BARRY COHEN, SPECIAL REPORTS EDITOR, HEDGEFUND
Unlike some hedge fund managers, who prefer to be very cautious
on markets, strategies and policy-makers, Jamie Rosenwald never
shies away from expressing his views - whether positive or
critical - on the broad range of issues that capture his
Since launching Dalton Investments in 1998 with two
partners, the firm has built an enviable reputation for
delivering highly competitive returns. It runs the Dalton
Greater China Fund, Dalton Asia Fund, Pacific & General
Investments and the Dalton High Yield Mortgage Fund. At the
2012 AsiaHedge Awards, Dalton won the coveted Management Firm
of the Year award.
Fuelled by a rapid growth in assets over recent years,
Dalton currently manages around $2.1 billion in three
strategies - global equities, Asian equities and distressed
debt - and the Asian operations account for one half of overall
assets. Based in Santa Monica, California, Dalton has
established a global presence with additional offices in Tokyo,
Shanghai and London.
Perhaps the 57-year-old Rosenwald's greatest passion is his
belief in the concept and application of value investing -
which he imbibed from his grand-father who worked closely with
Benjamin Graham, the pioneer of value investing. On a recent
visit to London, where he met with HedgeFund Intelligence for a
wide-ranging interview, Rosenwald took the opportunity to talk
frankly about his investment philosophy and the triumphs and
mistakes he has experienced in a long hedge fund career.
You named your firm after The Dalton School in
Manhattan which you and your partner, Steve Persky, attended
and where you originally met in 1970. You must therefore have
fond memories of your school days to adopt that name for the
JAMIE ROSENWALD It was Steve's wife who picked the name. Steve
and one of our other partners went to Harvard, but we clearly
couldn't pick 'Harvard'. The fourth partner went to the
University of Cambridge and we couldn't name it after
Cambridge. Steve's wife correctly pointed out that 'Persky
Rosenwald' sounds way too Jewish. So she suggested 'Dalton' -
almost a WASP name - which is great. I didn't think it would
overlap with Dalton Strategic Partnership's business in the UK.
So Dalton was a good period in your
JR No. It was miserable. I went to Dalton for 13
years and met Steve in seventh grade. We've been close friends
since then. He did my math homework and I figured it would be
great to be partners with a guy who was so good at doing my
Tell us how Dalton got started.
JR In 1998, I was approached by a large New York
Stock Exchange firm called Leucadia National Corporation. It
was also involved in a joint venture with Berkshire Hathaway,
called Berkadia, which is run by Leucadia and financed by
Warren Buffett. It said it would like to allocate money to
Asia. This was the period of the Asian crisis and Leucadia was
a serious distressed investor. I told them I have the perfect
person for you to meet: he is the world's leading expert in
Asian distressed debt. So I introduced them to Steve Persky,
who said to me: "What are you talking about? I have no idea
about distressed debt." And I replied: "Neither does anyone
else in the world." There had been no Asian distressed debt
because any debt that had been issued by a Japanese or
non-Japanese company in Asia was oversubscribed five times by
Japanese banks, since they had more liquidity in the 1990s than
anybody else in the world. This was the end of the bubble
period and they were chock-full of cash. As they had bought all
this debt, they were eager to sell.
So I said: "Steve, you have worked in Japan where all your
clients were basically Japanese banks and therefore you know
where the paper is. You knew how to do credit at Citibank, I'll
be your analyst and you will be the world's expert in Asian
So Leucadia funded the first account that Dalton opened. At
the same time, I personally seeded my other partner, Gifford
Combs, who was Steve's classmate at Harvard, to invest in
equities anywhere in the world, but he thought Asia was the
cheapest place at the time. That was how Dalton got started in
1998 when we took on our first clients, but we incorporated in
Dalton Investments has been built on the investment
methodology of bottom-up value investing with a strong emphasis
on an intensive research process and a disciplined valuation
approach to minimise risk. Can you elaborate on your
JR There are some key aspects of value investing,
as done by Dalton, and there is also a spectrum of the types of
value investing that people hear about.
At one end of the spectrum, you have Benjamin Graham, who
was the theoretical father of value investing, wrote Security
Analysis and taught the subject. He had no interest in meeting
management whatsoever; his was strictly a numbers approach
based on investing 50 cents for a dollar's worth of assets, and
sitting with that investment forever.
