This happened when you were working at Alliance Capital? Yes, but I was shorting with my own money. I couldn't short client money at Alliance because it was all invested in long-only strategies. But through Julian, I learned to understand how to short companies that are declining, how to make money doing that.
What convinced you to start a hedge fund? I met a fellow named Art Samberg, who was on the board of the mutual fund I co-managed. ... When I was at Allen & Co., I confessed that I wanted to leave. Art suggested that I start my own fund, saying “You're good enough to do that,” although he said he thought I should come and work for him at his hedge fund company, Pequot (Capital Management Inc.), which was then very small.
I finally decided in January 1992 to leave and start my own hedge fund. I went to Herbert (Allen, CEO of Allen & Co,) and told him I was going. Herbert wanted to buy a piece of my company, but I declined. He asked if he could give me money, and I did take that $1 million ... and then with the bulk of the money coming from my family, I started with $5 million.
So yours was really one of those classic hedge fund startup stories? Yes, I guess so. You have to remember that back then, in 1992, there were few hedge funds, very few. And the ones that were around were mostly the big macro players. There were hardly any long/short players.
I started with the notion that I would find the very best companies out there and short the very worst. I decided that my fund would be a classic hedge fund, along the lines of A.W. Jones (Alfred Winslow Jones launched the world's first hedge fund in 1949), where I was always long and always short. I would not time the market, but I would be consistently long and consistently short. I started July 1, 1992.
So many people heard about me through word of mouth and got behind me. So many prominent people, who I won't name, introduced me to endowments and foundations, and they started to invest with Chilton. Pension funds came later.
What has been Chilton Investment's appeal to institutional investors? It sounds sort of corny, but from our earliest days, we have always put our clients first along with always generating the best possible performance.
We were at the leading edge of being registered (with the Securities and Exchange Commission), with having a website, with offering transparency, with having not one but two general counsels. We didn't gate any of our clients in 2008 during the market crisis. We were used a little bit as an ATM back then, as clients needed liquidity, but that money has come back.
Not a lot of people in this industry have grown up as full-fledged money managers. Very few have grown up as pension managers.
So you managed pension money back in 1980s when you were at Alliance Capital? Oh, yes, we did. Frank Burr, the portfolio manager of Quasar Associates, Alliance Capital's small-cap mutual fund unit, managed $20 billion in pension assets when I started back there in the early 1980s.
The difference was that for pension funds, you showed what you did. The accounts were theirs and you did trades and they saw every trade that you did; you couldn't hide. There was never a thought that when you bought something, you wouldn't show it. I grew up in that environment as a money manager. Hedge fund managers who came out of proprietary trading desks or brokers didn't have that kind of institutional training.
If you accept money from institutional investors, you have to play by their rules.
Are you seeing even greater interest from institutional investors? Oh, yes, it's one of the real growth areas.
You're starting to see a melding of talent. Pension funds are coming to us and not only asking us to manage long/short strategies for them, but also to manage long-only strategies. They see that we're not benchmark-driven and I think there's a disillusionment among institutional investors with benchmark investing. They see the long/short managers as having really good stock-picking skills that can generate alpha. We're not in the long-only business, but we'll do that for existing clients. I think you're going to see more and more of this kind of thing.
Where do you see investment opportunities? In my career, there have been very few opportunities to buy blue-chip companies — and I'm not talking about mega-blue-chip companies - at such a cheap multiple. The consumer is overleveraged, the states are overleveraged, the federal government is overleveraged, but companies are in the best shape they've been in 50 years; lots of cash and low debt. September had the single highest issuance of corporate debt in the history of America, $160 billion. Companies are very flush. It's no accident that the better companies have been able to raise their dividends steadily over a long period of time because they're not afraid to do that.
I look at a company with a 2.5% dividend yield that's growing its dividend at 10% a year because their earnings are growing at 10% a year and they're holding their payout ratios. I see that over the next five plus years that stock is going to be up a lot. If we get a situation where they are increasing their payout ratios, these will be up even more.
In an environment where the S&P may be flat for five or 10 years, there will be a bunch of these companies that are going to do well. The better companies that have been able to hold their payout ratios (or grow) their earnings ... are going to be the stocks you will to focus on. These stocks — I call them the dividend aristocrats — have been less volatile in market downturns over the last year. It's not so bad to get 2.5% to 3% upfront (through dividend payouts).