Value Investing

Capitalize For Kids – Wide Ranging Interview With Larry Robbins On The Future Of Hedge funds And More

Capitalize For Kids – Interview With Larry Robbins See the full interview in PDF here->link 

Q&A with Larry Robbins

CAPITALIZE FOR KIDS: Thank you again for taking the time to speak with us. I’ll dive right into the first question: can you walk us through how you started, and how the firm has been able to generate attractive, riskadjusted returns since inception?

LARRY ROBBINS: Glenview started because when I worked at Omega for Leon Cooperman, I had the same need to invest personally as many of our clients. I was personally looking to invest in a way that would have low risk over time; that would provide real returns over time; and that would allow me to focus my own capital on that which was known and knowable – from a fundamental perspective. I think one of the challenges that many people have is that, in their pursuit of highly diversified investment strategies, they end up investing their own capital – or capital that they are the fiduciary for – on things that, due to time constraints, they have no contact with. Or of which they don’t have a capacity to develop a deep understanding. The theory, when we started Glenview – and that perpetuates today – is to invest in businesses that we believe we can adequately describe in a matter of minutes. Businesses where we can look at past and present fundamentals and try to predict future fundamentals – including future earnings growth, cash flow growth, shareholder returns, and where we can invest capital at valuations – absolute valuations – that we find reasonable. And the final thing is that, all along the way, we wanted to think and act like owners – which the business has allowed us to do.

CAPITALIZE FOR KIDS: How have things changed over time?

LARRY ROBBINS: As our business has grown and evolved, things we could do as trading strategies – including high capital velocity trading strategies around shorter term changes in macro- or shorter term data points – have become less relevant as the fund’s assets under management grew. At the same time, we have been able to develop deeper management relationships. We’ve been able to develop a true understanding and we’ve been able to inform our portfolio companies that we are true investors who think and act with a medium- and longterm mentality. We believe that we’ve been able to have a positive and constructive influence on the growth and economics of our companies over time that has benefited all shareholders. We have always been an organization that was focused on medium and long-term returns, but certainly our ability to support that through corporate engagement has evolved over time.

One thing that gives us an edge is that we’ve done a reasonably good job of being open-minded and unbiased in our analysis. This is enhanced through our team structure: we have a very large team, where we have approximately 40 people on the investment research staff – three quarters of whom are traditional analysts, and one quarter of whom are proprietary research analysts collecting real time information on economies and trends. In employing that size of team, we believe that we’re able to develop a very good understanding of not only the first three bullet points of what people think industries are about, but in fact the real way things work – as well as many of the nuances behind them. That’s led us to a focus in certain industries that appear to be perpetually misunderstood – most notably in the healthcare arena. All along the way, we think one of our competitive edges has been to use that broad research staff to separate out the commonly held bull or bear cases from those which are actually supported by evidence, so that we can trade against market perception for the benefit of our clients.

CAPITALIZE FOR KIDS: Do you find that the philosophy you set out with when you started Glenview more than 15 years ago has remained consistent in terms of the underlying tenets you look for in a business?

LARRY ROBBINS: We’ve always been a fundamental long/short firm. We did grow our capabilities to include distressed corporate fixed income to augment our equity investment strategies. And yet those are executed based upon the same fundamental principles which we’ve executed on in the equity market since the beginning. The fact that we have an absolute return-oriented strategy has not only allowed us to participate in those distressed markets during times in which they have been advantageous (and in fact superior to equity markets), it has also allowed us to walk away from those strategies during times in which there’s little to no value. The second thing is that we’ve had a more significant focus on arbitrage during times in which we were in a higher interest rate environment, because arbitrage tends to price on the back of the high yield market. And yet, as interest rates have been significantly reduced, we have not reduced the return objectives or cost of capital that we use to deploy capital at Glenview. So over time, the straight arb business has become significantly de-emphasized in our portfolio. In today’s interest rate and market conditions, we find very little that can be done outside of a few select deals. In general, we find there’s very little that can be done that can generate 20 plus percentage annualized returns in the traditional arbitrage business.

Those are a couple examples of how we’ve evolved with respect to the human capital side. Certainly, when we started Glenview, we were a much  smaller team, but it was always our view that we would be an organically growing organization that focused on training and development.