At the other end of the spectrum, you have his pupil, Warren
Buffett, who invests in operating and managing businesses and
who may be willing to pay close to $1 for $1 worth of assets.
He may even pay more than $1 for $1 worth of assets, because he
either likes the management or he likes the sustainability of
the business and the return on its capital.
So where we do we fall within that spectrum? We are probably
closer to Buffett than we are to Graham, but we manage public
equities and we don't have permanent capital like Buffett does.
So we have to think about various aspects of liquidity.
In terms of the long side of our portfolio, one aspect of
our value investing approach is that we buy companies that are
worth $1 for 50 cents, which creates a margin of safety.
Hopefully, at the end of the year, they will be worth $1.10.
Therefore, the valuation continues to grow over the term of the
investment. And, over the past 15 to 20 years, our average term
of investment has been five to seven years. Ideally, you would
hold something indefinitely.
The second aspect is what we call an 'alignment of
interests' between the investor and the management of the
company you are invested in. So one of our critical measures is
that we look for management that has more than five times their
annual salary in stock ownership of the companies they run. And
not just the CEO or CFO, but also the board of directors who
have very large amounts of shares in relation to their
compensation. For example, it might be an outside director who
is paid $50,000 to $100,000 per year, but he has $10 million or
$20 million worth of stock. So does he really care about the
directors' fees or is he much more interested in how the stock
is going to do? That is important to us and that exactly
illustrates the concept of alignment of interests.
The third key aspect is whether this is a sustainable
business. Does the business have a moat, or is this, perhaps, a
technology company where the technology is changing rapidly,
which presents an additional risk? Like Buffett, who has
historically bought businesses which are hard to replicate and
therefore hard to compete with, we look for companies that have
some kind of technological lead, some kind of moat, some sort
of market share which provides them with the kind of leadership
that enables them to sustain their position over long periods
A good example is Allied Group, a Hong Kong-listed family
conglomerate. The biggest driver of its growth will be its
consumer finance business. For many years, it has been number
one in consumer finance in Hong Kong, and is an early and the
biggest independent mover in consumer finance in China. Its
joint-venture partner is Orix of Japan, which has been very
successful in that business in Japan. The growth rate of that
underlying business is over 30% per year. There is an enormous,
insatiable consumer demand in China right now, but there still
isn't a consumer credit culture in China. The banks offer very
little in the way of credit cards or loans, while the loan
sharks are going to charge exorbitant rates.
Now this consumer finance company does something very unique
and interesting - namely, it buys the database for very little
money from China Mobile and other mobile telephone companies so
that it can run credit checks on the Chinese population and get
customers through this means. It also enables it to
differentiate customers between owners of smart phones and
old-fashioned phones. So it is at the early stage when it is
creating credit-scoring capability.
Allied Group also has a huge mainland Chinese and
Hong-Kong-based property development company and a medium-sized
stockbrokerage company in Hong Kong. It also has interests in a
wide range of mining assets in Australia, Canada and Africa. So
it's quite diversified. There are all sorts of ways you can
make money. And because it doesn't have a lot of debt, and
because it has all these different growth engines, you don't
need many things to go right to actually be a winner in that
The Li family's founding fathers of the company hold 40% to
50% of that company. That is a heavy alignment of interests.
The son of the family is the CEO, and board members all own
plenty of stock. Who buys a Hong Kong conglomerate? It's not on
any index and so institutional-index investors are not buying
it. Dalton clients own 5% of the company. When we buy into a
company, we're not buying shares but rather buying a percentage
of the company. We view our purchases in the same way that a
private equity investor would view their purchases. In this
case, we are buying a very talented, highly motivated, and
incredibly well incentivised management.
It must feel good when you come across investment
opportunities like that.
JR I only have to get two out of three right and
yet I make plenty of mistakes every single day.
What major mistakes have you made in the investment
JR I've been lied to by CEOs for my entire career.
That is why Ben Graham didn't want to talk to them, and he was
right. Many of them will lie. Hopefully, over time, I have
become better at analysing the guys who are just blowing smoke
and the guys who are telling it straight. And I can still get
it wrong. Even a lie detector can be fooled.
So there I was in Indonesia in 1996 and I'm at lunch with
the charming, erudite CEO of a family conglomerate, and I'm
trying to get exposure to his group by purchasing some shares.
