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 attention.
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
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 math homework.
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 distressed debt."
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 1999.
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
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
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 stock.
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
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
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
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
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
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
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 garbage!
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
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
You are the senior portfolio manager for
Dalton’s Asian equity strategies. So do you regard
yourself primarily as a specialist on the Asian
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% in 2012?
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 Town.
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 1992.
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
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 recruiting tool.
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
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
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.