Letter #268: Tom Purcell and Doug Dillard (2017)
Chief Investment Officer of Viking and Founder & PM of Alua Capital and Founder of Slewgrass Capital | Leaders of Global Finance Speaker Series
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Tom Purcell is a Cofounder, Managing Partner, and Co-Portfolio Manager of Alua Capital. Before starting Alua, Tom managed his family office, Lake Trail Capital. Prior to founding Lake Trail Capital, Tom was the Chief Investment Officer of Viking Global Investors, where he started as an analyst covering financial services company and was promoted to PM in just 4 years. He started his investment career at Tiger Management.
*Special Request: If you worked at Tiger (or at a Cub/with someone who worked at Tiger) and are willing to share your experience, please reach out (you can respond to this newsletter or email me at kevin@12mv2.com)! I’m working on an essay on lessons from Tiger, and would love to speak with you (more than happy for it to be on background or off the record if you prefer—also I don’t plan on sharing this essay publicly). This will be a different, more focused, in-depth essay compared to my previous post.
For those who want to learn more about Tiger, see said previous post:
Doug Dillard is the Managing Partner of Slewgrass Partners. Prior to founding Slewgrass in 2017, Doug was the Co-Managing Partner of Standard Pacific Capital, which grew to $5bn AUM at its peak. He joined Standard Pacific in 1998 as a Principal responsible for the Firm’s investments in software/services, fintech and emerging markets. Doug served as Managing Partner and Co-Portfolio Manager of the Global Fund from 2005-2016 and of the Global Concentrated Fund from 2014-2016. Doug started his career in New York in Morgan Stanley’s Investment Banking division as an analyst in the Real Estate and Capital Market Groups in New York and Hong Kong.
Today’s letter is the transcript of a conversation between Tom and Doug for Georgetown’s Leaders of Global Finance Speaker Series. In this conversation, Tom and Doug discuss trends in the long/short hedge fund industry, and whether the rise of passive investing is cyclical or structural and its effect on SMID caps. Doug then opens up the talk to audience questions, where Tom shares his thoughts on liquidity in longer term duration investments, the role of side pockets and alternatives in generating returns, sell discipline, rates, crypto, emerging markets, particularly India, whether Amazon’s acquisition of Whole Foods will prompt the selling of large cap companies over the long term, fundamental vs technical investing, the role of political risk in investing, and more.
I hope you enjoy this conversation as much as I did!
[Transcript and any errors are mine.]
Related Resources
Tiger Management
Tiger Cubs
Transcript
Doug Dillard: Hello there. Thanks for coming. I'm Doug Dillard. I've met some of you guys before, teaching a class in the business school on hedge funds. And we're lucky today to have a guest speaker in our class who's agreed to stick around and talk to you guys. Tom Purcell, who's a Georgetown grad, '93. And then also a graduate of Harvard Business School. Has been the CIO at Viking up until 2015, which, as some of you know, one of the largest hedge funds in the world. And is now running his own firm called Lake Trail in New York. So he's agreed to join us today. And I'm going to ask him a few questions. And then I'll let you guys ask questions. Just have a kind of an open forum here. So thanks for coming.
Tom Purcell: Thanks for having me.
Doug Dillard: I guess maybe we'll just start with kind of the your thoughts on the industry today, as you've kind of run one of the biggest funds, have left, and are kind of doing more of your own thing now. How do you see kind of trends, good and bad, and especially on the long short side, in the hedge fund industry?
Tom Purcell: I think it's a hard industry to define. Meaning there's not, I mean--so narrowing it down to long short I think makes sense, because hedge fund in general is a pretty broad term. And a lot of what we did at Viking, or what I'm doing now, is a lot more like what you would do if you worked at Fidelity than if you worked at Renaissance or one of the--or even parts of Citadel, or whatever. It's undeniable that both the absolute and the excess returns of a high percentage of hedge funds in the last 20 years has faded down. And a lot of people, I think, attribute that to size of the funds themselves, number of participants in the market, and I think the two that make the most sense to me, and I think this is an answer that's quite hard, if not impossible to answer. There's three. There's one quantitative, which is that zero interest rates at the short end meant that you didn't get a short rebate. And we started, well really, at Viking all the way through 2009 when rates went to zero, you'd make 100-200 basis points a year just on the rebate off your shorts. And that's now zero. So that's one to two percentage points off return. You shouldn't care about that if you're really putting up big results, but I think that's a piece of it. I think another piece of it is that a lot of funds just got very big. We started with $450mn and grew to be, I think, $33bn. They just made a decision, about two months ago, to give back $8bn. But I think once you get over $10bn, it's a little bit harder to generate returns. That doesn't explain the total number of funds. And I'd say the third thing for sure, that's different, is just that the the availability and transparency of information around the world, and the existence of new trading strategies with artificial intelligence or different datasets or other things mean--I think, personally, it's quite hard to trade on particularly short term time frames. And we used to do a lot of analyses around what gave rise to what were pretty good returns, and if you broke them out by return on earnings day, and then the rest of a quarter, you actually picked up huge--lots of the stock moves happened around earnings day, and the ability to actually, with completely legitimate and legal sources, to predict or try to have a better view on how earnings are going to develop, or really how people are going to react, I think, is just much harder than it used to be. I guess last factor really is just the amount of money going into passive investing, whether it's in ETFs, or it's in just broader indices. Clearly has an impact. I actually read an interesting strategy the other day, which is there's a manager who's looking for, and is really cognizant of single stock weightings within ETFs, and then just watching the inflows into ETFs, and when they go the other way--because there are a lot of--fundamentals sometimes, particularly with mid or small cap stocks, just don't get reflected in prices if it happens to be--if a company happens to be in a sector that's--even it's a sector that's out of favor, if the company's doing pretty well, the stock's unlikely to do well if everyone's selling the ETF. But that can turn the other way.
