market environment. Interms of our more equity-focused managers, we thinklonger term. We have theability to hedge-out certainrisks at the portfolio level. So ifwe have two great managerswe love and want to investwith for the next 20 years inEurope, but our CIO isconcerned that we have toomuch risk in Europe, we havethe ability to hedge that at theportfolio level, leaving ourbottoms-up investments intact.

In terms of manager turnover,generally, a change in peopleor process would be a reasonwhy we would redeem from amanager. Ideally, we wouldnever have to redeem andhave an extremely long-termholding period, but things dochange at these organizationsand partnerships. It is usuallynot about performance. Wehave redeemed from somemanagers who have performedextraordinarily well for us. Acommon reason is that theyget too big for our preferencesand are forced to investdifferently or to be a differentkind of organization because oftheir size. Otherwise, staffturnover, strategy drift, or amanager launching multipleproducts, changing the

business profile meaningfully—these are reasons we’veredeemed historically.

G&D: Do you get approachedby small endowments orfamilies that want to be a partof your organization?

HW: Yes, we do. Today, weare managing about $7 billionin assets for 35 investors. Weset out with the goal to get to$7 billion or $8 billion, andthen to reassess. We had beenmanaging just under $8 billionwhen we left DUMAC, so weare very comfortable with ourcurrent size. In addition tomanaging our AUM growthcarefully, we think carefullyabout the number of investorswe will work with—and forsimilar reasons: we want tomaintain quality, both inperformance and investorservice. In fact, we closed tonew investors in 2015, butexpect to open selectivelyagain next year.

G&D: With respect to scaleas an advantage, could you talkmore about why that’s soimportant? What elsedifferentiates you from yourpeer group?

HW: If you look atendowment history, the largestones have performed the bestbecause they have been able toattract and then keep atalented team, and that hasbeen really important. Theirsize also helps them get thefirst call when really talentedmanagers want to raise capital.If you are the world’s beststock picker and want to raisea fund, you could call five or 10big endowments and raise themoney, or you could call 50 to100 small ones. Obviously, thatis an easy choice.


leverage our team’s experienceto evaluate multipleopportunities, but our goal isto be able to say “no” quicklybased on a number of criteria.It could be they are too big. Itcould be they have 10 differentfunds, and it’s really more of anasset management business. Itcould be they’re not a good fitfor our portfolio at the time.It’s a balance between the two:thinking about our overallportfolio and how great aninvestor is on a standalonebasis. One of the toughestparts is when we identifyworld-class managers but don’tadd them to the portfoliobecause of our strongconviction in our existingmanagers. It’s clearly a high-class problem but nonethelessdifficult to pass on a world-class manager.

G&D: How important isresume pedigree as you workthrough the filtering process?

CW: It is important tounderstand where an investorlearned how to invest. Weactually think, increasingly now,that it is becoming possible tolearn from the greats withouthaving worked with them.There is so much info onBuffett, Klarman, Greenblatt,and others, that we’reconstantly finding self-taughtinvestors who just devouredeverything ever written by orabout those people and havebecome great investorsthemselves. Given theapprenticeship nature of ourbusiness, it’s still tough toreplace working for a worldclass investor but there areclearly self-taught managerswho are extremely successful.Like most careers, a passionfor one’s work as well as anintense work ethic are


Scott Trenary ’16, AnthonyPhilipp ’16, Yinan Zhao ’16,and Aaron Purcell ’16 enjoythemselves at the ValueInvesting Program WelcomeReception

build a closer relationship withthem. These strongrelationships can provide uswith the necessary convictionto support an investor duringinevitable periods of difficultperformance. We alsoencourage our managers get toknow and build trust with ustoo. If an investor hasconviction that GEM is a long-term and like-minded partner,it can provide them with a keycompetitive advantage. It’s easyto pay lip service to the valueof a strong partnership, so wetypically encourage prospectivepartners to speak with some ofour existing managers to get abetter sense of our ownmindset and, hopefully, gainconviction in us.

G&D: You have had theopportunity to evaluate a lot ofmanagers. Has that helped youto evolve your own mentalmodels and investmentframeworks within GEM byevaluating all these managers?

JF: We’re always looking atinvestments that we havemade or haven’t made,managers that have made greatpartnerships over time and

those that haven’t, and why. Afew lessons stand out and theco-portfolio manager model isa good place to start.

