FALL OF THE WIZARDJulian Robertson was the best stock-picker on the Street. Has he lost his magic?
Julian H. Robertson Jr. is warming to his subject. He is bald and burly, over six feet tall, 63 years old, with a deep, booming North Carolina drawl. The subject is stocks, and Robertson is alive, animated. Uni Storebrands. Ever heard of it? Robertson has. And how. It is his largest holding--an obscure Norwegian insurance company. He'd like to buy more, but local regulations forbid it. Swiss Reinsurance Co. is another favorite. So is Harrah's Entertainment Inc. Citicorp? Absolutely. Japanese banks are another matter. ``The worst in the world,'' he says flatly.
Stocks are what turned Julian Robertson from an obscure broker-turned-money manager into a power in the world markets. Robertson is the founder and chairman of Tiger Management Corp., Wall Street's global-investing powerhouse. George Soros may be the savant of the currency markets, but when it comes to stocks, Julian Robertson is the master--poised, ivory-towerish, in a top-floor, glass-walled office on Park Avenue. And even as a global currency-trading ``macro'' player, he could give Soros a run for his money. Year after year of brilliant returns lured the high-octane investors--at $5 million or more a head--who turned $8 million in 1980 into $7.2 billion in 1996. Robertson was ahead of the curve on every major trend in investing, from the surge in European equities that followed the fall of the Berlin Wall to the tumult in the global bond markets in 1992 and 1993.
Robertson was the reigning titan of the world of hedge funds--the secretive, often highly leveraged private investment partnerships that are the piggy banks of trust funds, endowments, and millionaires. Robertson assembled a team of the smartest and best-paid stock-pickers on Wall Street--a ``Super Bowl team,'' as his friend and adviser, Dr. Aaron Stern, puts it.
At his peak, no one could best him for sheer stock-picking acumen. Robertson was the Wizard of Wall Street. And he was paid well for it. In 1993, his compensation and share of Tiger's mammoth gain probably exceeded $1 billion.
But something toppled him from that pinnacle. It all began with a disastrous first quarter of 1994. In contrast to a stunning 1993, when Tiger's funds gained 80% before fees, his funds declined 9%. Investors, who had poured money into Tiger in 1993, began to pull out. In 1995, as still more investors defected, he eked out a pre-fee gain of 17%, a humiliating 20 points below the Standard & Poor's 500-stock index. And even though Robertson began to do well again in 1996, climbing 17% in January, his gains soon were cut almost in half--and his revival has all the makings of a bump on a downward slope. On one horrible day, Mar. 8, Tiger sustained a $200 million loss, as a bet on U.S. Treasuries turned sour.
Nothing seems to have helped, not more analysts, not the addition of Morgan Stanley & Co. managerial whiz Lewis W. Bernard. Not even Stern, a prominent psychiatrist and management consultant, has restored the magic that is fast becoming a memory.
How did the best record in the world of investing turn so dreary? Getting the answer to any significant question at Tiger has long been nearly impossible, for that glass-walled perch on Park Avenue might just as well be one-way glass. Robertson rarely grants interviews, and former employees are afraid to speak about him, even off the record.
But the veil of secrecy has been lifted. BUSINESS WEEK obtained access to the inner circles of the Tiger organization--including its mercurial chief. Interviews with Robertson, along with current and former employees, revealed a fascinating, if unsettling, story of a complex man and organization. It is a story of bad choices, grave missteps in high-stakes currency and bond plays, and atrocious management--including the waste of the some of most brilliant analytical brainpower on Wall Street. Above all, it is the story of a man who rose to greatness--only to be foiled by his own overcontrolling management style and hot temper.
When Robertson began his climb to the top, he did so on the strength of his stock-picking prowess. He still employs some of the best analysts around. Whether they are used well is another matter. One clue can be found in the tale of a promising young analyst.
``We try to assimilate in these people [young analysts] the qualities that made Julian Julian.''
- Dr. Aaron Stern, a Tiger Director
Katrin Yaghoubi could hardly believe her good fortune. It was the middle of 1994, and Tiger was suffering--down 12% in the first quarter because of ill-fated currency bets. In her little corner of Tiger, though, it was raining money. Barely a month and a half into her career at Tiger, her first job on Wall Street, Julian Robertson, on her say-so, had bought 15% of a company! It was almost an anticlimax when, six months later, the stock, Canstar, went on to double.