Doug Dillard: So do you think the passive thing is here to stay? Or do you think is more cyclical, liquidity driven? How would you characterize it?
Tom Purcell: My guess is it's not only here to stay, but I would think it would continue--it seems like--I mean, I worked at Tiger before Viking. Tiger was started in 1980. And for a large part of its history, let's say the first 10 years, I think a lot of the investors were principally just wealthy families. And it became more of an institutional product. It being hedge funds. When we started Viking in '99, it was somewhat institutional, but not particularly. By the time you got to 2006, you had endowment Investment Boards, you had sovereign wealth funds, and you had a whole bunch of institutional investors who wanted to be in alternatives, or non correlated assets, or whatever you want to say. And then it got to--from the numbers I've read, $3tn of assets under management. I'm just reading a lot now of very large investment organizations, whether they're public state pension funds, or other people who who are publicly saying they want to be in. And they're really focused primarily on basis points of management fees charged, and smart beta. And that is a trend that has been happening, but usually, by the time it gets--
Doug Dillard: I was going to say, when CalPERS is doing it, it's probably done, right?
Tom Purcell: Well, yeah, it's possible. I just think it could go on for a few more years. And it's undoubtedly--I don't know. And really, the hedge fund world, in my opinion, anyway, aggregate wise, hasn't put up the gross returns to justify the carries. If you don't put up the gross returns and deliver an adequate net return, then you're going to be under pressure anyway.
Doug Dillard: But do you think it's more structural, not just cyclical?
Tom Purcell: I don't know. I mean, I think that John Bogle was not incorrect, obviously. And that it's pretty hard to beat the market, if you want to look at it that way. I think a lot of this smart beta stuff--and I'm not--I'll probably get completely annihilated by Business School professors here--but that to me looks like you're just betting on sectors. I have no idea why anybody other than Druckenmiller is going to be particularly good at that. And I don't see why that should be an institutional--and I've had it explained to me and how people run it, and I think that is--that's a another form of active management that you might feel better about because you're paying 10 basis points, but you better have a good guy picking. And if you have somebody who gives you a strategy that delivers it at 10bps, then congratulations. But I think some of the ETFs will come under--and smart beta strategies--I think if you have a period of high vol, which you haven't seen in a while, but if you do, there's going to be a lot of pressure. I mean, the high yield ETFs are going to come under some serious duress. We've seen a couple short instances of it. Whenever the Taper Tantrum was, like May of 13. I mean, there's been a few instances of if. You have a very illiquid underlying, a very liquid ETF, and having those two, and if you have a sustained level of outflows, you're going to have a major issue. Larry Fink would vehemently deny that, but he's got a big interest in the game.
Doug Dillard: So having said that, we just spent three hours talking about a stock that you own and liked and and think has upside beyond kind of the market. Do you think that's going to be more relevant to kind of smaller and midcap stocks because of the ETF and passive dynamic going forward, even more so than what we saw back in the 90s and 2000s?
