Philippe Jabre On Opportunities In Russia, Japan And China

Philippe Jabre On Opportunities In Russia, Japan And China

Columbia Business School MBA and ’82 alumni Philippe Jabre, founder and CIO of Jabre Capital Partners, has been called, in the same breath, ‘star money manager,’ ‘a true maverick,’ and ‘one of Europe’s best-known fund managers.’

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Jabre is also known to be an extreme skier with a taste for Havana cigars and high-stakes trades.

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The Spring 2014 investment newsletter ‘Graham and Doddsville’ from Columbia Business School carries a highly readable interview with Jabre that delves into his development as a fund manager and his investing strategies.

Recognized and awarded

Jabre founded Jabre Capital Partners in 2007. The firm recently won EuroHedge’s Management Firm of the Year award for 2013. The firm’s JabCap Global Balanced Fund returned 48% in 2013, while the JabCap Multi Strategy Fund, which trades equities, convertible bonds and other strategies, gained 43%.

Prior to that, he was a top money manager at GLG Partners, where he reportedly managed assets worth $7 billion and more than quadrupled investors’s fund during the period 1998 to 2005.

You could also call him a survivor. Jabre ran afoul of the UK’s FSA in 2006 for allegedly trading inside information relating to a convertible bond issue by Sumitomo Mitsui Financial Group, Inc. (TYO:8316) He paid a $1.48 million fine in 2006 and moved out of the U.K to cooler climes in Geneva, Switzerland. The intrepid fund manager then proceeded to set up a highly successful hedge fund that quickly roped in over $3 billion in investments.

According to the firm’s website, Jabre Capital Partners is based in Geneva, manages both alternative and traditional investment strategies and employs more than 50 people.

Convertible bonds a strength

Jabre Capital was named Best Relative Value Convertible Bond Manager at the Hedgeweek Global Awards 2014.

“Last year, for example, the main source of returns in the fund was a macro bet on Japan and our ability to get leveraged exposure to that market through asset swaps on our convertible bond positions. This is a convertible bond where you create a swap to hedge out the credit risk and basically isolates the equity option,” says Mark Cecil, founding partner of Jabcap Convertible Bond Fund, which has Jabre and Philippe Riachi as the other co-founders.

Convertibles investing over the years

“In the early 1980s, people used to value converts as a substitute for stocks. Now people value them on implied volatility compared to historical volatility and there is more of a credit markets aspect to it,” says Jabre.

He also says that the market today has become much more efficient and that convertible bonds are issued with just 0-1% coupons and already pricing in large implied volatility.

Fund vehicles and the evolution to equity expertise

Jabre runs a multi-strategy fund which has a convertible arb portion, a long-short equity portion, and then a smaller section comprising event-driven, emerging markets, foreign exchange, and fixed income. In addition, he manages two long only funds where he looks to buy cheap stocks or convertible issues.

“People like myself look for catalysts on stocks – earnings, events, positive or negative surprises. This is why I’ve developed long-only expertise. It brings extra layers of information on why a stock should go up or down and what are our expectations,” says Jabre.

Of the different variables that make up a convertible bond, the stock valuation part is what you need to worry about in eight years out of 10, he says.

“Today, companies have a lot of cash and interest rates are at zero, so there is nothing to hedge there. The real hedge is on the equity part. So over the years we developed knowledge on the equity side. That’s how we became investors in stocks,” reveals Jabre.

Investing examples: Jabre

According to Jabre, his fund had limited exposure to emerging markets and none in Russia, but he was prepared to move in in the event of a collapse in valuation. Recent political events tied to the Ukraine took a toll on Russian stocks, and Jabre duly invested 10% of the fund in the country.

“There are names that trade around 3x P/E,” he explained to aghast colleagues. “You can’t invest based on news stories of what Obama and Putin discuss on their phone calls. You need something based on valuation and you need to forget about the noise.”

Similarly, in Japan, Jabre correctly read the political implications of a new government in November 2012, and immediately went overweight on Japanese stocks. The position worked very well for the fund all through 2013.

Jabre also read US banks correctly in 2009 and seized on CEO-talk from Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM) that said the banks were making money during Q1 2009, rather than losing it.

“And that was the biggest signal to buy US banks that I ever saw”, recalls Jabre. “We bought a lot of them in the US and we finished the year up 80%.

Moral: “So the key thing is to find things that have done nothing for ages and suddenly there is an event that you need to be the first to understand or appreciate.”

A bad year and why stop losses may not work

Jabre recalls that 2011 was a very difficult year because of the extreme volatility in the market giving fund managers the feeling, alternately, that the market was likely to collapse, or that it was going to shoot up. This volatility cost active fund managers dearly in terms of returns.

What about stop losses?

“As much as stop losses work in extraordinary periods, it can hurt you a lot when the market is going through erratic moves but with no definitive trend. And so the conclusion is that when you start to lose money, you should get smaller and trade less, because you can’t catch the market properly,” advises Jabre.

Risk management and position sizing

Jabre says position sizing differs for a manager who has an asset management background and another who comes from a trading environment in a bank.

“Since I come from a more traditional investment management background, we’re more diversified and have very strict limits on how long or how overweight we want to be in some situations when we find great, cheap opportunities.”

Cutting exposure to a bad trade helps stem losses and conserve cash for surviving difficult periods. Cash is also than available for taking advantage of opportunities during better periods.

Jabre cites an example of this discipline from the crisis days of 2008 and how it paid off big for him.

“I took a stop-loss in my long fund in the summer of 2008 and moved money into fixed income bonds. And in early 2009, the equity market stabilized and we had the cash to buy cheap banks and cheap growth stocks. It was the most extraordinary period we ever had because we had the cash and investors behind us.”

Evaluating opportunities

According to Jabre, it is crucial to first have a macro view and to use that drill down to a micro view.

“What we do is look sector by sector and analyse which sectors to focus on and which ones to avoid based on where we are in the cycle the macro backdrop,” he says.

Within a sector, one would need to understand the devil in the details – for example for financials, it would be essential to understand Tier 1 capital ratios and price to book metrics. On the other hand foreign export company, one needs to understand foreign currency exposure.

Current investment ideas

Jabre likes Japan if simply because too many people are doubtful that the current government policies will succeed. Yet, these self-same policies could propel the Nikkei two levels of 16,000-18,000 with the yen trading opposite the dollar at 110.

According to Jabre, the equity market in Japan is likely to benefit from reform measures from the government that could include tax cuts, easing labour policies, and pension funds investing more in stocks.

China is another idea. Jabre feels that Chinese authorities could implement stimulus measures that could send Chinese stocks up another 10%, catching macro funds that are short on Chinese shares, on the wrong foot.

Also see an interview from yesterday conducted by Josh Friedlander with Philippe Jabre at the EuroHedge Summit. Jabre explains why he is bullish on Japan.

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Saul Griffith is an investor in stocks, commodities and forex, writing under a pen name. Saul has top accounting qualifications and extensive experience in industry and the financial markets. He also has an abiding interest in breaking news that could be a harbinger of new trends and give insight into an instrument’s potential for providing value, growth or yield.
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