June 30, 2013www.valueinvestorinsight.comValue Investor Insight
greater amount o money gradually than alesser amount potentially in one day.
How systematic vs. opportunistic is youridea generation? JA:
We do screens in the sense that i we’rein a period when the markets are doingreally well or very poorly, we’ll look atwhat’s most and least in avor or ideas.This can lead us to avor an industryrom time to time, but it depends whyit’s cheap. I it’s politically motivated andbacked by secular tailwinds, like health-care in 2010, we’re more apt to get in-volved. I it’s an industry like steel orsome other very cyclical business wherewe have a more difcult time underwrit-ing the uture, it’s not that we won’t everget involved, but the price we’re willing topay is much lower. Industries are oten ina bad place or a good reason.That said, most o our ideas comerom bottom-up work on companiesand industries sparked by any number o things, rom a headline to a conversationwith another investor about a bankruptcysituation. We also oten fnd other thingsto do by looking horizontally and verti-cally rom names already in our portolio.We’ll talk later about Sprint [S], but as anexample, our research on it also gave uswhat we believe is actionable insight intoVerizon, AT&T and Dish Network.
Why did something like Yahoo [YHOO]attract your attention? Jerey Lee:
We’ve owned Yahoo o andon or awhile, but we frst got interested init due to its stake in Alibaba Group, whichin China is kind o like Amazon and eBayput together. We’ve had an ofce in HongKong since 2008 and i you were payingattention you could see that, even thoughAlibaba was private and there wasn’tmuch fnancial inormation, it was a tre-mendously valuable asset that wasn’t wellreected in Yahoo’s share price. We’vehad a lot o these cross-border situationsin our portolio, where there’s a U.S.-listedstock and the sell side spends 80-90% o its time on the U.S. business, even thoughit may to our mind only represent 20-30%o the value o the company.
Now that part o Yahoo’s Alibaba stakehas been monetized, have you moved on? JA:
Yahoo sold roughly hal o its positionback to Alibaba last year at what we con-sidered a too-low valuation o $36 billionor the entire company. Alibaba’s valuehas continued to grow and we believe inan IPO air value is at least $100 billion. I we’re right about that, Alibaba will havear more impact to the upside on Yahoo’sshare price [now just over $25] than anytweaking o the business model in the U.S.
You sold your AIG stake recently. Wasthat because the distressed part o the sto-ry had passed? JL:
It’s one o the more crowded tradesin insurance and we concluded the turn-around in its Chartis property/casualtybusiness was going to be more difcultthan we frst expected. Given that, youwouldn’t get the same leverage on going-orward changes in pricing and interestrates that you would rom other compa-nies. There’s still potential or value cre-ation at AIG, but the value gap had closedquite a bit and rather than go ater the bal-ance, we ound better ideas elsewhere.
While the majority o our portolio isevent ocused, sometimes we’ll fnd thingswe just think the market is missing. For in-surers, the low interest-rate environmenthas been a big drag on portolio returns.But i you look at where interest rates havebeen over the past 15 years, a 1.5% yieldon the 10-year Treasury is not even in therange o normal. So rather than hold onto AIG, we’d rather own something likeMetLie [MET], where we could pay 7xearnings or one o the best insuranceranchises out there. I interest rates nor-malize in the next three to fve years – theupside/downside on that is in our avor –we think its value could double.
Do you have a market-cap sweet spot onthe equity side? JL:
Most o our portolio is in the $2 bil-lion to $20 billion cap range. Less thanthat is difcult given the size o our undand how concentrated we are. Greaterthan that, we tend to fnd less inefciency.
You appear to have an Asian tilt to yournon-U.S. investments. Why? JL:
We have a separate Asia-ocused strat-egy, ocusing primarily on China and Ja-pan, and we have had a greater exposureto Asia than most New York-based frms.Part o that is that we’ve built our corecompetence there with investments in theregion since 2004 and having a HongKong team since 2008. But it’s also a unc-tion o opportunity and inefciency. Theequity markets there tend to be very retail-driven and short-term ocused, which ismore apt to create the types o mispricingwe try to take advantage o.
The volatility that you’ve seen in Ja-pan over the last ew weeks is consistentwith that. That type o market can beenormously benefcial to us.
How activist are you in your positions? JA:
With distressed credit, you have to beactive because the dynamics o the situa-tion can be very uid. On the equity sidewe’re sometimes in activist situations, butwe preer to take a back seat and let some-body else drive it.One example o that today is withCommonWealth REIT [CWH], where webelieve Corvex is doing an excellent jobin working to change an external-man-agement structure at the company thatwe think is improper and severely valuedestructive. Whether investors have stand-
ON ASIA INTEREST:Part of that is we’ve investedin our core competencethere. It’s also a function ofopportunity and inefciency.