Tom Purcell: I don't--well, the impact that the passive strategies have now for sure is bigger, just because they're a bigger piece of the market. And like, I don't know if you guys read Grant's Interest Rate Observer, but he's been harping on this for a few years--it hasn't yet really yield anything profitable, to be honest. But I think they have a bigger impact. I mean, where I'm focused now, partially because I'm not running a fund for non-taxpaying investors and managing a fund for my family is really more on longer term time horizon investments, for two major reasons. The first one is I live in New York City. Short term cap gains are not particularly fun to pay. So I want to be long term for that reason. The second reason is, I do think it's much harder to compete at the shorter time horizon. If I can add 25 analysts and a whole big infrastructure, and even for them, I can tell you because they're all still friends of mine, it's very hard. I don't have 25 people. I got four. So there's no way I'm going to do that. And I think where I can compete is taking a longer term view and really just having a view and owning things that I want to own. And size wise, I don't--I mean, I own--my biggest position, you know, is the biggest bank in Russia, Sperbank, which is already up a lot, and I think it's great. I own Bank of America. That's a very big cap stock. I own this Irish homebuilder that we talked about today that--I guess you'd call it mid cap, if it's a billion euros. Somewhere between small and mid cap. So I'm not--I don't have an opinion, I guess. But I would think that the ETF impact would be greater at the smaller end, just because of the liquidity differences.
Doug Dillard: Why don't we open up to you guys? I've got more questions, but I want to make sure--because Tommy has to catch a train in a little bit. So. Questions? Yeah, we got a mic coming.
Audience Member: [Student name], Georgetown Business School.
Doug Dillard: Graduate or undergrad.
Audience Member: Graduate. Curious as you've switched towards, or maybe not switched, but currently you're focused on longer term duration investments, how do you think about the type of liquidity that are in these investments? Are you getting more comfortable with less liquid names and kind of more volatility in the intermediate term, knowing that it's your family money and kind of understanding the liquidity profile of their needs. And then, obviously, a lot more hedge funds have kind of got burned in the crisis with some of their side pockets. Do you see side pockets playing a bigger role as you've seen hedge funds kind of move into the lending space and some other alternative spaces to kind of choose some of the returns?
Tom Purcell: Alright, so in terms of our approach to liquidity at Viking was always pretty dogmatic. Because I mentioned I worked at Tiger before, and there were like six of us when we started, out of a nine person investment staff. The three founders also worked there, and there were three more of us. The last couple years of the traditional, like the original Tiger, they were way off sides on liquidity. They owned a gigantic position in US Air and some other things. And there were a lot of redemptions. And it's what like I always think of as the hedge fund death rate. Liabilities are short and the assets are long. And generally, unless you're unbelievably lucky, you're not getting redeemed during a great period when you can unload whatever you want to unload. So we were pretty dogmatic about that. We had, I think the max we ever had, what I would think of as illiquid was, we were 10% of NAV in 2008, 2009 in senior bank loans, which, even though they're traded, are pretty illiquid. And then we owned some late stage tech things like BABA and Facebook, privately, in 2012 and 2013. So in terms of my own investing now, yeah, I guess I have more tolerance for illiquidity, because first of all, I don't have $30bn. But in the public stuff, I haven't really gotten that illiquid. But I have more of my net worth--I mean, I have 99% of my net worth invested in Viking. Right now, I've got--I've made some more investments in private companies. The hard thing with private companies, which is also why a lot of pension funds like to have PE funds and private company investments is you don't--what the mark to market is, I have no idea. I really rather that the managers to the extent you're in a fund didn't try to give you an NAV, which their required to do, because I know it's all made up. Just leave it at cost is how I would do it. But I also understand what the SEC has their point of view. But I don't think I've had to--well, thus far in the last year and a half, I haven't had a position in illiquid stock where I've had to kind of hold and not... I own a bunch of a Brazilian railroad, and when--I don't know why the President in March was caught on tape with these guys talking about the [to be] processing brothers, but he was. And the currency and the market went down 25% in a day. And that was--I didn't sell I ended up buying some more, but I--my information flow is slower too. So I think you need to really have a lot more conviction. In terms of the side pockets and whether or not it's a bigger trend, I'd say the assets you--like private lending is just a big trend. Or has been. I've seen a lot of funds--I know a lot of people who run these funds, and that's because It's been hard to get yield, obviously, in the bond market. I don't know personally, if, in many instances you are getting paid enough for the illiquidity you're taking as an investor in a private fund, either run by a hedge fund or run by--I don't know what you call GSO or you call--it depends. You have to kind of look product by product. But in general, I think people tend to undervalue liquidity, particularly in periods like now. And for 100 basis points or 200 basis points, it doesn't make sense to me. And if you're a taxable investor, it makes absolutely no sense because you're getting paid ordinary income anyway. And 100bp--
Doug Dillard: A lot of the side pocket stuff is more now they've actually instituted funds. Their real funds, they're not side pockets.
Tom Purcell: They created funds. The problem with side pockets was people thought they were liquid, and then turned out they weren't. Because I know--I mean, anyway, in 2008, we had a number of redemptions late in 2008, even though we were up for the year, and the reason was that a lot of our investors could not get money from other hedge funds that they were involved in because they closed the gates. And we were quite--and I think the firm will always be this way, because they look very closely at liquidity, but we were very dogmatic--not dogmatic--intent upon not closing the gates, because I think it's a commitment to your investors if you're running a liquid strategy that if they want their money back, it's their money, and they can have it back, according to the terms that you've agreed to. I don't know if that answered your question.
