Chasing Opportunity in an Age of Upheaval
By PAUL SULLIVAN
Published: October 19, 2011
Nicolas Berggruen is passionate about investing. A compact, handsome billionaire, Mr. Berggruen is often talked about for his eccentricities — he does not own a home, preferring to jet around the world and live out of hotels — but his ability to find, invest in and turn around neglected companies points to a hardened and savvy approach.
And while a series of extreme events in global financial markets this year have shaken investors’ confidence, he maintains his strategy of investing in undervalued companies. In fact, the general sense that things are bad and could get worse seem to have little effect on him.
“I continue to do the same thing,” said Mr. Berggruen, who would not disclose his net worth beyond saying it was more than the $2.2 billion estimated by Forbes. “I buy businesses that deserve to exist but have been mismanaged. I feel there are more opportunities now.”
His focus is retailing, media and real estate. He picks companies in these areas, he said, that have lost a lot of their value because of macroeconomic events beyond their control, and he expects them to rebound, eventually.
“I’m not optimistic in the short term,” Mr. Berggruen said. “I just think that if some businesses are going to survive it’s worth investing now as long as it’s a real business, and as long as you don’t have to sell the stock to make a mortgage payment or eat next week.”
Concerns about the ability to cover basic expenses and a fear of losing more money after the losses in the 2008 crisis are keeping most people on the sidelines. They have plenty of reasons to be there. Stock markets rise and fall like a stomach-churning roller coaster ride. European leaders have been slow to devise a resolution for the debt crisis in Greece, which has rippled through the European banking system and into other European countries.
While Mr. Berggruen has a front-row seat on the political problems in the United States through his nonprofit policy foundation, the Nicolas Berggruen Institute, he doesn’t necessarily like what he sees. So he is looking long term.
In his belief that various assets are undervalued, he represents people who see opportunities and are moving their money from cash into investments. These investors are not looking for the hottest new investment but searching for companies that are strong and have continued to perform, regardless of what their stock prices say.
“Real big fortunes have been made in times of hardship,” said Karl Wellner, chief executive of Papamarkou Wellner, an advisory firm that works with wealthy families and has $3 billion under management. “These people are looking at it from a different perspective.”
While these investors are contemplating the perils of the market and how to safeguard and build their wealth, President Obama and others, including the billionaire investor Warren E. Buffett, have called for increased taxes on the wealthy. These proposals come in different forms, and how they may apply to the investors described in this article is not clear — nor are the prospects that any such proposal will be enacted.
The Senate majority leader, Harry Reid, for example, recently proposed a 5 percent surtax on all income over $1 million, including capital gains and dividends.
Many of these investors have enough wealth to buy millions of dollars of some asset and the time to wait to see what happens. If that investment appreciates wildly, they have increased their fortune; if it goes to zero their standard of living will not change.
But even with the luxury of time and wealth, some of them can find ample reasons not to invest right now.
“Why should I plow money into the market because it has dropped, when it can drop some more?” said Fred Branovan, the president and chief operating officer for FFC Capital Management, which is the family office for Milton Fine, who sold his hotel company to Wyndham Resorts in 1998 for $2.1 billion. “This family is into wealth preservation. They got rich; now they want to stay rich.”
While Mr. Berggruen is confident about the long term, he acknowledged that the next few years could be bleak. “I’m scared like everyone else is because the world is scary,” he said. “I just don’t think the world will disappear.”
The amount of money it takes for even wealthy investors to feel comfortable with risk is staggering. Todd M. Morgan, senior managing director at Bel Air Investment Advisors, which manages money for high net-worth investors including Hollywood celebrities, said he had clients who were worth $25 million to $30 million and remained entirely in bonds.
Those who are worth more than $100 million are comfortable taking some risk but rarely with more than 20 percent of their assets — and many of them define risky as being in blue-chip stocks.
“In a perfect world you should be selling some bonds and buying some high-quality stocks,” Mr. Morgan said. “But the stock market is the only place in the world where if there’s a big sale no one comes out and buys.”
Those who are investing now fall into three distinct approaches: the bargain hunters, the natural resource crowd and the bettors.
Bargains are everywhere right now, and those looking for them do not have to go into the riskiest assets.
Ron Carson, the founder of the Carson Wealth Management Group in Omaha, which manages $2.6 billion, said his firm focused on an “advance and protect” strategy, with the emphasis these days on protect. He has investments in dividend-paying stocks like Johnson & Johnson, Microsoft, Verizon, ConocoPhillips and Abbott Laboratories.
“We’ve done the research and think they’re cheap,” said Mr. Carson, who has $68 million of his own money invested in this strategy. “They all pay really good dividends. But if you look at what they could pay versus what they do pay, they could pay substantially more, so the dividend is safe.”