So I said: "You run this wonderful business and I would really
like to be a shareholder in this company but I'm having a
difficult time buying enough stock." And he replies: "How much
would you like?" I told him I would really like to buy $1
million worth of his stock. He said: "Don't worry. By the end
of lunch, you will have your $1 million worth of shares." So I
paid for lunch and I bought $1 million from his personal
account in which he can print more shares. That was a total
mistake, and he ripped my face off!
When you do this for 35 years, you remember those kinds of
families - they don't go away. But you also remember the
families who you made money with in the past. One of the few
advantages of being older is that you have been around the
block a few times and, occasionally, life will repeat
Another mistake happened in Japan. The CEO and founder of
the Shokoh Fund (later renamed SFCG) was on the Forbes 400 list
and one of the wealthiest men in the world. He ran a phenomenal
loan business for many years. Then the Japanese government
decided that his type of lending should no longer be allowed.
They moved the goal posts to the point where the interest
rates, that he would charge, would be so low that he couldn't
make any money. So, in my opinion, he was forced to start
fudging his numbers. He protested not only against the
government's actions, but also against anyone who criticised
his accountant. I had invested with him and made lots of money
over the years. So, when some of my analysts were telling me
this guy is in trouble, I didn't listen.
Now I listen more to them, because he eventually went
bankrupt at the end of 2007. Lehman Brothers was his financier
and when Lehman went bust, it called his bluff. And when it
called his loan, he had to file. Although we sold out of most
accounts before that happened, it was nevertheless a good
example of a bad case where I really lost a lot of money.
We've covered your methodology on the long side. But
how does it apply to the short side?
JR We are looking for positions which are almost
identically the opposite of the long side. That means no
alignment of interest with management; stocks that are
incredibly expensive so they have 200% of what we value
according to enterprise value, or the value of the business
today compared to what it might be at some future time; and
unusually large leverage. A classic example would be a Chinese
state-owned enterprise where the management doesn't own any
stock; the management's alignment of interest is totally with
the political party that runs the country; the objective is to
hire as many people as possible rather than making money for
shareholders; and management is told to build factories by the
In Japan, the equivalent of state-owned enterprises are what
we call zombie companies such as Toshiba, NEC, Hitachi or Japan
Railways. Elsewhere, for example, we're looking to short
state-owned banks in Thailand and Indonesia, or state-owned
railways in Australia. There is certainly no shortage in Asia
of state-owned, state-manipulated, state-managed and
state-controlled companies that happen to trade on public
markets. The same could be said of French state-owned companies
like Crédit Agricole or BNP Paribas.
Compared to finding strongly aligned, high-quality companies
on the long side, we tend to have a lot more ideas for
opportunities on the short side.
Has your faith in value investing ever wavered -
particularly during periods when the value approach was out of
favour and overshadowed by cycles of growth-oriented
JR As my grandfather asked my daughter: "Since your
father is Jewish and your mother is Episcopalian, what are
you?" And my daughter turned to my grandfather and said:
"Grandpa, I'm a celebrationist."
I may be a value investor but I also celebrate all
religions. Value investing is a name and there is a spectrum of
value investors. But I do believe in growth. People say that
value investors don't invest in growth and that value investing
and growth investing are utterly separable. That's complete
My view is that you have to believe in all these religions -
whether it be growth, or value or growth at a reasonable price,
and fit it into whatever makes you comfortable. The confluence
of growth and value is the best of all worlds. If you have a
fantastic growth company trading at a fantastically cheap
valuation that is run by a benevolent dictator like Warren
Buffett, that's about as good as it can get in my world. It's a
long-winded way of saying that I, too, am a celebrationist.
Your grandfather, James Rosenwald I, who was
Graham's financial-services analyst, taught you to analyse
company valuations from the age of 12. Would you say he has
been a primary influence in steering you towards the philosophy
of value investing?
JR He certainly showed me how making money
translated into being able to buy an automobile and travelling
to Europe. From a business-philosophy standpoint, he was a
fundamental influence. The fact that he worked for Ben Graham
meant he drank the Kool-Aid that Graham was serving and I drank
the Kool-Aid one degree removed. But it was the same Kool-Aid -
the concept of being able to buy a dollar for 50 cents, the
concept of doing raw data research, the concept of
understanding businesses. Where it has veered from my
grandfather is more in the alignment of interests and on how
much weight, at Dalton, we put on management's capability. My
grand-father believed there was absolutely no need to go and
visit companies because management would simply lie to you and
the exercise would only colour your review and analysis.