Audience Member: [Inaudible]… I was just curious because... many people who have been strategies, whether hedge funds are starting to have look in places or create income structures that match different opportunity sets than historical where those investors wonderfully with everything, and if you don't have this institutional constraints because
Tom Purcell: There could be. You just have to--I mean, if you're--whatever hedge fund it is, has to get enough people to sign up for that strategy.
Doug Dillard: It's a barbell. They're kind of using the passive ETF liquid stuff, and then less liquid stuff in other vehicles.
Audience Member: Thank you for being here. [Student name], second year MBA. With such a long term horizon, and such diverse investments, how do you make the decision to sell?
Tom Purcell: Well, I've only been doing this like a year and a half. I'd say, when have I sold things? I've sold if I--if the information irrefutably just proves wrong what my thesis is, I sell. That's no different. Or cover, because I still short a reasonable number of stocks. It's a lot less, it's not really balanced. I'm only shorting things that I think are really gonna go down. Where I'd say it's--when it's demonstrable to me that I just wrong, then I sell. And it doesn't really matter the price.
Doug Dillard: Or if expectations catch up with you.
Tom Purcell: Or, yeah, if you feel like it's fully valued, and you have other things that you--I mean, I have a limited amount of capital, and if there are other things that I would like to invest in, then you got to raise capital somewhere. But it's definitely--the long term viewpoint is really, for sure, driven by just the tax considerations, which managers don't really have, because 75% of their investors are either non-taxpaying US institutions, or foreigners who don't pay any tax. And so they don't care. And if I thought about it as a company, it's 75% of their shareholders, so it makes sense. And the managers are all paid annually. So it makes sense for both of those parties to not look at after tax returns.
Audience Member: First year, [Student name]… as the Fed starts to raise short term interest rates, both tapering, quantitative easing, actually putting pressure on the far end of the curve, you see equity valuations broadly kind of picking the gradual heights in stride or do you see a violent correction if people realize all of a sudden, their short term rates are one and a half percent...
Tom Purcell: Well short rates are like going to be one and a half in December. Fed funds. But I think rates are too low, personally. If you go on to Bloomberg and you type in Taylor Rule model, it'll autofill, and it'll give you this Taylor Rule Model, and you can type in the US, you can type in any country you want. And the last time I looked at it, the US should be at four and a half, according to Taylor Rule. Now, I'm not saying the Taylor Rule is the only way to set rates. And I know the theory of--I don't know any of the people at the Fed, but I know what they've said in speeches and all that stuff. And they really, truly believe in quantitative easing and asset inflation causing--helping lead to recoveries. And then as Bernanke said in a speech in like 2003, they believe that the 1937 recession was caused by the Fed pulling out stimulus too early. And he told Milton Friedman or the Milton Friedman society, Sorry, we learned our lesson, we won't do it again. So they're going to be as slow as possible, and they already have been as low as possible. But I think rates genuinely are too low. I'm a little bit surprised there's no wage inflation or other things. I do wonder about how the figures are calculated. I think the Fed released an alternative way to look at inflation, the Fed itself did this last week. And there's a bunch of inflation, it's just like--for lack of a better term, it's rich people inflation--you've got art in houses. And I don't think that's good for the country either. So frankly, I think rates should have been higher already. Rates going up, though, from one and a half to two and a half or something--I don't--I'd be surprised if there wasn't some sort of setback. But part of the reason I say that is, the KOSPI is at close to an all time high, and, North Korea is about a half an hour north of Seoul. And back when I used to own Kookmin Bank, there really wasn't that much going on between the two of them, but there'd be some strange speech, and the whole KOSPI would be off 8%. Now, you don't even see it move. I don't know how to explain that. Maybe we'll get tax reform. I kind of think we need it. But there's not that many indications we're gonna get that here. I mean, valuations are not as cheap as they used to be. It's always hard to say what's absolute high. But it's amazing the amount of things that have been thrown at the market and you haven't had a break. So I wouldn't be surprised. But I personally think the economy should be--I don't see why two and a half percent interest rates should be that big a deal. And right now you have a pretty good global recovery. I don't know how long it's sustainable in Europe. I don't know how long it's sustainable in China, either. But--so there's been some pretty smart--I mean, Druckenmiller I think is on the tape saying he thinks next year is gonna be disaster, for that reason. I'd watch the shape of the curve, because it's still quite--if you do a five year--if you look at the last 10 years, the 2/10 spread and the 2/5 spread right now, they're still far lower than they used to be. Used to be meaning like in 2013, even. And I don't know if the bond markets kind of way behind, but that's a pretty big market to disregard, because it generally has predicted things pretty well. We went inverted in 2006, I think, and Greenspan kept talking about the great conundrum. Now we know what the great conundrum was. Wasn't excess savings.