Katrin Yaghoubi was an anomaly at Tiger--a woman born in Germany of Iranian parents working in a largely male, largely WASP outfit where Southern accents are dominant. Yaghoubi was introduced to investing just a few months before she was hired in mid-1994, as she was completing course work toward an MBA at Columbia University. She was in a class taught by James Rogers, the investor and commentator, when she caught the eye of Patrick Duff, a former Tiger analyst who was often invited to help with the class. That led to an introduction to Robertson, who hired her out of Columbia.
Yaghoubi discovered Canstar while still at Columbia. She came up with the idea not by a hot tip or by reading about it in a brokerage-house report--but by dogged research. She started by putting together a list of every public sporting-goods company. She talked to trade-magazine editors, store owners--anyone who knew anything about sporting goods. ``I kept asking, `What's the next big trend?' They told me it would be roller hockey.'' Yaghoubi then immersed herself in the roller-hockey world, even ``interviewing kids in Central Park.'' She soon found Canstar, which makes skates. The company boasted a healthy balance sheet and lots of insider buying.
This was an example of Tiger at its stock-picking best: a smart idea, grounded on exhaustive research, followed by a big bet. When Robertson is convinced that he is right, a former Tiger executive notes, ``Julian bets the farm.''
Canstar was only the beginning. At Tiger, Yaghoubi had a string of winners, all found through the same rigorous legwork. She even used the Internet and online services. A chat lounge on CompuServe gave her negative information on another company--Franklin Quest. Further research showed that margins were under pressure, competition was mounting, and insiders were selling. On Yaghoubi's recommendation, Robertson ``pulled the trigger,'' ordering a short sale.
Yaghoubi's other short picks were similarly doped out in the Robertson manner. Bell Sports, Fossil, Arctco--all were shorted by him on her recommendation and blissfully tanked. Typical was Arctco Inc., a snowmobile maker. ``I must have called every snowmobile dealer in the country,'' says Yaghoubi. Researching a possible ``long'' pick, Avon Products Inc., she became an Avon representative. She would go to trade shows, and she subscribed to 35 trade journals. At Tiger, the resources were unlimited. ``It's all about ideas, new ideas. To survive at Tiger, you've got to generate ideas,'' says Yaghoubi.
Recommendation after recommendation went on to perform handsomely. But soon, something started to happen. Robertson liked Yaghoubi's picks, but more often than not he wouldn't act on them. Tiger simply couldn't amass a big enough position in them to make much of a difference in the huge portfolio. Robertson won't even look at a stock unless he can take a $125 million long position or a $50 million to $70 million short position.
After a while, it became clear to Yaghoubi that her talents were best used elsewhere. So a few weeks ago, she left to join a smaller hedge fund more suited to her investment style. She was one of a succession of analysts--veterans and neophytes--who've passed through what is an ever-faster revolving door.
Yaghoubi's picks were the kind of stocks that propelled Tiger when it was smaller. Tiger is just too big for small stocks nowadays. Yet Tiger is run just as it was when it was a small hedge fund buying--and shorting--mainly small stocks. There is one portfolio manager, one decision-maker: Julian Robertson.
THE INFORMATION MACHINE
``He can look at a long list of numbers in a financial statement he'd never seen before and say, `This one is wrong.' And he'd be right.''
- a Roberstson associate who requested anonymity
It used to happen every day until 1993, when Robertson moved from the trading desk to his own office. On the screen were the prices of the stocks in Tiger's portfolios--all 100 of them. Just the prices, and the changes for each stock. Tiger might own a million shares of one, 2 million of another. But that's not on the screen. Only the stock symbols, their prices, and the change during the day.
Robertson would call out a figure. He had calculated, in his head, the total change in his entire equity portfolio, down to a fraction of a point. Inevitably he'd be right. ``I'm pretty good mathematically,'' says Robertson blandly.
Assimilating and sifting vast quantities of information is the Robertson forte. Robertson's analysts give him ideas and data. He then makes the buy or sell decision--usually after checking and rechecking what they have to say. Other hedge- fund operators, however, have found they can't run funds as one-man outfits--not when they grow to multibillion-dollar size. They are too large and complex--far more so than even the largest mutual funds. Some large hedge funds, such as Soros' and Odyssey Partners, the money-management machine run by Leon Levy and Jack Nash, delegate decision-making power. Soros even let one of his top analysts--London-based macro guru Nicholas Roditi--run an entire fund under his watchful eye. Under Roditi, Quota fund more than doubled in value in 1995, far outpacing Soros' flagship Quantum fund. Such independence is unheard-of at Tiger.
