Letter #57: Chris Hohn (2014)
Founder of TCI Fund Management | Activist Investing Creates Inefficiencies -- and Opportunities
Hi everyone! Due to popular request (and a few persistent individuals), I’ll be restarting this newsletter, but with a few changes. Most notably, rather than sending “A Letter a Day”, I’ll be sharing a letter or transcript twice a week, once on Tuesday afternoon (2:22pm) and once on Saturday morning (6:06am). Second, I’m expanding the scope of the newsletter to include a broader range of subjects, but still focused on thought-provoking investors (across venture, hedge funds, and private equity), founders (not just tech), and operators (sales, marketing, product, etc). Lastly, I’ll be limiting my commentary so it’s a smoother reading experience and you can read the work as is. (If you’d like to see my notes or trade thoughts, shoot me a DM on twitter!)
Today’s letter is a short one—it’s the transcript of an interview where TCI Fund Management Founder Chris Hohn discusses activist investing and how he generates alpha. Chris spent the beginning of his career in private equity at Apax before moving into the hedge fund world with Perry Capital. In 2003, he set up The Children’s Investment Fund, an investment vehicle that was contractually obligated to donate a portion of its assets to charity. Today, he is known as one of the world’s sharpest and most feared activist investors.
I hope you enjoy this transcript as much as I did!
(Transcript and all errors are mine.)
The Transcript
Host: So is alpha dead?
Chris Hohn: I don't believe so. There's really no shortage of opportunities and alpha generation, in our view. And since 2010, the fund has returned 18% per annum, we're up 22% net of fees this year, and 18% a year over the 10 years life of the fund. So we're finding plenty to invest in.
Host: Has it gotten harder to find then?
Chris Hohn: Yeah, let's talk about how we generate alpha, if that's okay. For us, we generate alpha through a number of ways. Firstly, understanding the sustainability of business models, selling business models, and taking a long term horizon, over which the persistence of high barriers to entry plays out, very much in the philosophy of Warren Buffett. Secondly, we have a deep sector expertise in some sectors, including infrastructure and consumer goods, which help us to understand when opportunities are good. Thirdly, we run concentrated, positions can be in excess of 10% of NAV. And so by concentrating our capital in in a handful of very good ideas, where we find the alpha, it can mean something and can outperform. And finally, I'll mention the issue of being prepared to be activist, which is an inefficient space where few people are willing to do that. And we're willing, where appropriate, to be activist. And so that combination of taking a long term view, which gives us a time horizon arbitrage, sector expertise, understanding business models, corporate governance, expertise, and the concentration, the combination of those factors has allowed us to generate consistently high alpha.
Host: Now, can you just talk a little bit more about why you think the activist space is inefficient?
Chris Hohn: Well, firstly, where there's a corporate governance concern, investors just tend to stay away completely. They don't try to say, Well, what discount should I apply? And they just completely stay away. An example is News Corp, where we made a very large investment a couple of years ago during a hacking scandal where the stock traded at extremely cheap valuations, four times operating profits, was worth triple. And people, investors, said, Well, I don't want to invest in a company that has hacking, phones, who knows what the liability might be? And we said, Well, the liability, we can't tell if it's $20 million, or $10 million, but $50 billion was discounted. So it didn't matter. And so for us, there was a price. And secondly, we understood that there was an inflection point in corporate governance as a result of the scandal, where they decided to buy back a lot of shares, break the company up, and have a new COO, Chase Carey, run the company. It's an inefficiency. And also that can be exploited because investors will say There's no price. Think of it like the damaged goods section of a department store where you can get 80, 90% off, even though... because most people won't buy anything that's damaged. And also, hardly any investors will be activist, because it's a reputational issue for them. And they think that no company will ever talk to them again. And so there's a dearth of investors willing to be activist. So few competitors.
Wrap-up
If you’ve got any thoughts, questions, or feedback, please drop me a line - I would love to chat! You can find me on twitter at @kevg1412 or my email at kevin@12mv2.com.
If you're a fan of business or technology in general, please check out some of my other projects!
Speedwell Research — Comprehensive research on great public companies including Constellation Software, Floor & Decor, Meta (Facebook) and interesting new frameworks like the Consumer’s Hierarchy of Preferences.
Cloud Valley — Easy to read, in-depth biographies that explore the defining moments, investments, and life decisions of investing, business, and tech legends like Dan Loeb, Bob Iger, Steve Jurvetson, and Cyan Banister.
DJY Research — Comprehensive research on publicly-traded Asian companies like Alibaba, Tencent, Nintendo, Sea Limited (FREE SAMPLE), Coupang (FREE SAMPLE), and more.
Compilations — “A national treasure — for every country.”
Memos — A selection of some of my favorite investor memos.
Bookshelves — Your favorite investors’/operators’ favorite books.
Question for Chris: Could you give us a general sense about how you feel about your CNI investment today?