Audience Member: Yeah, hello. [Student name], Spain. I study here English. So I have a question. What do you think will happen with bitcoins, and would you invest your money in bitcoins?
Tom Purcell: I think that Bitcoin--I don't own any bitcoin. There's--first heard of it, or--there's a friend of mine who ran a hedge fund in New York and he and his partner did really well 2007 and 2008 and for about three months in 2009. They never really turned around and went bullish, so then they got killed and 2009 and 2010. And one of them was reading about Bitcoin in a newsletter and they started mining it in 2011. And--so I've spoken--he owns a bunch of it, and I've spoken him pretty extensively. My own theory is that Bitcoin is kind of like digital gold. There's a limited number of them. My friend Chad, who has a fair amount of--I mean, fair amount, like a lot of Bitcoin. He said he thinks that 10-15% of the world's Bitcoin already lost because they were mined so long ago, including the stuff he was mining. And he's like, Nobody knew what they were going to be worth, and people just lost the access code or whatever. So the bitcoin is on the blockchain but nobody's gonna be able to access it. So I think that there's a legit case, given the amount of fiat money printing, etc., that--just like, why is a Monet painting worth what people think it's worth? Because it looks great, and there's only one of them, or there's limited supply. So I can understand that. I think the blockchain technology is 100% legit. And for a lot of things, eventually--I don't know how quick it'll happen, but securities custody, settling trades, keeping title to your house. I mean, why do we have a title insurance industry? It's the stupidest thing. I don't know if you've ever bought a house before, but it's just--it's like a $1,000 tax for doing nothing. There are lots of things that it could really revolutionize how commerce is done in a variety of industries. And I think that's completely and totally legitimate. Financial services, which I spend a lot of time in, you're gonna have resistance by regulatory authorities, and by governments, because governments don't--they're going to want to control what is deemed to be money in their country, and legal tender, and they're also going to want to control financial institutions. Because when you have a failure of financial institutions broadly, you have civil unrest. And we didn't really have a ton of civil unrest in 2008, but we had a whole lot of angry tempers, as all of us know. And that's continued. So I think blockchain is real. From what I understand, the friends I--this ethereum is for sure real, and apparently it's more... it's not--I didn't understand why people were that interested in it, because the supply is not limited. But apparently the computer code, which you may know more about, is far more flexible and can be utilized. I do think, in general, and I've met with, in my capacity as an investor, two or three people doing ICOs. I think you'd have to be completely and totally insane to put any money in. These guys are raising $50mn in a half an hour. All that money will be lost in a vast majority of these. For sure. One guy I met with explained a $50mn ICO he was doing. And I said, Well, what are you buying? He said, Well, we're gonna take the 50mn--and they're getting a 2% management fee, not paid in their coins, by the way, paid in US dollars, to go out and make investments in the blockchain. And these guys aren't--I mean, I checked them with--I'm friendly with a guy named Mike Novogratz, who's who's done quite well in Bitcoin investing, and he's a legit player in the in the market. And there's an article about him today in the press. But he vouched for the two people I met that they're viewed as being not charlatans, I guess. But when they explained to me what it was, it's a closed end fund that they can go make investments, the investors have no governance rights, you never have any right to make them--so it could trade at 1% of NAV and you can't call a board meeting and say, Let's liquidate the portfolio. You have no right to anything. Except for the guys who run it get 2% a year and they get 20%. So the only thing I know about that one is between five and eight years from now, the management of it will own the entire trust. That will happen. So Bitcoin for sure is legit. I think there's 8-9mn people. And frankly, I mean, look, China shut down all the exchanges, the price went from 5000 to 3000. But it started the year 1000. It's a great mechanism if you're a Chinese citizen and you want to get your money out of that country and not in control the government. It's also, frankly, the same thing here or anywhere else, which is why, I mean, I was--kind of thought the governments would crack down on it a little bit quicker than they have, but now it's too late, in my opinion. So anyway, I'm not an expert, but those are my thoughts on it. I don't know if it's a buy or a sell at 3,000.
Doug Dillard: Right here. Here first, and then we'll go to you.
Tom Purcell: It's higher than gold, though, which I think is interesting.
Audience Member: Yeah, hi. [Student name], MBA first year here. So what's your take on the emerging market, specifically India, of the Indian stock market, but also the private market as such, as an investor and like somebody who's observed the market.
