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
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
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
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
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
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,
4) The longer-term potential for a merger between Porsche and VW.