While this strategy has produced a gain of less than 1 percent this year, Mr. Carson said he was more concerned with positioning the portfolio for the time a rebound occurs.
Others share his view. “You don’t have to be in a particularly esoteric strategy right now,” Mr. Wellner said. “You can make money in plain vanilla.”
He said several of his clients were putting more money into an equity fund run by Fayez Sarofim, a billionaire investment adviser in Houston. Clients seem to appreciate that Mr. Sarofim is invested in blue-chip securities that they can understand.
Mr. Berggruen said he, too, favored simple investments like dividend-paying stocks as “something I’d recommend to my mother.” He mentioned multinational corporations with large cash flows and dividends, like Nestlé or Anheuser-Busch InBev, because they spread their risks around in many different markets, so currency or economic crises in a few countries will not damage them. “If I had to put all of my money away and come back in five years, this is what I would do,” he said.
Natural resources have drawn many wealthy investors because they think that whatever happens in the global economy, demand for these resources will continue.
How they invest in this area is more intriguing. Some hear the siren song of alternative energy; others focus on companies that provide traditional sources of energy.
Steve Smiley, who made his money in banking and private equity, said he had been increasing his personal investments in oil and natural gas projects in the United States. His primary concern in choosing investments, he said, is in evaluating the management teams of the companies rather than the price of the commodities or any sentiment surrounding them.
“At some point we’ll start building houses again, and the consumer will go back to the store and buy what he needs,” Mr. Smiley said. “That’s going to create a demand for energy.”
Nicholas Butta, whose family’s wealth came from interests in coal mines, said he had put a substantial portion of the equity allocation of his family’s money into mining companies. He said he had little interest in what the price of commodities was today or tomorrow.
“Trying to guess in the short term what will happen to commodity prices is a mug’s game,” said Mr. Butta, who lives in Australia. “Medium to long term, I can give a view on commodities. In the short term, it’s futile.”
He said he focused on the costs and production levels of mines, then decided whether the companies that own them were undervalued. “I’m never buying anything with the expectation that someone is going to buy something from me at a higher price,” he said. “I’m looking for strong cash flows.”
That is an advantage of wealthier investors: they can buy and hold indefinitely, and if the dividends are reasonable, they can be content with a steady, predictable return for years. When it comes to alternative energy sources, however, the view needs to be very long indeed.
Michael Steinrueck, 55, who managed money for institutions for 30 years before retiring, said he had about a third of his money in alternative energy. “I believe it will be the next mini-industrial revolution,” he said. And China will drive that with its push to build up its infrastructure.
He would have pushed as high as 40 percent if his adviser hadn’t discouraged the idea. His adviser, Iain Silverthorne, a partner at Evercore Wealth Management in San Francisco, said Mr. Steinrueck was one of his few clients whom he has had to persuade not to invest right now.
Preferring not to choose among wind, solar or other alternative energies, Mr. Steinrueck has focused on energy storage. “You just don’t know what part of the sector is going to be the decisive one,” he said. “But energy storage is so underdeveloped.”
Most investors in the third category are more willing to speculate, but they also believe that the best future returns may come from nontraditional assets. Ward McNally, whose wealth derives from the Rand-McNally mapmaking fortune, said he was plowing his money into his firm, McNally Capital, which advises other wealthy families on private equity investments.
He said one deal his firm both advised on and invested in was a fund that lent money to companies that could no longer borrow from banks. The returns on these loans are 8 to 12 percent, and if the companies were to default, provisions in the loans would allow the fund to take over.
Recently Mr. McNally said his firm had put together a syndicate of 12 families with a collective net worth of $30 billion to invest in clean technology companies,. He said the Cleantech Syndicate, as it is called, includes Dick DeVos, a son of the founder of Amway, and David Nazarian, a co-founder of Qualcomm.
“For some it’s a financial hedge on what they already have,” Mr. McNally said. “To others, like a family in the real estate business, investing in early-stage lighting technology could reduce their real estate expenses.”
Mr. Branovan said the Fine family was increasingly invested in farmland, an asset based as much on stability as demand. “It doesn’t look to have a tremendous amount of downside, and it has a lot of upside,” he said.
Dennis Jones, who sold his company, Jones Pharma, in 2000 for $3.4 billion, said he had decided to bet on zero-coupon municipal bonds, which are bought at a discount and grow to their face value over a set time, usually decades. He sees them as a good way to leave something to dozens of relatives.
He and his wife recently bought $26,000 of zero-coupon municipals bonds for a niece that will be worth $156,000 upon maturity in 20 years. “The Napa school district is going to survive,” he said of the California municipality that issued the bonds. “Worse comes to worse, you end up owning a building.”