One of the biggest challengeshas been the co-PMpartnership where there is noclear driver and no clearpassenger. When things aregoing really well and theinvestments have performedwell, it is easy to have a greatpartnership. However, whenbusiness is under a lot of stressand the stocks are notperforming well, it can bedifficult to resolve conflicts in a50/50 partnership.

We’re also focused on ourown return on time. It’s easyto treat the most preciouscommodity that we all have asdisposable but, ultimately, theway that we use our time willdictate our long term results.As a result, we’re spendingmore time looking formanagers that can compoundour capital over multiple yearsand preferably into thedecades. This not onlymitigates our risk through thestrength of the relationship butalso mitigates the reinvestmentrisk that we face when weredeem from a manager andlook for a new opportunity toredeploy that capital.

G&D: Have you seen othercommonalities of what makesorganizations successful orprone to failure?

CW: There are different waysto do it. Some of the bestinvestors in the world have setup their firms to decentralizethe organization. I think ofBuffett as an example. Hespends all his time reading andthinking—not managingpeople. That’s great but hard


At the same time, we generallythink size is more often thannot the enemy of performance.It would be really hard tomanage $30 billion and achievethe results we do. With $7billion or so, you can write bigenough checks to get theattention of good managers,but you’re not so big as to beforced to change investmentstrategy.

CW: In terms of ourcompetitive advantages,certainly our network helps,going back to the DUMACdays with all the managerrelationships we developed.Our team also brings depth ofexperience and industryrelationships—we have threeformer CIOs and a number ofother people who have comefrom direct investing roles aswell. I think that all helps ourown process, and hopefully ithelps our managerrelationships, too. We try tobe helpful, value-addedinvestors for the managers weinvest with—not just callingonce a quarter to check a box.Hopefully, we bring somethingto the table, whether it is beinghelpful through connectionsand insights from our networkor through our own historyand experience.

G&D: Is the relationshipdifferent when you’re the maininvestor versus when you areone of many? If so, is thatintentional?

AB: It definitely can be. AsCampbell mentioned, wealways seek to have deeprelationships with ourinvestment managers and incases where GEM is a keysource of capital, it’s typicallyeasier for us to improvetransparency and access and to

“When somebody

shifts from being a

great stock picker to

managing an

organization and

delegates the idea

generation and

research to someone

else, that is usually a

mistake”


the investment thesis when wefirst met?” We can check inwith them, and ask, “How havethings changed with theunderlying business? Asidefrom stock price performance,what was your view on thebusiness? Did you think it wasgoing to grow by 20%, and thebusiness is actually shrinking?Why is that? Was it a mistakein process or something else?”We think about the outcomethat we’re seeing play out inthe context of their originalthesis and, as a result, thinkabout the portfolio on a look-through basis in terms of theindividual businesses that weown.

G&D: How do you think ofalignment of incentives withthe managers and yourselves?

HW: First, we want to seeour managers have all or mostof their own net worthinvested alongside us. Wethink that is the best alignmentpossible, but we have alsomade a push over the years toimprove alignment of theterms of the partnerships weinvest with. For example, wehave a number of funds thatwe invest with now where westructured the incentive fee tobe paid out over a multi-yearperiod. We think it makes a lotof sense. Managers say theyhave a multi-year investmentapproach, and I think everyonewould agree that it takesmultiple years for results toeven mean anything. In thehedge fund world, the 20%carry came from Venetianmerchants who got to keep20% of their profits if they hada successful voyage across theocean. But we think that payinga hedge fund manager anincentive at the end of the yearis like paying a merchant for

crossing part of the ocean, notfor getting all the way, so wehave been promotingstructures like that. We wantto reward managers if theygenerate great long-termperformance, but not just forhaving one good year— orworse, for just showing up orriding a beta wave.

CW: We have also beenstructuring management feesto scale down as the managergrows. We think that, at theend of the day, themanagement fee should keepthe lights on, pay people’ssalaries, and keep everyonecomfortable. But we think thata manager should get wealthyfrom our capital if theygenerate great performanceover multiple years. Our idealstructures would have someelements of what Hugh and Ijust described. Over a third ofour managers now have atleast one of thosecomponents.

