Richard Chandler: Few Bets, Big Bets

Richard Chandler is a New Zealand-born investor and businessman based in Singapore. From 1986 through 2006, he ran Sovereign Global Holdings, a private investment firm, in partnership with his brother. Over 20 years, the Chandlers turned their initial US$10 million investment into almost US$5 billion. They were pioneers in emerging markets investing and their fund was among the first portfolio investors in countries such as Brazil, the Czech Republic and Russia.

In 2007, the brothers split their assets and started independent investment firms. Richard Chandler founded and now serves as chairman of the Clermont Group (previously Orient Global) in Singapore, a family office that manages his personal assets. His brother, Christopher Chandler, founded the Legatum Group based in Dubai.

The Chandlers generally keep a low profile but were once interviewed by David Lanchner for Institutional Investor magazine back in 2006. That article is available here and it contains some excellent insights that individual investors can use.

Here are five things I learnt from the article (please note that certain sections of the original article have been paraphrased below):

1) Invest with conviction
The majority of Sovereign’s gains over time came from just a few investments. In fact, Richard Chandler believes the way to achieve outsize returns is to make a few big bets rather than to run a diversified portfolio. It was a lesson he originally learnt from his mother, who ran an upscale department store in New Zealand. She was, in his words, able to “identify the best opportunities and be the master of narrow and deep.” The brothers adopted a similar approach to investing, often backing their ideas to the hilt.

One example of this approach was their first investment in Hong Kong back in 1987. At the time, sentiment was depressed as a result of negotiations to hand the then-British colony back to China. Real estate prices were ~70% below their peak in 1981. The Chandlers, however, believed the 50 year status quo promised in the handover treaty and found that rental yields exceeded interest rates by more than 5 percentage points, providing them with an adequate margin of safety.

Out of the original US$10 million they started with, the Chandlers put down ~US$5.8 million to finance the purchase of an office building in central Hong Kong. Upon renovating it, they were able to triple their rental income within three years, allowing them to finance the purchase of three more buildings. By the time sentiment recovered in 1991, they were able to sell their buildings for US$110 million, which took their net worth to ~US$40 million.

2) Avoid leverage (especially in the stock market)
While the use of leverage made sense in the context of their early real estate investments, the brothers have generally avoided borrowing with respect to their other investments. After 1990, the fund’s leverage ratio (debt to total assets) averaged less than 1 percent – in fact, they stopped borrowing money entirely from 1998 onward.

This lack of leverage, combined with their permanent capital, allowed them to take a long term view of the often volatile emerging markets they invested in. For the Chandlers, this was an important source of competitive advantage relative to the majority of institutional investors who often have to invest with a shorter term horizon. In Richard’s own words, “[they] like investments where the risk is time, not price.” This concept of time arbitrage can be an especially powerful edge for individual investors.

3) Think creatively
Given that the Chandlers have historically invested in distressed markets and companies, traditional financial metrics are often not meaningful or helpful in a valuation context. As a result, their investment team have often resorted to using “creative metrics” that can serve as the basis for their investment thesis. Here are two examples of this approach:

  • In the early 2000s, Japanese banks had no earnings off which to base multiples while uncertainty regarding the nature of their loan books made it difficult to forecast a recovery. Instead, the team looked at market cap as a percentage of assets. They found that Japanese banks traded at ~3% compared to ~15% for global banks such as Citigroup. They then concluded that the banks would either be nationalised or that Japan would lower interest rates to boost the economy and bet correctly on the latter scenario.
  • In the early 1990s, hyperinflation in Brazil made it difficult to calculate price to earnings ratios for publicly listed companies. So, when evaluating potential telecom investments, the brothers looked at market cap per access line. They found that Telebras traded at US$200 per line versus US$2,000 for Mexico’s largest telecom. Here, they bet (again, correctly) that the government would eventually liberalise the economy and open it up to foreign investment.

4) Move fast
Once the brothers have decided to make an investment, they like to move fast. It helps that they don’t have an investment committee, which allows them to make immediate decisions. Below is an excerpt from the Institutional Investor article:

“The market gives you the opportunity to arbitrage what the emotional investor will pay or sell at versus the fundamental value of a company, but you’ve got to pull the trigger promptly without hesitating,” says Richard. “We’ve disciplined ourselves mentally and prepared ourselves in terms of information, as well as relationships with brokers, to do that.”

5) Be patient
It can often take years for the market to realize a company’s true value. Short term volatility should be welcomed by long term investors, but it’s critical to have conviction in your ideas. For example, the Chandlers first invested in Telebras in late 1991, but by mid-1992 stocks in Brazil had fallen by nearly 60% following a political scandal. Most foreign investors exited the market but the Chandlers stayed. Richard said that “the shock was external to the fundamentals of the company” and the stock had “simply gone from extremely undervalued to outrageously undervalued.” 

By late 1993, the market had recovered and the brothers were able to exit at ~5x their original investment. The experience, however, taught the Chandlers to “build [their] emotional muscles, helping [them] make it through major market falls and grind through the trying times without losing [their] equilibrium.”