Tom Purcell: First time I went to India as an investor was 2005. Only been there three times. Don't consider myself an expert there. He's actually been there as an investor a lot more than I have. My take right now, though, is number one: There was a great deal of excitement when Modi came in, then things faded and like they always do. I think he did start to deliver. That monetization scheme he pulled off last year, I have to say, was the biggest bet that any Prime Minister maybe ever has tried to pull. I mean, exchanging in a cash economy 90% of the most used notes and not having a revolution, I have to give him credit for that. It doesn't seem like he stamped out the black money as well as he had hoped to, from what I gather. The markets ripped since December. And I own one stock there, Dewan Housing Finance Co. But everything has ripped. So I don't--like, short term, is it gone too far? I'm not really sure. I think India, as an economy, I've always found it quite interesting. I mean, like, in a really bullish way. If you take China and India--this is totally simplistic on my part, but here's how I look at it. If you go to China, everything's pretty clean. They've got--Ronnie Chan, who runs Hang Lung Properties told me You get instant park there. Meaning like, if you're building a big housing thing, they just put up a park. Now, this is somewhat harder now because there's a lot more development. You got to really clean political system, ie there's one party. There's about to be a dictator, he's going to tell you that in about a month. And you have big companies and everything seems a lot easier. The only place there though, that you really have--and if you go to India, what do you have in India? You have a billion people in a democracy, it's absolute mayhem half the time. And they're very short on capital. But the fact that all the companies there have been short on capital for so long, and have had to get around this crazy bureaucracy, whereas you have a surplus of capital, I've always thought that the--outside of the internet focused companies in China, which are quite vibrant, mostly because the SOEs are nowhere to be found, wouldn't know how to get in there, the Indian companies that you meet are just, I mean, they're way more dynamic. And that's why you have, in pharma and in consulting and in financial services and in a bunch of stuff, there's just a great deal of dynamism. And I also think, you go 20 more years of development in both places, when people have more disposable income and other things, they generally like to have some redress to a court system and be able to vote. And I don't know when, but at some point, the Chinese party is going to have to deal with that, because they've been 20 or 30 years--I mean, this sounds like I'm some political professor, but give them 20 or 30 years, and the more money people have, eventually at some point, they're gonna want to vote, and they're also going to want a court system where it's not--so I don't know. I just--that's kind of how I look at it. I think it's a pretty interesting place. We've made some reasonably good money, and it's definitely the one market I think where--not the one, but it is a market where you really just have to only buy the best management teams, which always makes the stocks look expensive. But HDFC Limited has gone from 30 rupees to 1800. It's run by--and HDFC Bank, I think is one of the best banks in the world. Hindustan, Unilever, I mean, there's--any of the consulting firms over time been good. There's a lot of good companies. And then within a sector, you'll find--you could try to do value investing--I don't think it works there because the corporate governance and all that is so bad that the ones that look cheap, they're not cheap, they're just stealing your money.
Doug Dillard: India's very bottoms up. China's very top down. Like I used to describe it as you go to India, and there's bamboo infrastructure on new commercial construction. And you go to China, and there's just cranes everywhere, which to me was a really bullish thing for India, because was really just showing you what a constraint on development was. And you put the same thing to capital and everything else Tommy said, it's just--you've had--there's really good companies there. But valuations are a little a little stretched.
Tom Purcell: And it's--I mean, it's a battle. I mean, democracy ain't easy. Looking at some of that right now.
Doug Dillard: Oh, okay. I thought you had a question before. Sorry. Okay, so you did have a question. I could read your mind.
Audience Member: Hi there. [Student name], first year undergrad. So given the M&A between--
Doug Dillard: First year undergrad? You're a freshman?
Audience Member: Yes.
Doug Dillard: Where you living?
Audience Member: Darnell Hall.
Doug Dillard: Ahh, that's too bad.
Audience Member: It's not as bad as as it seems. But anyways, so, given the M&A with Amazon and Whole Foods, would you say that will prompt the selling of large cap companies over the long term? Of retail companies?
Tom Purcell: You mean is that going to put a bunch of pressure on other grocers and other things?
Audience Member: Yeah.