G&D: We noticed that youstarted posting thought pieceson your website over the pastyear. Can you talk about thegenesis of that?

HW: Well, we’ve only postedtwo pieces but intend to domore in the future. That hasbeen something that wethought would be helpful toour investors. In particular, thecapital market assumptions aresomething we talk about withour university and foundationinvestors a lot. Our researchlays out what they couldreasonably expect for long-term returns given wheremarkets are today becausethey need to think about theirspending requirements andbudget partially based on whatcould happen to their


to pull off, of course. The bestinvestors generally try tomaintain a small teamstructure, so they can spendmost of their time investing.Having a really strongoperations team, for example,to manage all the non-investment activities isimportant. When somebodyshifts from being a great stockpicker to managing anorganization and delegates theidea generation and researchto someone else, that is usuallya mistake. They are managingpeople and process, and that isentirely different. Some peoplemake that transitionsuccessfully—for example, anumber of the big hedge fundmanagers now have done thatwell—but we have seen a lotof bad outcomes there.

We advise managers who arestarting up not to compromisetheir investment process. It isso easy to set out saying, “I amgoing to do this. This is how Iwant my own money invested.This is what I believe in,” andthen somebody comes alongand says, “Could you change ita little bit, and I will write youa big check?” That’s hard toturn down when you’restarting off and you’re worriedabout growing your business.

G&D: After you have madethe initial investment, how doyou monitor the fund toensure that theirs is arepeatable investment processthat works the way that youinitially understood?

JF: In evaluating a manager ona forward-looking basis, it iseasier to investigate what’sworked and what hasn’t versusreviewing past case studies.We can say, “Okay, what didthe manager tell us? What was


biggest positions in OaktreeCapital. We thought that heknew the financial sectorbetter than anybody—he wasour only financials-orientedfund. Oaktree is a businessmodel we understand andcould underwrite. It’s notdissimilar to our own businessmodel, we had been acustomer of their products atDUMAC for a time.

Then Bruce Karsh joined theDUMAC board, eventuallychairing it. When Todd waspounding the table aboutOaktree, we started talking tohim about whether we couldbuy some directly. He wasopen to the idea, and heactually started sharing hisresearch and walking usthrough the accounting, whichwas a bit messy, and sharinghis model—we had a goodback-and-forth on Oaktree.

We were ready to buy theshares ourselves when we gotthe call from Todd saying thathe was shutting down the fundand going to work for Buffett.

It was unfortunate as a wholefor GEM to lose Todd as amanager. One silver lining wasthat we actually bought CastlePoint’s stake in Oaktree andtransferred the shares to GEM.We have held a position in thatever since, and it has been anice investment for us. I thinkthat is an example of a one-offopportunity where we thinkwe can understand thebusiness and also leverage ourmanagers.

We really liked Todd, and heloved this position. That isusually the starting point forour direct investments becausewe want to do it in a way thatis complementary to the factthat we spend most of ourtime investing with managers.

G&D: Has your view onprivate equity evolved over theyears as the space becomesmore crowded?

HW: Our philosophy there issimilar to the public team,where we are always trying toinvest our capital in lesscompetitive markets and inareas where we thinkmispricings are more likely tobe found. For example, on theprivate equity side recently,our team has been spending alot of time looking at smallturnaround opportunities inEurope. Since starting the fundfrom scratch in ’07, thepercent in overall privates hasgrown to where about 25% ofthe total pool is invested inprivate assets—private equity,private real estate, private oiland gas assets. We think that isgetting closer to the steady-state level where it will leveloff: closer to 30% over time iswhere we would like it tosettle, but that will fluctuatewith the opportunity set.


endowments over time. So,that literature has been inresponse to that need.

Then we do have a couple ofinvestors who fall outside ofthe endowment andfoundation space where theyview us as a strategicpartner—a few family offices, afew sovereign funds. Weproduced the literature toshare our thoughts with themon what’s happening for ourequity space.

A good example is the GEMImplied Private Premium (orIPP), a concept we developedto improve our evaluation ofilliquid investmentopportunities. One of thechallenges with theseopportunities—of whichprivate equity funds are a greatexample—is that a simple IRRdoesn’t account for theopportunity cost of forgoingpublic alternatives (forexample, an S&P 500 ETF). Tosolve this problem we calculatethe GEM IPP to answer thequestion, what additionalreturn, if any, did an investorreceive for agreeing to forgothe liquidity of the publicmarkets? The answer helpsguide our evaluation of theprivate investment opportunityrelative to other, more liquid,alternatives.

