Adam Schwartz on Intelligent Investing and China

July 19, 2017 in Asia, Featured, Latticework

In the inaugural episode of the Latticework Podcast, presented by MOI Global, Shai Dardashti speaks with Adam H. Schwartz about First Manhattan’s approach to intelligent investing and China.

Adam is a Senior Managing Director of First Manhattan Co. He joined the firm in 2001 to work with Bob Gottesman, First Manhattan’s CEO. Adam is a value-oriented, long-term investor who is focused on preserving, sustaining, and growing his clients’ capital. Adam tends to invest in companies that are led by seasoned management teams that have a proven track record of generating attractive returns. He is also drawn to companies that are undervalued but operate in an industry with a high barrier to entry. In addition to his work as a Portfolio Manager, Adam played a lead role in establishing the FM First Hong Kong Funds—First Manhattan’s China-focused investment vehicles. He travels to China regularly and works closely with his China-based Fund partners on company research, portfolio management, and due diligence.

Adam is an instructor at Latticework 2017.

The Latticework Podcast is on iTunes, Soundcloud, Stitcher, and TuneIn.

The following transcript has been edited for space and clarity.

Shai Dardashti, MOI Global: It’s a pleasure to be here with Adam Schwartz, Senior Managing Director at First Manhattan Co. He is also the Chief Disruption Officer at First Manhattan Co., as we’ll discuss a bit more. Adam has very graciously agreed to speak at Latticework 2017, taking place on September 7, at the Yale Club of New York – exploring the subject of Intelligent Investing in a Changing World. Adam, thank you for speaking at the conference and thank you for being here right now.

Adam H. Schwartz: Shai, it’s a pleasure to see you again and I’m always happy to have an interesting conversation with someone who takes the time to do their research, I appreciate that, and you’re a very thorough guy so I enjoy speaking with you.

Dardashti: It’s amazing to be here at the office of First Manhattan Co.; there’s quite a bit of history and this is hallowed ground, I would suggest. Why don’t you please share with us your personal journey, how you got to your current role?

Schwartz: I am coming up on my 17th year; I’ve been at First Manhattan Co. for 16 years now. Let’s start from the beginning: I have an undergraduate degree from Brown University in economics and international relations, then a business school degree from Columbia Business School. I would say, early on, I’ve always had a passion for, and an interest in, investing – and that’s kind of how I found my way here.

As an undergrad at Brown, at the time I graduated in 1998, it wasn’t really a professionally managed endowment in the way that endowments and pensions are run today. It was basically a loose board of professional people who were in the investment business that would look after investing. I got to know a gentleman who was one of the board members at the time, who turned out was a partner First Manhattan Co. I had met him because I had basically went to the faculty and said, “I have an interest in investing, there really aren’t too many investing classes at Brown, could there maybe some practical way that I could get to understand how you manage the endowment and what people do?”

Informally, I got to meet and got to know this [First Manhattan Co.] partner and we stayed in contact. This was my sophomore year at Brown; I had a number of different internships from other Brown alumni who were loosely in business analysis. Over the course of time, when I graduated, my first job was as an investment-banking analyst at Morgan Stanley, in New York City. I thought I got a great pre-business school education and it was a real practical knowledge – at the time it was the telecom corporate finance group, so I knew telecom companies very well. But I always stayed in touch with this guy thinking that I was really impressed with his knowledge of business, and more importantly, I thought he was just a good person. In my life I always try to surround myself and stay in contact with people that I really admire for their values and just how they conduct themselves.

After two years of Morgan Stanley I got an opportunity from one of our clients to move to London and help with strategic development and M&A analysis. So, I lived in London for two years. I’m a lifelong New Yorker, I grew up in Brooklyn, and after two years of helping to build a company I thought to myself, “This is great, but the company had decided they were actually wanting to sell themselves and that was a different job opportunity than helping to build it.” When I was looking for opportunities to come back to New York, I reached out to Charlie Rosenthal, the partner that I had known from my days at Brown, and said, “I’d really like to hear about what you’re doing at First Manhattan Co., maybe there’s an opportunity?” and he said, “We really don’t hire; so to speak, we don’t put out a shingle, but come in and talk to my partners about what you’re doing, and what you know, and maybe something will come of it. But I can’t promise anything.”

