Investor Communications Network, LLC


10 Questions with Chris Hohn

The Activist Report - Volume 3 Issue 1 - January, 2013

Chris Hohn is Founder, Managing Partner and Portfolio Manager of The Children’s Investment Fund Management (UK) LLP (TCI). TCI is a global valuebased, fundamental investment manager with a concentrated portfolio aiming to bring a long-term, owner-oriented investing philosophy to the public markets. TCI, now entering its 10th year, has successfully compounded out at over 16% pa vs global equity markets at 5% pa. Last year the fund was up 29% with strong gains in News Corp, Japan Tobacco and Porsche SE. Mr. Hohn is based in London and has more than 20 years of experience in the investment industry and has managed equity portfolios for over 15 years. Chris was able to make the time to sit down with us for this month’s edition of 10 Questions.

13DM: The Children’s Investment Fund, led by you, has been one of the most effective and successful activist investors on a global scale. How has your outlook on activism changed over the years?
CH: TCI is not a purely activist fund manager – we have a global equity fund that is not afraid to use activism to enhance value as appropriate. This has always been the case since we started back in January 2004. First and foremost, we find truly great businesses, often with very high barriers to entry, and we buy them cheaply. Typically there is a reason these great businesses are so cheap – often because of poor corporate governance. So we scout the world globally, because of the limited number of opportunities which meet the TCI criteria, and we pick up these compelling but deeply out of favour opportunities. My style of activism has evolved over the years – from antagonist to now being more constructive. In the early days I was involved in quite a few nasty activist battles, which in retrospect were great learning experiences. If I had to do over again would likely take a more constructive approach.

13DM: How have you managed to continue to be so successful in the many jurisdictions in which you operate?
CH: We are successful in the many jurisdictions in which we operate because of the reliability of the TCI investment approach, deep fundamental work that we do, we take a long term view and we have a small team who are very experienced executing activist campaigns successfully.

13DM: Your most recent success in Japan with Japan Tobacco was very surprising to many; can you give us your thoughts and perspectives on the JT activist campaign? Anything you learned from this long battle and what were the critical elements that made it a success?
CH: Through its activist campaign, TCI wanted to change JT’s poor corporate governance. We did this by lobbying the Japanese government, the company, journalists and analysts as well as promoting a bilingual website www. jtchange.com. The three key aims were to increase the dividend, the instigation of buybacks and the replacement of the CEO with a stronger operational manager. Gradually, the logic of our case was accepted by the Japanese Government, which needed to raise money following the March 2011 tsunami. TCI pressed the Japanese Government that it was more sensible to sell their stake in JT to pay for reconstruction than to increase taxes and that simple changes to corporate governance would substantially increase the value of the sale. So far, through consistent prodding, TCI have secured a doubling of the dividend pay-out, a firm commitment to substantial buybacks, and the addition of two independent directors to the board and the replacement of the CEO with the more market-friendly Mr. Koizumi. TCI exercised its right as a minority shareholder and submitted three agenda items to the board of JT for inclusion in the June 2012 AGM, recommending that the Japanese Government exercises its vote in favour of the provisions set forth, in the best interests of the Japanese Government and the people of Japan. We went on to explain that the increase in dividend would likely cause a re-rating of the stock price of JT, which will be of significant benefit to the Government as they reduce their holding at higher stock price levels. The Japanese Government will receive a higher share price for the shares it sells if the dividend paid by JT is substantially increased. [See Case Study attached hereto]

13DM: You received the largest allocation of any institutional investor in the November 2010 IPO of QR National (renamed Aurizon), the monopoly freight track owner in Queensland Australia. How did you collaborate with the management team and did your previous railroad experience with CSX help in achieving this? What’s activism like in Australia and is this a jurisdiction you plan spending more time in?
CH: TCI’s deep infrastructure and utilities expertise – in particular railroads - certainly played a large role in securing a sizable allocation at the IPO for this investment. This investment was interesting to us from the outset – hard asset, monopoly freight operator, inefficiently run for years by the Government with low coal pricing contracts. Prior to investing, TCI undertook many months of due diligence - well over 80 meetings/conference calls with management, consultants, experts, competitors, customers, bankers, government officials and analysts. We met with the CEO and CFO three times and the Government of Queensland twice in order to build key relationships and conviction. We also wrote to the Treasurer of the Queensland Government setting out the attractions of the Aurizon business in a global context, our views on valuation and our extensive railroad investing experience. This collaborative working relationship with the executive management team and the Chairman allowed us to make suggestions which were well received by management and the Board. For example, we were supportive of aligning management incentive plans with shareholder returns. We were also pleased with Aurizon’s A$1bn share buyback from the Queensland Government. Australia has a sophisticated capital market and a corporate culture that lends itself to value investing . We are always looking for new opportunities to invest.

13DM: You have been an activist investor on several continents. What are the best jurisdictions for activism?
CH: UK, Canada, Australia certainly have good opportunities for activism.

13DM: How does the United States compare to other countries you have been active in?
CH: Boards and CEOs in the US take a very legalistic and defensive approach to activism. In other countries there is more of a willingness to engage constructively. For example, QR National, the monopoly freight track owner in Queensland Australia, we were able to develop an excellent relationship with the management which was very value added.

13DM: Will we see you as an activist investor again in the United States?
CH: No reason to rule it out but the best opportunities are where management is already aligned or can be aligned consensually to effect a corporate transformation. For example, our investment in News Corp in the summer 2011.

13DM: How has the economic climate in Europe and the fiscal cliff in the United States affected shareholder activism across the globe?
CH: The opportunity set in Europe has become very interesting due to cheaper valuations resulting after the Euro debt crisis. There is also more pressure on companies to deliver returns for shareholders post financial crisis.

13DM: Since 2003 you have donated well over 1bln pounds to The Children’s Investment Fund Foundation (CIFF), founded by you and your wife, now one of the largest charities in the UK. Can you tell us a little about the relationship between TCI, the hedge fund, and CIFF, and what issues you and the charitable fund are focused on?
CH: Historically there was a profit allocation in the management company to the foundation. Now the foundation relies on its substantial endowment for income. The focus of the foundation is improving the lives of children in some of the poorest parts of the world – areas of focus include education, health and climate change (www.ciff.org).

13DM: What is your favorite investment in your portfolio now and why?
CH: Our favourite position in the fund right now is Porsche SE. Porsche SE is a holding company which owns 150mln shares of VW. Porsche is a perfect TCI investment – heavily discounted great business purchased at 2.5x P/E for arguably one of best car companies in the world. The reason it was so cheap - hedge fund litigation, it’s a holding company so mainstream investors typically find it difficult to analyze and being listed in Europe did not help. Porsche SE is our favourite idea because there are multiple ways to get paid-
1) Strong underlying performance from the investment in VW,
2) A successful and benign resolution of the legal cases,
3) Large and increasing dividends from VW flowing through to Porsche shareholders, and
4) The longer-term potential for a merger between Porsche and VW.