G&D: How long have youbeen doing the directinvesting?

HW: Since we started GEM in2007. We do a few differentthings there. For example, backin 2010 we were invested withTodd Combs at Castle Point.Several of us had known himsince being an early investorduring the Duke days. At thetime, Todd had one of his


“...the 20% carry came

from Venetian

merchants who got to

keep 20% of their

profits if they had a

successful voyage …

paying a hedge fund

manager an incentive

at the end of the year

is like paying a

merchant for crossing

part of the ocean…”

interesting on a long-termbasis? Would you look atmarkets that are short-termdestructive like Russia?

CW: There is a great book byBill Browder about Russia. Ifyou haven’t read Red Notice, Iwould recommend it. We havea couple of managers who havedabbled in Russia, but that isone of the few markets whereit would be hard for us to havelarge exposure. Thereprobably are some goodopportunities, but I doubt thatwe could get comfortable—atleast not today—with having alarge position, given all theobvious issues.

G&D: What about India?

CW: We think that a marketlike India over the long term isgreat. There are more stockslisted in India than in anycountry other than the U.S.Over the next 20 years, wethink a lot of those companieswill grow a tremendousamount. There will be a lot ofdifferentiation and a lot ofinefficiencies, given therelatively low level ofcompetition in the market, sothat is one we are excitedabout. Even in Japan, we thinkthere are far fewer long-termvalue-oriented investors thanin a market like the U.S.,despite it being a major marketwith lots of companies listed.Obviously Japan is not growinglike China or India, but itrepresents a market with a lotof mispricing.

In Europe, too, there are notas many long-term fundamentalinvestors as there are in theU.S. There are a lot of placeswe like more than the U.S.from an opportunitystandpoint because of the level

of mispricing we perceive.

G&D: Do you feel like you areable to instill best practicesthrough your partnerships withemerging market or frontiermarket investors?

JF: We are always thinkingabout ways that we can behelpful to our managers, bothon the investment side and theoperations front. For example,our CFO used to be in theback office of Blue RidgeCapital before moving downsouth. We have several peopleon our operations team whoworked in hedge funds oraudited hedge funds, so theyhave seen the best practicesoperationally of a number ofdifferent funds acrossstrategies and regions.

When a manager is launching anew fund, we try to be helpfulby providing best practicesfrom an operations standpointas well as using our experienceand network to providedifferent perspectives aroundincentives, fund structure,service providers, etc.

On the investment side, we tryto connect managers wherethey would both benefit fromdifferent perspectives. Forexample, one of our managersfocuses on China, while wehave another manager whoinvests a lot in technology andInternet business modelsglobally and probably knowsthe Internet better thananyone. We think our Chinamanager knows China betterthan anyone. It turns out theyboth were looking at ChineseInternet opportunities, so wethought it made sense toconnect them. Having ourglobal network of people in


G&D: Are emerging marketsan area of opportunity eitheron the public side or privateside for you or managers youare working with?

AB: We are actively investingin emerging markets in bothpublic and private investments.We also consider investing inemerging markets, one of thehighest risk investment areas inour portfolio. However, in theright circumstance, thepotential rewards outweighthe risks. Developing equitymarkets can provide skilledinvestors with great huntinggrounds for mispricedsecurities. Not all “emergingmarkets” fall under the sameumbrella, of course. Today webelieve that many markets inAsia represent an especiallycompelling opportunity due tothe combination of the sheerquantity of listed securities andthe relative dearth ofexceptional investors lookingat those markets. This dynamicis, of course, particularlypronounced for less-liquidinvestments. To help GEMexploit this opportunity set, Ispent two months last yearbased in Hong Kong andtraveled around the region inattempt to uncover somesmaller, off-the-radar managerslike the ones we can moreeasily find and partner with inthe U.S. I think it’s importantto mention that our positiveview of the opportunity set inAsia is not related to our viewon the consumer or China’sGDP growth—it’s a function offinding more mispricedinvestments due to a lowerlevel of competition amongprofessional investors in themarkets.