I came back to New York, just prior to September 11, 2001. I came in and I thought I was going to have an informal discussion – kind of like the one we’re having now – where I was going to just discuss my thoughts on investing and what I’ve been doing, etc., in low-pressure environment. I arrived at a conference room that had five or six partners across from me on a table and it had the feel of – again, it’s the number of years here, but I remember leaving that room thinking, when I first saw it – this is kind of like a Congressional grilling. There were five guys on one side of the table, there was a spot for me, and it was, “Okay, so please tell us everything that you’ve learned and what you’ve done, until this point in your life.”

From my perspective, it was the first time I had really been asked deep, probing questions – not just factual questions, like “Tell me about the company, tell me about the growth, tell me about the industry” – but these were quite in-depth questions about me as an individual: “What are my values?” I was young, I must have been 23. It was a pretty deep process and I thought, “Wow, I wasn’t expecting that! If they do that with everybody that goes through here, then they really get a sense, very quickly, of what the person is, what makes them tick.”

At the end of this – I’m going to call it an ‘interview’ but it was felt like a ‘grilling’ – I had a little bit of one-on-one time with Bob Gottesman, the CEO, and he said, “You have an interesting background.” He gave me a homework assignment: ‘Kroger, value or value-trap?’ And he said, “Won’t you come back in a week or whatever you need, and in a two-pager, write up what your thoughts are on this topic.”

I wrote up a research report. I didn’t really have a template, I just sort of imagined, if I were had to make an inform decision whether to invest in this company or not, what are type of things I would want to look at. With very little guidance, I came back a week or so later and walked him through my analysis of Kroger – I had come to the conclusion that it was a value trap. He said, “I tend to agree with you.” We spoke a little bit about his work-style and maybe how I could work with him and, as a result of that, he said, “The ways you look at things are similar the ways that I look at things, why don’t you come and work with me, and we’ll see where it goes?”

And that’s more than 15 years ago. I’ve worked very closely with Bob, and my other partners here, and initially my responsibilities were research support. Gradually, over time, I took on increased responsibility supporting the firm’s central research effort – which included covering media-telecom companies – to eventually becoming a portfolio manager and really a partner with Bob Gottesman and managing portfolios. I have in more recent years, since becoming a partner of the firm, also focused on what I would call ‘Special Projects’ – things that really move the needle and are significant, hence the ‘Chief Disruption Officer’ role, and we can get into what that means to me.

The most special of our special projects, that I’m very focused on, is our FM First Hong Kong Fund. First Manhattan Co., along with our local partner Sean Huang, who’s a former intern of mine, started a value-oriented fund in 2009 – investing First Manhattan Co. style in the Hong Kong and China market. We’ve adapted the First Manhattan Co. research processes to make sense and to be effective in that market, and we can get into that later in the conversation. My experience here at First Manhattan Co. – an absolutely wonderful and lucky experience from my standpoint – is to have been given the opportunity to contribute and to help our clients’ portfolios grow; what I thought I was going to find here, in terms of high-quality people who had the highest integrity and who are really interested in creating value for their clients and for themselves – it totally exceeded my expectations. The first five-years of my experience of First Manhattan, while they paid me a salary, I really should have paid the firm for the opportunity to be here – because the amount of learning that took place was enormous. If I’m really critical and honest – well, I hope that I contributed. I think the first five-years was really me absorbing, more than anything else, and I’m happy to expand on what I mean by that.

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Disclaimer provided by the interviewee: This transcript is for educational purposes. The interview enclosed should be read in conjunction with the Fund’s PPM, Subscription Agreement and related documentation, and no decision to invest in the Fund should be made without reviewing such documentation.

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