When Lewis A. Sanders was abruptly replaced as AllianceBernstein LP's CEO in December 2008 — ending the legendary value investor's 40-year run there just as the market was approaching a violent low point — people who knew him well predicted he'd be back. And when Mr. Sanders, less than a year later, launched Sanders Capital LLC in New York City with a handful of former AllianceBernstein colleagues, questions quickly turned to the scale of his ambitions. Some industry veterans, calling Mr. Sanders as competitive as he is brainy, predict he'll look to build Sanders Capital into a heavyweight — at least in part to show that AllianceBernstein parent AXA Financial Inc. made a questionable call in replacing him.
Mr. Sanders, however, insists his latest act is a return to what he really loves about the money management business: research. Sanders Capital will only grow big enough to deliver superior results to a small group of clients by doing focused, cutting-edge research and no larger, he says.
On some of the important questions facing investors now, Mr. Sanders says he's far more bullish on the outlook for the U.S. economy than many people today, even as overbuilding in China's construction market leaves him on edge.
Japanese salarymen retire to the golf course after 40-year careers. You had no interest? I just found retirement entirely unsatisfactory.
Did you really give it a try? I did indeed, for four to six months — managing my own capital, doing research as a solo act. At heart, I'm a researcher. That's really what I enjoy. But as an individual, you're going to have inadequate bandwidth. And so the whole point of establishing a firm was to re-establish a research platform that would be of sufficient scale and depth to pursue research projects I judged to be of merit ... and not to get any larger.
Any larger, in terms of ...? Numbers of clients, assets under management. The point of this (new venture) is not to build some major investment management firm. To the contrary, (the point is) to build a really great research team, to pursue what appear to be important research topics that can be profitable. I don't think we'll have more than 30 or 40 clients. I don't know what the ultimate assets will be — they're approximately $4 billion today — clearly higher, but not a lot higher. And then we will close the firm to new clients.
Isn't growth the key to hiring and retaining top talent? Growth is a strategic imperative for many managements, but not for me. The bulk of the research staff here, aside from the senior core, are young people whom we will train and develop, who may later pursue their ambitions elsewhere, but while they're here, will make an important contribution to our research process, and become a lot better for it, as research analysts. Another way to think about it is that the staff is leveraging the intellectual capital of the senior group here: me in particular, and John Mahedy (co-CIO and research director).
So you're sanguine about turnover? Bernstein had a history of developing people who went on to great success outside the firm. I used to cheer them. I still do. We populated the industry with a lot of fine, talented people who had all the right values as well. Perhaps in a very small way we'll do a little of that here. But that will be a byproduct, it's not an objective. The objective is to do interesting research, to be large enough to have an internal staff and access to external research to accomplish that mission well.
What's the size of your staff now? We're about 15 people or so — think about it as 10 in research and portfolio management. You can see we have a single floor, and we're landlocked. There'll be no need for additional space.
Are you indispensable, or can the firm outlive you? Certainly today I'm the key man. The name of the firm suggests that. (But) it's not as if the basis for continuity beyond my tenure won't have been established. There are some really strong people here, with lots of experience. They may choose to carry on. (In any case,) I'll be here for a very long time.
You said your mom is 91. Can we count on you for another 28 years? I don't know, but I'll surely be here as long as my health permits. I'm 63. Intellectually, I hope to have at least 10 years where I'm still a contributor of note to the research process. So that's my vision for it. It was never, ever about building another large investment management enterprise.
Did you enjoy running a large investment management enterprise? Well, ultimately what you do changes. For the first 25 years (at) Bernstein, I was a very central figure in research and portfolio management. In the AllianceBernstein years, especially in the latter part of my tenure there, the firm was too large for me as CEO to function that way, so I became progressively removed from the ... process. It wasn't as if that wasn't “enjoyable”; it's just different. But if you (ask) what's preferable, there's no contest. Research is just energizing. Research is, to me, what this business is about. Remember, I have a value philosophy. Value is about the anxiety of the seller. It's compensation for taking on that anxiety, and the research problem is always whether that anxiety is a derivative of transitory or permanent factors — whether it will damage the enterprise that's been afflicted — the company, the industry, the sector — in a lasting way or not. That's the research problem. So the problems are provocative — difficult but provocative. And I think that there's little in this business that's more interesting.
Toward the end of 2008, when financial firms AllianceBernstein invested in on the way down went bankrupt, did you get the answer wrong? I think history suggests otherwise. There's been a pretty strong recovery in 2009. Of course, there were a couple of failures, but in very deep value cycles that's not that unusual. And often the compensation for what then recovers more than recovers the penalties of some of the errors. But that's all history, and I think that the dire forecasts that became popular at the end of 2008 and (early) 2009 proved invalid.
You're not a believer in the “new normal”? My own view is that the adjustments under way today are putting in place the basis for a resumption of relatively robust growth. I'm not dismissing the threats, but the essence of growth is productivity and labor force expansion (and) the data so far couldn't be more encouraging. Productivity is advancing at a record pace. The financial fundamentals are being repaired. A huge amount of remediation has already occurred. Think about the business sector — debt's down, cash is up, profitability has been restored. Banks today are more strongly capitalized than at any time in decades; credit losses have peaked and are on the way down. And the consumer sector, which everybody hand-wrings about, itself has experienced substantial remediation. Debt service in relation to personal income — the key metric — is already back to where it was in the late 1990s. All of the bubble years have been reversed. I find that very encouraging. There's an imbalance now between the size of government and the size of the private economy, but that becomes less threatening as the private economy grows.
Any fears the government could take its foot off the gas too soon? I'm much more worried about what's going on in China. I'll give you some numbers: Housing starts in China right now are running 13 million units at an annual rate. A good year in the U.S. is 2 million. It's clear they're overbuilding. If you add commercial to residential, (the building sector) accounts for 20% of China's GDP, and a headwind is likely to develop before too long. If you're an investor in commodities, you have to get China right. Exposure to materials-based commodities is inappropriate in a setting like this. It relies too heavily on property construction in China, which is already at a fevered pitch and needs a downward adjustment, not further growth. It's a good example of the kind of research problems we're trying to solve here, and why I formed the firm.