I was 31 years old when I launched Glenview. My own limitations as a manager caused me to only want to hire people junior to me in experience (which, for me at 31, was reasonably limited). And so not only by strategy, but also by necessity, we became a training and development organization that developed its senior people. Today, as we look at our firm – which includes 12 partners – our average senior person has been with us for a decade. That’s not by accident, that’s by design. We have a meritocratic culture which has allowed those people who’ve not only demonstrated success financially, but who’ve also demonstrated success in terms of their ability to train and develop junior resources, to rise to senior positions across the portfolio team and across the business operations team. This has allowed us to become a much more sustainable organization than we contemplated on day one.

CAPITALIZE FOR KIDS: Can you speak to your love and passion for hockey, and how the sport has influenced how you went about building the team and culture at Glenview?

LARRY ROBBINS: Glenview is named after the first town that I played hockey in – Glenview, Illinois. The reason I did that wasn’t so much about the game itself, and the strategy, but anybody who’s ever played team sports either as a child or at a competitive level will understand that there does have to be a certain mentality in which team goals come first – team before individual – and that nothing replaces hard work, no matter how talented you think your team is. I’m very happy we had that understanding when we formed Glenview. And 15 years later, I can tell you that I feel just as strongly – if not more strongly – about that. We operate in a highly competitive business where we have a tremendous amount of respect for the intellectual capacity and resources of our competitors. We operate in a very confusing and difficult industry where there are many crosscurrents – economically, fundamentally, valuation wise, and regulatory – that constantly challenge one’s perception of risk and opportunity. The only way to combat that is to have a team of people with a common goal who remain objective, focused on team goals, who have a work ethic, and who put in the time to prepare. So that during those crunch time moments, we are well-prepared and wellresourced  to make optimal decisions. I think the parallels with hockey do  run deep, and I certainly think that we are just as committed today to the ideals I took from the game as when we started.

I do a lot of youth hockey coaching because I have four boys who all play. Coaching has helped me become a better manager because – and this is ironic – it’s harder to tell somebody you’re paying to do something than it is to tell a 13-year-old or 14-year-old. Yet in reality, those 14 years old are just playing for the love of the game, whereas for everybody else it’s their job – they’re supposed to be following orders. So, certainly, I think coaching and sport have helped me become a better and more direct manager – particularly in dealing with challenging human capital situations.

CAPITALIZE FOR KIDS: How does Glenview think about its relationship with its investors and its limited partners?

LARRY ROBBINS: We think of them exactly as partners. Since day one, and through today, I have all my money invested in funds managed by Glenview. I believe that the reason that hedge funds work over time is because the owner/operator hedge fund has a tremendous and complete alignment of interest between the fund manager and the  client – because the fund manager is the largest non-diversified client. And because of that, I am not only well-motivated to drive returns over time, but I’m also extremely well motivated to manage risk. Unfortunately, most people gauge risk based upon the mark-to-market stock price movements or security price movements of the day, whereas in reality those risks are more  appropriately measured through a cycle – based upon the certainty of outcomes and the hit rate in which one invests long and short with success. I think that alignment of interest is exactly fair and  appropriate, and is the motivating factor by which hedge funds have delivered risk-adjusted returns and alpha over time.

CAPITALIZE FOR KIDS: Glenview launched a sidecar fund in Q4 last year to take advantage of the recent market dislocation. Can you talk about what that sidecar fund is and why you decided to offer it to your partners?

LARRY ROBBINS: It’s no secret. Hedge fund performance in general, and Glenview’s performance in particular, has been negative over the last six months [as of March 2016]. And it’s been negative for reasons that we believe are transitory rather than perpetual. We therefore believe that the forward opportunity set is greatly enhanced, and that clients will be best served by allocating more capital – rather than less – towards that market opportunity. Notwithstanding, we also understand that there is a viewpoint that, of course, an investment manager who works for fees is going to say that – because the manager gets paid more to have you give them more money. In order to maximally assist our clients in making the right decision – as well as to further and deepen our alignment with our clients – we felt that it was fair and appropriate for us to be able to manage an additional amount of capital above and beyond what we managed for them. In doing this, we would receive zero benefit, we would charge zero fees, and we would invest in securities that were highly liquid, so that they did not crowd out any opportunity for our core funds, our core fee-paying clients. We offered this as an option – but not a requirement – to all of our clients, so that they could benefit from the dislocation between fundamental values and trading values that occurred prior to the middle of November. In that spirit, we launched the sidecar product which is long only – which only invests in $10 billion and up securities – and that augments the holdings that we have in our Glenview and Glenview Opportunity funds. The product was extremely well received. It was fully subscribed: we contemplated three closings, as it was fully subscribed after the first two. The product has delivered alpha. I’m going to stop short of quoting performance statistics because I don’t want to get in trouble with my compliance officer, but it has delivered alpha. We believe that it will deliver value to our clients over time – above and beyond that which we believe we deliver in the core products.

