Adam Schwartz, senior managing director of First Manhattan Co., and Sean Huang, managing director and portfolio manager of First Beijing, joined the MOI Global community at the Latticework 2017 summit, held at the Yale Club of New York City in September. David Yazdan, chief executive officer of Lyndhurst Investment Partners, moderated the discussion on intelligent investing in Asia.
We are pleased to share a transcript of the session.
The following transcript has been edited for space and clarity.
Shai Dardashti, MOI Global: We have Adam Schwartz and Sean Huang joining us from First Manhattan and First Beijing. Sean flew in from China to be here. Adam Schwartz is the Chief Disruption Officer at First Manhattan Co., which is quite applicable for this context. We also have David Yazdan hosting the conversation.
I’m hoping we will explore a few nuances: First Manhattan is transferring knowledge across geographies, applying institutional knowledge from North America into the Asian context — so understanding how First Manhattan is transferring knowledge. We also have the nuance of figuring out Asia, from a standing start — how do you unpack Asia? We are going to learn from great first-hand experience, we are very honored to have you here with us, in person.
David Yazdan, Lyndhurst Investment Partners: We’ve worked with the team at First Hong Kong Fund for more than a year and have had a great opportunity to get to see the symbiotic relationship between not just Adam and Sean, but the organizations — First Manhattan Co. and First Beijing. It’s a very collaborative one that we reference as the best of both worlds, and we’ll delve into that.
Let’s set the table and hear from Adam first. Talk a little about your background and then how your and Sean’s paths crossed to create this unique partnership that is 11 or 12 years in the making.
Adam H. Schwartz, First Manhattan Co.: I told Sean — not to make him nervous — but I said, “Sean, this morning it’s important that we sound intelligent because they gave us badges that said ‘Instructor’ and my mom’s here. She is the Ph.D. professor, the teacher of the family. I’ve been telling her that we’re going to be teaching today.
I came to First Manhattan over 15 years ago. I initially joined the firm to work as a general research assistant to Bob Gottesman, who runs the firm. Over time my responsibilities increased from helping with research projects, to running portfolios to doing special projects. The most special project I’ve ever gotten involved with is sitting to the right of me.
I was fortunate enough to have a young, promising intern join me when he was studying at NYU Stern. Initially, we thought international investing at First Manhattan, a decade ago, was something akin to investing in Nestlé or Novartis. I said there are probably other companies out there that publish annual reports and that we can analyze.
Sean came to us and we started looking — basically fishing — and over the course of the time that he was with us we looked at companies in Asia. Ultimately, at the end of his time with us, he went back to China as the only son and got a business degree and invited Bob and me to go visit China.
We had no intention, prior to this trip, to start a China fund. Basically, the genesis of the trip was to look at the ‘best of’ First Manhattan Company’s large multinationals that we had invested in and Sean put together the ‘best of’ China companies that he had identified. We spent over two weeks on the ground; it was an interesting time to be in China — December of 2009.
We spoke with these groups of companies and they were both identifying the things that were going on in the economy. But their responses were very different: On the US side or the multinational side, they were retrenching. In China, they were expanding — and they were often very interested in meeting with investors who had done their homework and had taken time to get to know them.
At the end of our trip, the three of us sat down and said, “It’s interesting. It doesn’t appear that people are doing the kind of fundamental analysis and homework on these undiscovered companies; maybe there’s an opportunity here to make good returns if we adopt what we would consider First Manhattan-style investment principles to this market.” That was the genesis of the fund. Sean, do you want to add anything?
Sean Huang, First Beijing: I’m Chinese, born and raised in China, came to New York at the age of 10, and I was very lucky to have worked at First Manhattan. The people at First Manhattan taught me everything I know about investing. About 10 years ago, we had the idea of taking advantage of some of the inefficiencies that we saw in the Chinese markets and it’s now been 7, 8 years since we started.
The primary motivation of the fund has always been to make money as investors in the fund. When we first started, the partners of First Manhattan and the partners of First Beijing, collectively, put in $10 million. Now the fund is about $250 million and half of the fund’s capital is still from the partners of both companies. We have a great partnership in the sense that First Manhattan is doing all the back-office and non-investment related work. First Manhattan has empowered us, me and my local team, to make investment decisions. It’s a dream job.
Yazdan: Sean, let’s expand on that local team and then also the landscape of investing in China in terms of opportunities for value investors. I was at Berkshire Hathaway’s annual meeting this year. Charlie Munger spent a good amount of time talking about the bargains that could be found in China, particularly for those willing to do the work. The way I interpret “willing to do the work” is obviously rigorous fundamental research, but also avoiding landmines — and having a team on the ground, with a network that your team has, is probably critical for that. Maybe it’s a two-part question: it would be good for the audience to understand why you chose the market you chose and then the importance of that local team.
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