"There has to be a day of reckoning and we have to invest in a way to ameliorate the pain when that day comes. But painful as it may be, there is one good thing about that day; it is the day reality returns to the markets." -- Julian H. Robertson Jr., in a memo to investors, Jan. 7, 2000
It's an annual ritual at every money management firm: the yearend review. Performance is discussed, goals hammered out. In a bull market, this tends to be a pleasant experience. But on the 48th floor of 101 Park Avenue in Manhattan, the gleaming offices of Julian H. Robertson Jr.'s Tiger Management LLC hedge-fund group, the bull market is but a distant rumor. Only a year and a half before, Robertson was the master of the hedge fund universe--running the largest funds, boasting an enviable track record. But by December, a shrunken Tiger was concluding the worst year in its history--a 19% decline that trailed the Standard & Poor's 500-stock index by a staggering 40 percentage points.
The atmosphere was grim as analysts met individually with Tiger Chief Operating Officer Philip N. Duff. By the account of one person called in for that annual review, Duff didn't mince words. According to this ex-Tigerite, Duff told his employees they have eight months to perform "or we're done." Tiger analysts, this person says, were told by Duff that "the firm has got one year to survive." A Tiger spokesman would neither confirm nor deny Duff's remarks nor comment on any point raised in this article, saying only that "Tiger's first priority is and always has been to manage the portfolio in the best interests of investors," and that Tiger "will consider any strategic option that makes sense."
The reason for Tiger's dire straits is straightforward enough. Continued poor performance means that Tiger's only source of revenue is its 1% management fee. No profits means no profit-based compensation--the lifeblood of Tiger and every other hedge fund. Without this "performance fee," Robertson must dig into Tiger's reserves to pay Tiger's high-priced talent. Continued poor performance also means continued investor redemptions, which result in asset sales and even worse performance. Duff acknowledged in September that Tiger's performance has been hurt by withdrawals (BW--Sept. 27). But he predicted that the worst was over--and it was not. Heavy redemptions continued into early January, when investors pulled out $1 billion, one out of eight dollars invested with Tiger.
It's now two months into the year--and for Tiger, it is a case of "so far, so bad." Jaguar, which mirrors the performance of the other Tiger funds, plummeted 13.8% through Feb. 29, including a 7.9% decline in February that trailed the S&P 500 by six percentage points. Although the Tiger funds performed well in 1996 and 1997, the awful recent numbers have erased those gains and ruined what had been Robertson's pride and joy--his long-term performance numbers. According to the latest monthly report for Jaguar, investors who joined Tiger as long ago as December, 1992, would have done better in an index fund (chart). Only investors who joined Tiger in 1989 or earlier, when it was much smaller, have beaten the market if they remained.
Increasingly, though, Tiger investors are choosing to become ex-Tiger investors. A combination of poor performance and redemptions have caused Tiger's assets to shrivel from $22.5 billion in August, 1998, to just over $6 billion in recent days. Indeed, Robertson's funds have fallen 50% from the effects of poor performance alone, since their 1998 peak--a far worse decline than was suffered by hedge-fund veteran Michael Steinhardt before he shuttered his funds in 1995. "It's getting nasty," says a former Tiger analyst. "The clock is ticking."
"OBLITERATED." Various options are under consideration to resuscitate Tiger, from the creation of "sector funds" concentrating on industry groups to a merger with another hedge-fund group. Also in the cards is an infusion of capital from a large corporation such as General Electric Co. BUSINESS WEEK has learned that GE held talks with Tiger in mid-1998, before the decline, and considered taking an equity stake in Tiger at that time. A GE spokesman declined comment.
What ails Tiger? An answer to that question emerges from an examination of the monthly and yearend reports issued by Robertson's offshore Jaguar fund, distributed to investors in recent months and obtained by BUSINESS WEEK. Investors and former Tiger officials declined to comment on the record. Ex-Tiger employees say that Tiger analysts are asked to sign agreements forbidding them from talking to the press about Tiger after leaving the firm.
The most recent Jaguar monthly report, sent to investors early in February, makes the problem at Tiger dramatically clear: poor stock picking, particularly U.S. stocks. In Robertson's Feb. 4 memo, he acknowledged that "our value stocks were completely obliterated." Indeed, Tiger's top 10 holdings as of Jan. 31 were top-heavy with stocks that have fallen faster than the market as a whole (table).