Tom Purcell: Yeah. So I think for sure--I mean, the markets been somewhat onto this, but it's going to be--Amazon, and particularly Amazon, but I mean, it's an incredibly deflationary and disruptive force in business. And it's because they're really good, for sure. And they're almost maniacal about what they pursue. And the market gives them gives them the capital to go after things at a pretty low cost. So they developed AWS without really making any profits while no one knew what was in there. And I can remember we owned a bunch of Viking, and the analyst prediction was they were going to tell everybody what was--how big AWS was and everything, and it'd be a big catalyst for the stock. And I was like, How can everyone not already know this? And you know what? The stock was like 400. And then like six months later, it was 800. But my reason for bringing that up is, I don't know how many--I mean, that must have been 30 or 40 billion in capex that went in and produced no operating profits for quite a long time. So if you're running Kroger's, and Amazon just bought Whole Foods, and the first thing they did--now, Whole Foods had a problem, which was they staked out that high end healthy part of the market, and they had it to themselves for a long time, and then other people caught up, and they were too high in price. Amazon comes in, cuts the price 40%. What are you gonna do if you're Kroger? The Amazon stock price goes up, everybody loves them. Kroger goes and cuts their price 30%, you know what's gonna happen to the stock? It's gonna get halved. So they're in like, a--I mean, it's tough. But for sure, in retail, and in--there's a great deal of flux. I mean, this will sound insane. Maybe some of you guys have heard of this. But I looked--early in the spring, ran into a friend of mine, actually on a train going from Baltimore to New York. And he said--and I'm laughing because of how crazy it sounded--he said, I want you to see this private company. It's run by two superstars. There's a bunch of great investors. And it's gonna revolutionize retail. And I was like, Alright, what is that? And he said it's in the clothing rental business. And I was like, come on, how many people are going to clothing rent? So companies called Gwynnie Bee. Still private. Just got a big valuation. It's growing very fast. But--and their model is to--and you can look them up, I mean, pretty impressive management team, etc.--is to rent you clothes. And the logic actually isn't that crazy. They said in the UK, there's 60bn pounds of clothes that sit in closets and never get worn. It's a huge expenditure for all consumers that really the utilization of which is quite low. So, theoretically, if you could get a bunch of clothes delivered to you that fit you alright and were clean and pressed and all that stuff, probably people would try it. That's their thesis. I thought it was totally insane. They have a bunch of data that shows 80% of women would be interested in--because the women demographic is the first one they've gone after. I don't know if it works, and I bring it up because I'm not a venture capitalist.
Doug Dillard: I think your suit looks great.
Tom Purcell: Yeah, I know. I picked it up yesterday, or this morning it got delivered. But Amazon and buying Whole Foods. I mean, there's--in lots industries the next 10 years, I mean, auto industry, there's just a lot of flux, and they are an incredibly destructive and hard to deal with force for the retailers who are out there. I mean, you should look at these private label food companies too.
Doug Dillard: But it helps to they don't pay tax, right. So it's like there's a double whammy.
Tom Purcell: They don't pay tax and they're not required to turn a profit.
Doug Dillard: Yeah, it's good combo.
Tom Purcell: Now, anyone who owns the stock would say that we're far too cynical for ever mentioning something like that.
Audience Member: I'm [Student name], first year MBA student. I have a question on fundamental versus technical, where do you see... [inaudible]…
Tom Purcell: To work at a hedge fund? I don't--I have no experience being a technical fund manager. Now, every fund manager, despite what I just said, to some degree does pay attention to technical. It's just like--and every technical guy also pays some attention to fundamental things. Outside of like the big systematic--but even the systematic guys are using lots of data and lots of input, a lot of which is just around valuation, or rate of change?
Doug Dillard: You mean technical or quant? Those are different. Technical is literally This chart's breaking out, I'm gonna get out of the stock because the chart's upside down or whatever. Quant is very different. That's using a lot of data sources and data to predict valuation and other things. Momentum and all this other stuff. There's two different--
Tom Purcell: You're gonna get into quant, you need to have a high level mathematics degree. For sure. As far as I know. Which I don't have. I have an MBA from Harvard, which I can tell you has nothing to do with mathematics or any numbers at all. So then, on fundamental or the types of hedge funds that, at least I've worked at, you just got to apply to them and work and try to get a job there. And how do you do that? Well, you got to demonstrate an interest in the market. They're going to come here to interview. Interview with them. Use whatever context you can to try to get interviews up in New York and just find a way. I mean, there's a lot of resources now that when I was in business school, you don't have. So LinkedIn, and things of that nature. I'd just be pretty resourceful. The one thing that probably hasn't changed in however many years is, if you're pretty persistent--I mean, people may tell No like a gazillion times, but most of the time, people who are pretty persistent find some sort of opportunity. And it's some combo of hard work and luck. Like, I just ended up getting a job at Tiger in the summer of '98. If I hadn't--that was how I got into working for a hedge fund. And it was between going to work there or at Wellington. Now Wellington's a very big long only fund--it's not a long only fund--it's a big asset manager in Boston that's known as a long only manager, but they have a huge hedge fund complex underneath it, and all the PMs that I know that work there actually spent a lot more time in their hedge funds than they do on the long stuff. But it's a pretty cool mix for them, because all the companies think they're just a big long only fund, which is a good trick.
Doug Dillard: But know you want to do it before you go. I mean, it's 100 hour weeks. It's not glamorous for a long, long time. Yeah. Last question. He has to catch a train.
Audience Member: Thank you for letting me have last question. And a woman, yes. Well, I'm not a business student.