Size and centralization have clearly hurt Tiger. Another negative is that Robertson has pushed stock-picking even further into the background as macro bets on currencies and bonds have dominated Tiger. He no longer visits corporate managements, and most of his extensive travel during the year is spent educating himself about currency and interest-rate trends. It can be an exhausting pace.
On one recent visit to his office, Robertson was preparing for a tour of Frankfurt, Paris, Hong Kong, Bangkok, Kuala Lumpur, and Tokyo--all in two weeks. He prepares in the usual manner. Research and more research. Interrupting a conversation with a visitor, he takes a call from Hong Kong--Morgan Stanley's former chief global investment strategist, David Roche. With Roche on the speakerphone, the discussion switches from stocks to the intricacies of Indonesian economics to the latest trading by another hedge fund in Hong Kong stocks. Indonesia intrigues Robertson, and so do the currencies of the southern Pacific Rim. The Thai, Singapore, and New Zealand currencies have great potential to appreciate vs. the yen, in his view. Robertson terms Indonesia ``an interesting currency play.'' And then there is Japan--``the most beautiful place to invest in the world,'' he later remarks. ``The worst companies sell at the best [price-earnings] multiples and the best at the worst multiples.''
The two men discuss possible contacts for Robertson in Hong Kong and Djakarta. Robertson plans to go from Frankfurt to Paris before jetting off to Hong Kong, but he was willing to return to Frankfurt if he could get in to see Hans Tietmeyer, president of the Bundesbank. Asked about Tietmeyer later, Robertson bristles. ``George [Soros] walks in and says, `I need to see you,' and they fall in line. He would have had the appointment with Tietmeyer lined up months ago.'' As Robertson leaves on the trip, he still doesn't know if Tietmeyer will see him.
``I think Julian's competitive instincts come from the fact that he's a North Carolinian. We've always been second fiddle, stuck there between Virginia and South Carolina.''
- a longtime Robertson acquaintance from North Carolina
It took quite a while for those competitive instincts to emerge. Robertson was from Salisbury, nestled between Charlotte and Winston-Salem. He likes to portray himself as a ``typical small-town boy,'' but there's no doubt that he came from the right side of the tracks. His father, Julian Hart Robertson Sr., was an achiever in his own right--an Army lieutenant in World War I at 18, a college graduate at 19, then a fast-rising executive in the North Carolina textiles industry. ``He was a tough, demanding father,'' Robertson recalls. But young Robertson was an underachiever in high school and at the University of North Carolina, where he graduated with a degree in business administration. He was mediocre in pretty much all his subjects--including math. ``A late bloomer,'' as he puts it. ``All my friends were like that, and they turned out all right.''
After a stint in the Navy, Julian Jr. moved to New York to join Kidder, Peabody & Co. as a sales trainee. Then came a long sojourn at Kidder--20 years as a stockbroker, becoming one of the firm's top producers. He then was named head of the money-management unit, Webster Management. He left Kidder to start Tiger in May, 1980.
In the beginning, it was just Robertson and Thorpe McKenzie, a fellow Kidderite who soon went off on his own. The early numbers were brilliant--such as the 24.3% gain the Tiger fund recorded in 1981, vs. a 5% decline in the S&P. That was 19.4%, after the incentive fee--20% of profits and 1% of assets, which is standard for hedge funds.
Tiger remained a small operation through the 1980s--just a handful of analysts and Robertson. He was little known except in the gilded precincts of hedge funds. And he liked it that way. Like Soros and most other investors, he was caught short by the crash of 1987. But canny investments worldwide, including an early move into global stocks, kept Robertson's performance glorious at a time when other money managers were suffering. In 1989 and 1990, Robertson flawlessly timed the soaring German stock market, and he went short the Japanese market in time for the crash there. By 1991, Tiger was fast approaching $1 billion (chart, page 73).
As Tiger grew ever larger, two things happened: Robertson began to focus on global stocks, and his temper, always looming in the background, became more and more a negative as the staff multiplied. It is a legendary temper--one that former Tigerites speak of with fear and awe. It is unpredictable, they say, and frightening. ``Julian can be rational one minute and irrational the next,'' says one former Robertson associate. ``He would remember something that happened months ago and yell at you about it. He would turn blotchy red.'' Robertson admits that he can lose his cool but says his relations with his ``employees and peers'' are good.