The Robertson pick that has received the most publicity is his 16.5 million-share stake in US Airways Group Inc., which has fallen 42% in the year to date. Far less attention has been focused on Robertson's other major picks, some of which have been almost as lackluster. Among his other top holdings are Royal Bank of Scotland Group, which has been embroiled in a takeover battle with National Westminster Bank PLC. Tiger has major stakes in both--and the shares of both have dropped this year. Robertson has done much better with its little-publicized major stake in San Paolo IMI, an Italian bank that has seen its share prices climb 11.2%, in dollars, through Feb. 28.
Robertson's U.S. stock picks have generally been heavily weighted toward the industrial and financial sectors, both of which have been subpar performers. Among Tiger's major holdings are Bowater, the newsprint manufacturer, Columbia/HCA Healthcare, and GTECH Holdings, which operates computerized online lottery systems.
Robertson appears to have sold at least a portion of his stake in Bear, Stearns & Co., which appears on the December list of top holdings but not the January list. Short-selling of American stocks--a wager on lower share prices--was Tiger's best-performing asset class. But shorts contributed only 1.8 percentage points to Tiger's January performance.
LEVERED DOWN. Robertson has retreated from bets in currencies, fixed-income investments, and commodities--and the ones that he made were also lackluster, according to the January monthly report. Bad currency bets trimmed one percentage point from January performance, and commodity bets eked out a 0.8% performance contribution. According to the January report, Tiger is mainly short Asian stocks and is long the North American and European markets, though with a substantial short position almost two-thirds the size of its stock holdings. In his Feb. 4 memo to investors, Robertson was philosophical about his holdings' dreary performance: "I know you have heard this before, but we still believe that these and our other value stocks will work well for us in time."
The Jaguar reports shed an interesting light on Robertson's use of leverage. In recent months he has used far less leverage than he formerly employed to beef up his stock and "macro" investments in global currencies and derivatives. Hedge funds have often been criticized for using borrowed money to boost their returns, which can result in massive problems if market bets go sour. Indeed, leveraged market bets contributed to the downfall of Long-Term Capital Management in 1998. Robertson is avoiding that pitfall, however.
At the beginning of 1999, Tiger's stock positions were leveraged to about 270%. Adding in its positions in currencies and commodities, Tiger's total leverage was 500% of its net assets. By the end of 1999, Tiger's stock positions were leveraged to 135% of invested capital, and total leverage was down to about 280% of net assets. Tiger's leverage of its stock portfolios increased slightly in January 2000, to 149%. But that is still a far cry from the massive leverage that troubles regulators.
By using only modest leverage, Robertson has ensured against dramatic declines if his portfolios continue their downward slide. Less leverage also limits Tiger's upside potential, if its holdings rebound. But will they? In 1999, of course, the big winners were technology stocks, and Tiger generally kept its distance. Only one high-tech stock--Korean electronics company Samsung--appears in the list of Robertson's top stock holdings as of Jan. 31. In a memo to Jaguar investors in mid-January, Tiger technology analyst Thomas Kurlak predicted strong earnings growth for the Korean company. But the company has performed poorly so far in 2000.
Technology has been a low priority for Robertson. At the end of 1999, just 9% of Tiger's equity positions consisted of technology stocks, compared with a 24% exposure to financial stocks, 12% for transportation stocks, and 11% for industrials. Tiger officials have said publicly that his technology picks have performed well. But according to one former Tiger analyst, Robertson has resisted implementing an idea that is said to be favored by Duff--industry-specific "sector funds."
CLAWING BACK UP. According to the former Tiger analyst, Robertson likes the idea--in principle. "Phil thought that people, because they love diversification, weren't going to increase their investment in Tiger," but might put their money in a sector fund operated by Tiger. "Julian has been saying: `I agree, let's do that.' But when push has come to shove, he hasn't let go." Such funds, he notes, would result in separate track records that might be better than Robertson's, "and that's not something that, frankly, his ego can handle."
Another alternative that has gone nowhere, so far at least, is the possibility of a merger partner. That would reassure investors and bring Tiger new capital. But a merger or creation of sector funds may prove to be fruitless unless Tiger stems the flow of losses in the coming months. In order to again begin drawing its 20% share of profits, Tiger must recoup all of its losses since January, 1998--the "high-water mark" for most Tiger funds. With Robertson's funds now 33% below their levels at that time, the Tiger funds have to climb 50% just to break even and begin drawing fees.
Accomplishing such a task is daunting but not impossible. Market sentiment can shift. There may even be that "day of reckoning" Robertson mentioned in his January letter to investors. His value stocks may come back in style. But for Robertson's sake, they'd better start rebounding over the next few months. If they don't, that "day of reckoning" will take place on the 48th floor of 101 Park Avenue, New York City.