That's why we have offices around the world, because you
need to have boots on the ground if you are actually going to
meet with management and learn about the businesses.
You are the senior portfolio manager for Dalton's
Asian equity strategies. So do you regard yourself primarily as
a specialist on the Asian markets?
JR I've been a student of Asian equities since the
early 1970s. Does that make me an expert? That depends on what
your definition of an expert is. I am responsible at Dalton for
managing the Asian equity strategies and that includes
responsibilities for the teams on the ground in Tokyo and
Shanghai. And, within that overall responsibility, it
encompasses client and partner assets of more than $1 billion.
So Asia represents around half of our business.
Dalton's assets under management have grown rapidly
in recent times. In October 2011, the firm's AUM was $1.3
billion and it now stands at $2.1 billion. Can a lot of this
gain in assets be attributed to very good performance in 2012,
when a fund such as Dalton High Yield Mortgage returned 34.93%
JR We probably took in between $200 million and
$300 million in new assets last year. In Asian equities, we
were up between 20% and 40%, depending on what type of mandates
we are referring to. We were up so much that I even questioned
the accounting. Had we valued all the assets correctly?
The mortgage business at Dalton, which started in June 2008,
has been by far the best-performing sector and you would have
made three times your money since June 2008. That's a very,
very good result. Having said that, the problem is that we are
now in the bottom of the eighth inning. We might have a top of
the ninth or we might have a bottom of the ninth. We could get
a couple of more swings of the bat at the top of the ninth and
then the game could be over. Therefore, in our mortgage
strategy, we are now coming up with the next idea.
The fixed-income business has been Steve Persky's baby. But,
because the distressed fixed-income area is declining, his team
have to think of some new and interesting ways of making
fantastic returns. And you can't expect them to generate
30%-plus returns for four or five years like they had done. So
as the bonds roll off, I have a feeling that they will go into
the bridge mortgage business. Some high-net-worth people may
have had a problem with their credit during the last financial
crisis, but they may want to buy a $5 million house. We will
provide them with a value investment loan of $2.5 million. It's
sort of buying dollars for 50 cents - you have heard about this
game before. And we will charge them maybe an 8% to 12%
interest rate and some extra points for putting it on, which
should generate a gross yield of around 12%.
It should deliver high-teen returns, which would be great in
today's environment. And it will also fill a big hole in
America in regard to jumbo mortgages - especially if you have a
'ding' on your credit so that some box can't be ticked. It's
very hard to buy expensive houses if you have difficult credit
and it's very hard to get jumbo loans.
In one of Dalton's press releases, it mentions the
aim of "protecting Dalton's unique culture". Can you elaborate
on what that means?
JR What Dalton shares across all its platforms and
all its products is the concept of value investing, and that
resonates with our clients. They get it. We are not a much
larger firm because it isn't easy to find clients who
understand this philosophy or believe in it. Many investors
believe that you can make money by trading securities very
rapidly, or that you have to trade securities in order to make
money. They might think that sitting on your hands and doing
nothing for five or six or seven years, which is our average
holding period, cannot be really regarded as work. They might
ask: "So what do you do?" I tell them I look for four or five
new ideas a year. And they respond: "Is that really working?
How can you charge all these fees if you are only coming up
with four or five good ideas per year?" So I tell them: "You
don't really understand investing. Sorry. You should look for a
fund manager who fits your description."
As a result, the fact that we have highly sophisticated,
interesting clients who are also great investors in their own
right is not a surprise.
Over the course of your career, you have met a lot
of outstanding managers in the hedge fund industry. Back in
1992, you founded Rosenwald, Roditi & Company with the
legendary Nicholas Roditi.
JR Absolutely. The hermit of [London's] Hampstead.
He now splits his time between Hampstead, New York and Cape
So is he still working above the Gap shop on
Hampstead High Street, then?
JR No. He bought a building after that. But when we
started, he was based above Gap. I was based on the pier in
Redondo Beach [Los Angeles], and we each had a secretary.
What sort of strategies were you running
When we started out, our first fund was called Korea
Non-Life Investment Company Ltd, which we launched in 1992 to
invest in Korean non-life insurance companies. You couldn't
invest in these companies easily, so we had to create a Korean
trust to get around the foreign-ownership rules. We raised
between $15 million and $20 million from some of Nick's former
employers such as Jacob Rothschild of RIT. In May 1997, after
Nick had had his phenomenal years and Rosenwald, Roditi had
grown to over $700 million in AUM, I sold my shares back to the
company and its name was changed to Rovida.