We are extremely frustrated any time our funds have a drawdown. We try to do everything we can to put investors back into a position where the capital balances are restored, and then augmented. But while investors wait, we thought that it was fair and appropriate for us to offer this additional product so that investors could benefit from the volatility that we saw in the marketplace, rather than simply suffer from it.

The unfortunate truth of our business is we’re trying to do something that’s very hard, and very unnatural. We were created in order to take advantage of market anomalies, and yet we are also expected to prevent market anomalies from negatively impacting capital balances. I’m not complaining about that dichotomy. We’re not crying about it, but we do recognize that there’s a natural tension between the times that opportunity sets are created and the times that the opportunity sets are harvested. And it is likely, over decades, that occasionally opportunity starts to get created on your watch while you’re holding that security. In order to encourage opportunistic investor behavior, I think you’re accurate  in saying that we will go to great lengths to encourage opportunistic investor behavior – because we want to make sure that the clients know that we will do anything we can to support their objectives. At the same  time, our firm has greatly benefitted from the long-term commitment our clients have shown to us by giving us the honor of managing money for them over more than a decade-and-a-half. We absolutely believe that the hedge fund industry has not only a right to earn fees when it delivers value, but a responsibility to deliver value – and we are happy to find any opportunities that allow us to do that.

CAPITALIZE FOR KIDS: When you look back at the last 15 years, are there certain milestones that you’d like to point to and highlight?

LARRY ROBBINS: Investment management is a marathon. Consider Glenview. I launched the business when I was 30, and started the fund when I was 31. I said that it likely would be a 30-year endeavour for me. Any time you’re talking about 25 or 30 years – that’s a marathon, not a sprint. If you know me well, you’ll know that I’m neither a distance  runner nor an endurance athlete. But if you talk to any good distance runner or endurance athlete, the focus is never on any individual mile or any individual milestone. It’s  about the race – knowing that you need to make sure you keep pace over time. Through the last 15 years, we’ve certainly had banner years where we’ve been afforded lots of awards  from industry groups for having tremendous performance. We’ve also had years in which we’ve failed to meet our objective of protecting and preserving capital in all market environments. The milestones  don’t so much come based upon the calendar – or even based upon any one quarter or year’s performance – they come based on the cycle of when we’ve had significant disagreements with the market, and how those situations get resolved. Early on, in 2002, we lost money. We then made a significant amount of capital in 2003. The principle behind that was the view that wireless businesses which were over-leveraged were nonetheless attractive growth businesses – including cell phone towers, rural wireless, and Sprint PCS affiliates. Another example is the pharmaceutical benefit managers [PBMs]. Even though they enjoyed a business model that was confusing to some, they offered great value and great savings to their clients – and therefore were great business and growth opportunities for years to come. Looking back on things now, 13 years later, we can appreciate – and feel a sense of pride in – having been correct in our judgment about the attractiveness and durability of those industries, particularly while they were so unpopular – while they were under sale and attack by both other members of the investment community and the financial press. But as soon as one smiles about that, one realizes that there are other significant dislocations that have been created. We certainly saw that cycle in ‘08 and ‘09 with respect to overall systemic risk. We saw that cycle in 2011 through 2014 with respect to contrarian healthcare, and the impacts of the Affordable Care Act. Right now, as we think about the present environment, we are again in a very, very significant disagreement  with the financial markets with respect to the durability and traction of franchises in the health care area, as well as in other stable growth franchises. We’re in disagreement about the durability and traction of their business growth and cash flows, which seems to be as large a discrepancy as we’ve seen since we were founded.

We don’t spend too much time as an organization trying to measure milestones, because we know that as soon as we’ve achieved one, another one lies ahead. We just simply need to keep our eyes on the road.

See the full interview in PDF here->link 

Larry Robbins