Back then, Robertson's temper did not interfere with the only thing that really mattered: the numbers. They were terrific. Pay scales were skyrocketing. Then as now, Tiger analysts were paid a share of the 20% profit allocation. In 1993, the 80% gain in Tiger's $3.7 billion in stock and macro portfolios resulted in profits of about $3 billion, of which about $600 million went to Tiger as a profit allocation. Former analysts say Robertson gets about 60% of the allocation. Robertson acknowledges that he gets about half of it. In 1993, that would have netted him an astonishing $300 million. (The numbers are skewed by the fact that the offshore Jaguar fund has a different fiscal year than the U.S. partnerships.)
In addition to the $300 million, Robertson would have picked up a share of the 1% management fee, not to mention his stake in the profits as a big investor in the Tiger partnerships. Robertson won't say how much of Tiger he owns but acknowledges that his stake is substantial. If it's just 25%, in 1993 that would have given him profits, on paper, of some $750 million. Added to his $300 million paycheck, that results in a gain to Robertson, in 1993, in excess of $1 billion.
Tiger analysts also raked in extraordinary amounts of cash. Back in the early '90s, senior analysts took home upwards of 2% of the allocation, and even some promising junior analysts received as much as 1%--a cool $6 million for somebody just out of business school.
Such massive wealth was the lure of the macro era--the heyday of global bonds and currencies. It was macro that moved Tiger to the summit from which it was about to descend.
SCALING THE PEAK
``It is unfortunate that we have such a great fear of failure, because it is success that is far more dangerous to the human condition.''
- Aaron Stern, in his book ME: The Narcissistic American
In the macro world of the early 1990s, where $1 in assets could often support a $100 position, there was only one true star--George Soros. Soros was the master at translating broad-brush economic trends into highly leveraged, killer plays in bonds and currencies. Robertson had no background in macro. So he reached out, as he often does, to Morgan Stanley.
Robertson had long had his eye on David Gerstenhaber, a London-based economist and rising light at Morgan. He met Gerstenhaber at a Morgan Stanley conference in the Florida Keys in 1987, and in the succeeding years Gerstenhaber was often called by Robertson for advice, mainly regarding the Japanese market. It was a typical Robertson head-hunting stratagem. ``I didn't realize it at the time,'' Gerstenhaber recalls, ``but Julian was testing me.'' He passed the test.
The Gerstenhaber-Robertson relationship was lucrative--and stormy--from the start. It was early 1991, and the conventional wisdom held that the Persian Gulf war would bring about another energy crisis. Gerstenhaber was bearish on oil. ``I was dead convinced that every rust-bucket tanker was full of oil,'' says Gerstenhaber. He constructed a position, using derivatives, in which Tiger would short oil prices while limiting risk--as Robertson wanted. Still, the two men were hardly the best of buddies. Gerstenhaber, like Robertson, was no shrinking violet. Robertson does not exactly wax nostalgic about their collaboration and minimizes Gerstenhaber's role. ``He was the implementer,'' says Robertson. ``Decisions of any real size were made by me.''
That's undoubtedly true, for only Robertson ever made any important decisions at Tiger. If anything, his urge to control seems to have grown through the years--to the point of intervening, one ex-Robertson associate insists, in the techniques used by window washers outside the building: ``I think they were going left to right and he felt they should use the squeegees up and down.'' That is hotly denied by Robertson.
Gerstenhaber and Robertson--two strong, controlling personalities--were destined to collide like two freight trains on the same siding. And they did. But it was a grand partnership while it lasted. By 1992, when the portfolios charged ahead 34% before fees, about two-thirds of that sum came from macro bets. In 1993, when all the major hedge funds scored big from the demise of the European currency system, macro was Tiger's money machine. Of the 80% gain before fees, 48% came from macro and 32% from stocks.
Given his tense relationship with Tiger, it was no surprise when Gerstenhaber left in mid-1993 to set up his own hedge fund, Argonaut. He started with 50 times the $8 million that Robertson began with. In 1994, Argonaut tanked. But in the beginning at least, Robertson admits, ``I was a little jealous.'' How did Gerstenhaber get all that money? Investors were flocking to Tiger as well as Argonaut and other hedge funds to make currency and bond bets. It was a decision they would soon regret. And few have more to regret from the reversals in macro than Julian Robertson.
Updated December 17, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.