Nick is a brilliant macro and value investor. If you ask
him, "How can you take so much risk?", he will say, "It's not
my money." And, if you ask him, "How much should I invest with
you?", he will say, "It's too dangerous; I don't think you
should invest with me." He understands the psychology of
investing, and that also makes him a wonderful salesman. I
place him in the Keynes category of investment, which really
means sort of opportunistic, global and contrarian.
Between 1992 and 1998, you advised many of the Soros
Group of funds. What sort of experience did you have working
with the renowned Soros firm?
JR We created Rosenwald, Roditi because I was being
hired by the Quantum Emerging Growth Fund at Soros to manage a
$25 million equity portfolio. Nick was hired by Soros to manage
substantial macro investments for the Quantum Quota Fund. When
working for Soros, you either make a fortune for him or you get
fired. We had a good chance of being fired. So we formed
Rosenwald, Roditi in order to take advantage of a longer-term
opportunity in the nascent Korean non-life insurance space.
This was an opportunity that could provide satisfactory returns
for investors for over five years - given the valuations in
You must have had direct dealings with
JR I had a few dealings with him. Soros is a
fascinating, very thoughtful and extremely insightful character
and one of the greats of our time. He was way ahead of his time
in lots of areas and has been willing to bet big money on every
one of the ideas he truly believes in.
Why have you chosen to take time out from your busy
investment career to lecture at New York University's Stern
School of Business with a course called Global Value Investing:
Theory and Practice?
JR It's a way of giving back to society and I also
donate to the school which is my alma mater. However, I'm not
totally altruistic… because the course is a great
For your own firm?
JR Yes. Every one of those students, who are aged
between 26 to 35, holds a full-time job. It's a six-week,
three-hour-per-night course. Anyone willing to spend weekday
nights after a 10 to 12-hour working day is probably taking the
course because they very much want to learn something. We're
also running the same course simultaneously at the China Europe
International Business School in Shanghai and the National
Taiwan University's business school in Taipei. We haven't
recruited anyone from the course as they haven't graduated yet.
At the moment, a Chinese-speaking individual that is a student
of value investing is almost impossible to find. The final exam
is a five- to seven-minute investment pitch by each student
where they present their value investment idea in which we
should invest money.
And the winning ideas are chosen for investment with
funds drawn from the $1 million endowment that you and your
wife have made to the school?
JR Yes. And those ideas have been performing
On the reading list for the course, you include
works by Seth Klarman and Warren Buffett. Do you regard them as
JR Not Buffett. Although I do revere his track
record and style, and I think he is phenomenal, I've not had
any personal dealings with him.
Besides my grandpa, who would be my number-one mentor, I
would include Prem Watsa, Marty Whitman of the Third Avenue
Value Fund and Seth Klarman of the Baupost Group - in that
Prem, who runs Canada's largest insurance conglomerate,
Fairfax Financial in Toronto, has been a client since 1996. He
is a highly brilliant investor and many people describe him as
Canada's Warren Buffett. He believes that if you are working
with him, you should have five times your annual income
invested in the fund you are working on, since that will ensure
that you will be definitely watching over the fund. That is
more important than worrying about your frigging job, because a
20% increase in the fund represents a whole year's salary.
As for Seth, I've been dealing with him for more than 20
years and he was an enormous help in the early days of my
career. I view him as a friendly competitor and someone to
model one's business on. The concept of having all my employees
putting half of their bonuses into the fund is something I
attribute to Seth. However, he demands 100% of your personal
net worth invested in the fund if you are going to work for his
firm. Actually, I think that's going a bit too far.
Looking back on your long career, what would you
regard as your first outstanding value investment?
JR Going to Vassar College [a co-educational
liberal arts college in Poughkeepsie, New York] was my first
great value investment. For a heterosexual male, it was a
phenomenal value investment. Think of the ratio of women to
men. It's not a dollar for 50 cents, but three dollars for 50
cents. It's unbelievable! Many people say I wouldn't want to do
it over again. Bullshit! I want to do it over again at Vassar
with this mind and that body. And I want to do it over and
over, and I never want to leave.