Doug Dillard: I didn't give you the first question because you didn't raise your hand, just to be clear.
Audience Member: But I do go to school here at Georgetown. I'm a Master of Science in Foreign Service second year. And I know that you've referred to several international cases, a lot of trips to foreign countries like India and China, and you referred to the case in Brazil. So I was just wondering, what do you think is the role of political risk in finance, and specifically in investment? And is this a growing role, or do you personally use consultants in political risk? Thank you.
Tom Purcell: So, yeah, I'd say, it's interesting. When we started Viking, and I was in the Foreign Service school here, undergrad--when we started Viking, we actually--and Tiger had a big business investing in emerging markets. And we started Viking, we intentionally did not. So we only invested, at that point, in the US, Europe, Japan, Australia. And that was all. And the reason we didn't was because what we found at Tiger was if you were investing in EM--you couldn't totally ignore, obviously, politics and things like that in what we at that point called the Western world, but in EM, it didn't matter if you found the greatest company that you really liked. If you were in Malaysia, and Malaysia was having problems, you were in trouble. So you had to call the country right, and the macro right about the country, and then get the stock right. Which at Tiger they had a lot--I mean, Rob Citrone who runs discovery was running EM and macro, so there was a lot of capability. We just didn't have that. So we avoided it, at that point. Fast forward, then we started investing in Korea, which we viewed more as a developed market. And then over time, we just found good companies and started investing in EMs. And then on top of that, if we really go back to 2008, and I ran our financial services practice from 2002 until 2015. I never used to pay attention, really, to the Fed much, or particularly to regulation, or anything else in the United States or in Europe, other than a couple of things out of Basel, and not really. Then you had 2008. And the only thing you--and by the way, you could compare that to someone who did like TMT or healthcare, healthcare investors had to come to DC, will always have to come to DC because you have to see the CMS and all that stuff. Once we had our housing/debt bubble collapse, you could not ignore what happened here and invest in lots of markets, but particularly financial services. So went from don't invest in EM because there's too much macro and political risks you have to assess too. We kind of went there anyway, because they were interesting companies. And on the flip side, you really couldn't say that the all these markets we considered developed no longer had political risk and anything else because government regulation and other things certainly came to be. So I think that--I know--that there's a very big business in consultancies and just staff at lots of institutional hedge funds out there. In terms of how I'm investing now, or, I'd say even, whatever, just smaller hedge funds or--I'm trying to take a view that's longer. But if you take Brazil right now, I mean, Brazil has been a five year saga of--yeah, probably started five years ago, the carwash scandal and all this other stuff. And I think, someday, for that country, hopefully, I think this is actually really good, because you've got an independent judiciary, and most of the business people like Odebrecht's defense has been, well, everybody's always done it this way. But that wasn't a great thing for most of the country other than him. And so I think that that's probably good for the country. But getting through that period is obviously going to be pretty hard. And it was--but you have--you seem to have a reasonable--right now, what you have there is an investor, in my opinion, is you got a pretty good setup from the macro, which is, things were pretty washed out. Dilma's out. And she was bad. She just was not good, from all sorts of economic reasons. Temer and the people around him seem pretty good. They're trying to push through some reforms that are needed. The country's debt to GDP is in deficit, is not sustainable. And they're not going to be given the rope that someone like we get. And I don't care if that's--it doesn't matter if it's fair, it's not fair. It's just not going to happen. So I think that stuff's a reasonable backdrop. And I thought there was a big risk when when he got caught on tape in March, but he seems to have gotten through that. And from what I understand from people I know who live there or really invest there a lot, one guy explained it to me in this way, he said: the country is going somewhere between center right and right for a period of time at the elections. And the reasons for that is that we don't have anything to redistribute. He's like, We are bust right now. Because in 10 years, if we come back again, those guys will come back and they'll want to redistribute, but we're at this period of time where there's nothing to redistribute, and therefore, it's really the--and from a investing stock market standpoint, leaving out everything else societally, that's a good thing. I think, for the society there, at least my personal opinion is--and going all the way back to your first question, there is definitely a role, almost feels like it's bigger. It's kind of hard. In my experience, like how often has using real experts on policy and political economy really paid off? Macro investors, all the time, because they're trading currencies and all that stuff. We would use them a lot, and I still talk to people, because I got a big investment in Russian, and it's a bank too. I don't know. I mean, the information's only good for some period of time, meaning accurate, or the politicians or whoever the policymaker is can change their mind. And so it's not--I'd say it's like having a consultant around any other issue. But there's definitely--there's a big business. If you're interested in it, it's also pretty interesting stuff. I think. So, anyway.
Doug Dillard: All right. Thanks, Tom. I appreciate it.
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Wrap-up
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