G&D: Are there othermarkets that you find similarly


We only want to invest inlong/short managers if wethink that they’re great on theshort side and truly add valuethere over time. Arguably, alot of hedge funds short to callthemselves hedge funds andjustify the fee structure, andwe think very few managersare great at shorting.

G&D: What do you think arethe biggest risks to yourportfolio, and how do youthink about that on a managerlevel and then also on a macrolevel?

CW: I think that we share theviews of a lot of smartmanagers today that all themoney printing and artificiallylow interest rates are a bigwild card that could be a riskover the next decade. Whatwould we do then? Well,we’ve tried to build abattleship that can survivedifferent environments. LikeBuffett says, “Predicting raindoesn’t count. Building arksdoes.”

For managers one risk that hasincreased in recent years ismanaging inflows into theirfunds. It’s a risk to managers ifthey grow at the wrong times.There is a big differencebetween dollar-weighted andtime-weighted returns. Thereare some great managers withvery strong performance trackrecords, who have actually lostdollars for their investors overtime. Money comes in at thewrong time and leaves at thewrong time. As a result, wehave seen managers who havedeliberately tried to limitinflows when things are hotand opportunity sets decrease;then they raise their handswhen it’s a great time toinvest. It’s hard to pull off. You

have to have the right investorbase and a truly long-termmindset, but we have seenexamples that have workedsuccessfully. Then you canhave great time-weighted andcapital-weighted returns.

G&D: Do you have any viewon activism and what seems tobe the growing trend of activistmanagers?

JF: Interestingly, at the DailyJournal meeting, Mungerbasically acknowledged that insome cases they are needed,but in other cases, they arenot, and I think that’s probablyhow we think about it—it’svery dependent on thesituation and the activiststhemselves.

It is about the time horizon ofthe activists: are they really init for the long haul? I am surethere are some people taggingalong, calling themselvesactivists, trying to getcompanies to lever up and buyback shares to get a stock pop.That probably is an increasingrisk, but some activists do addreal value— it’s probably agood thing to have themwatching over a company atthe end of the day.

G&D: Could you talk aboutthe mission of GlobalEndowment? In addition tomanaging capital, is there anacademic mission?

HW: We do not pursue anacademic mission ourselves,although we obviously serveacademic institutions and workto further their missions. Butwe do believe that servingone’s community is important,in an absolute sense, of course,but also as a way to develop


different places, doing differentthings, and then, when it makessense, connecting them, is justone way that we can behelpful.

G&D: Broadly speaking, long/short, as a strategy, hasstruggled over the last coupleof years. Could you share yourthoughts on what you think ofthe strategy, how it hasevolved over time, and someof the challenges it has facedrecently?

JF: We think that short sellingis exceptionally hard, andobviously it has been a toughmarket for shorts since themarket has gone straight upfor six years. It’s also muchmore challenging than it usedto be given the change ininterest rates. That being said,we do think it is an importanttool for a select group ofmanagers and one where thebest short managers can addvalue through the process.

Ultimately, we think thatmanagers have to run theirfunds in a way that lets themsleep at night. Some of thebest investors in the worldsimply aren’t comfortabletaking 100% market risk andbeing long-only; they sleepbetter at night knowing thatthey have a short book toprotect them againstuncertainty in a world ofvolatility. We know othergreat investors who can’t sleepat night knowing that they havea small short position in astock that could lead tounlimited losses. Investing ispersonal at the end of the day,and you have to do whatyou’re emotionally equipped todo, to think about it as if itwere all your own money.


Sinegal worked before leavingto co-found Costco. Several ofus also read Brad Stone’s TheEverything Store about JeffBezos. Another book that Ireally enjoyed is Capital Accountby Edward Chancellor. It’s acompilation of excerpts fromMarathon in London.

Their unique focus on thesupply side and the idea that itis the main driver of returnson capital instead of aggregatedemand provides a differentview of the world.

G&D: Do you have any advicefor our readers who hope toinvest as a career and even runa fund some day?

JF: If I were in an analyst’sshoes, I would really thinkabout why I want to start afund. There are a lot of peoplefor whom, if you asked thatquestion, the ultimate answermight be that they shouldn’tstart a fund. If your goal is todo really well financially, thereare a lot of funds where youcan work and do very wellfinancially, so I don’t think thatis a good enough reason. Doyou want to be in charge ofthings? Maybe you can run aportfolio in size. I don’t thinkthat alone is a good enoughreason. As we were sayingearlier, about investing beingso personal, it really is aquestion of figuring out whyyou want to start a fund. Thatbeing said, we love new fundsand spend a lot of time lookingat them. If someone does wantto start a fund, we think thattalking to people like us prettyearly in the process can behelpful, not to figure out if weare going to invest, but just forperspective. We can provideperspective for different thingsthat we have seen in the

industry and help in thinkingthrough each part of theprocess: Who are the rightLPs? Do you want to partnerwith someone else? How bigdo you want to be?

We have seen a lot of fundsthat have basically built theCadillac model right away.Then they put themselves inthe position where there is somuch pressure from a businessstandpoint that they really haveto go raise a huge fund. Abetter bet might be to startsmall and bootstrap theorganization to create thetrack record and then build theteam accordingly.

The last thing to add is thatbefore starting on your own, ithelps to have worked for anexceptional investor. At theend of the day, it’s easy to getdistracted by money, titles, orsome other outward trappingof success. However, giventhe ability to compoundknowledge in our business, agreat foundation will at leasttilt the odds in one’s favor andprobably lead to all of theabove in the long-term. And ifit works for your personal life,focusing on a less efficientmarket right now couldpresent significantopportunities.

G&D: This has been great.Thanks so much.

*Since the original interviewwas conducted, Campbell leftthe firm to launch the first“GEM Cub,” Old WellPartners, which will be focusedon the direct investmentstrategy deployed at GEM overthe past eight years.

our internal culture. Forexample, a few years ago wecreated a virtual foundation—the GEM Foundation—that ismanaged by GEM employeesand gives away a certainamount of the company’searnings to impactful localcharities in Charlotte everyyear. Our employees actuallydiligence potential charitiesmuch like our investment teamdiligences managers! Each ofour five partners has abackground in the non-profitworld—in addition to four ofus having been principalinvestors—and that it issomething that we are proudof. It keeps us excited aboutour work and reminds us thatthe underlying institutions forwhich we invest want toachieve great things. If wegenerate better returns, theycan hire more professors, domore research and give morescholarships, and do things thatwe think are positive in theworld. We actually holdregular overview presentationson what our investors do atour weekly company-widemeeting—every employeeeventually ‘presents’ a deepdive on a particular investor tothe group, to remind us allabout the good they are doingand what our efforts support.To keep that front and centerin our minds is reallyimportant.

G&D: Are there anyresources or books that youhave read that you couldshare?

JF: I have spent a lot of timereading business biographieslately. I really enjoyed RobertE. Price’s Sol Price RetailRevolutionary and SocialInnovator about the man whofounded FedMart, where Jim


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Graham & Doddsville Editors 2015-2016

Brendan Dawson ’16

Brendan is a second-year MBA student and member of the Heilbrunn Center’sValue Investing Program. During the summer, Brendan worked for Thunderbird Partners,a London-based global long/short equity fund. Prior to Columbia, he was a member of theinvestment team at the UVA Investment Management Company. He also was an invest-ment analyst intern at Slate Path Capital. Brendan graduated from The University of Vir-ginia with a BS in Commerce. He can be reached at [email protected].

Scott DeBenedett ’16

Scott is a second-year MBA student and member of the Heilbrunn Center’sValue Investing Program. During the summer, Scott worked for Maverick Capital, a NewYork-based long/short equity fund. Prior to Columbia Business School, he worked atLightyear Capital, Citigroup, and Morgan Stanley. Scott graduated from Princeton Universi-ty with a BA in Comparative Literature. He can be reached [email protected].

Anthony Philipp ’16

Anthony Philipp is a second-year MBA student and member of the Heilbrunn Center’sValue Investing Program. He spent the summer as an investment analyst at Blue RidgeCapital in New York. Prior to business school, Anthony worked as a private equity asso-ciate at Flexpoint Ford in Chicago, and before that as an investment banking analyst atCenterview Partners in New York. He graduated from the University of Illinois at Urbana-Champaign with a BS in electrical engineering. He can be reached [email protected].

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