By Gillian Tett, The Financial Times, 28 December 2006
Until very recently - apart from some specialist corners of the asset management world - not many people had heard of Richard and Christopher Chandler.
The two New Zealand-born brothers, both in their mid-40s, have kept an extraordinarily low profile while pursuing their careers - to such an extent that the website for Sovereign Capital, the company they jointly ran until this month, did not mention their names.
However, last year, the two shot into public view when Forbes magazine included them for the first time in a list of New Zealand's richest citizens - and placed them top, with $2.7bn of assets.
Behind their elevation lies a story of some great trades - including one particularly striking bet recently made in Japan which is still partly under way and could have earned the brothers more than $2bn.
The saga revolves around Japanese banks. Four years ago, the sector appeared to be on its knees, overwhelmed by bad loans after years of grinding deflation, a stagnant economy and dire mismanagement.
As a result, share prices had fallen to levels that effectively implied manyof them were heading for collapse.
The Chandler brothers decided that these were the perfect conditions in which to invest.
Born in Matangi, a rural town in New Zealand, they had set up Sovereign Capital in 1986 with $10m of capital and based themselves in Dubai and Monaco.
The raison d'être of the fund was to take large long-term long-only positions in sectors that appeared to be mispriced based on a fundamental analysis. They made their early forays into Hong Kong real estate and Latin America, later followed by eastern Europe and Russia.
Then, in 2002, the brothers started to buy Japanese bank shares, firstly spending about $530m on a 5.1 per cent stake in UFJ. That was followed with a 3 per cent stake in Mizuho, that initially cost about $600m, according to court documents later filed in association with a lawsuit Sovereign was dragged into in South Korea.
At the time, these moves seemed bold, given that it seemed impossible at the time to ascertain what value - if any - the banks had. However, these were exactly the conditions the Chandler brothers profess to relish.
Or as a spokesman for Legatum Capital, one of the two funds that have replaced Sovereign since the brothers split, says: "The company's investment in the Japanese banking sector is a good illustration of . . . the principles we adhere to and the contrarian approach which is often required."
He adds: "[We] are patient, entrepreneurial, value-oriented portfolio investors. We do not think of ourselves as investors in stocks, but as investors in businesses with excellent potential - filtered through a long-term perspective based upon themesfor which we develop a detailed understandingand a strong conviction. We frequently invest in transitioning economies during periods of uncertainty."
The move into Japanese banks was brilliantly timed. From 2003 onwards, Tokyo finally started to grasp the nettle of bank reform. More importantly, the Japanese economy also recovered, partly due to strong expansion in China. Consequently, when the brothers sold out of UFJ in 2004, they pocketed an estimated $1bn of profits.
They also appear to hold $2bn more in paper profits on their Mizuho stake, according to some estimates. Although Legatum confirms that it still holds a "substantial investment" in Mizuho, it says it does "not disclose details of its investment portfolio, except where regulatory requirements mandate this".
The Chandler brothers are certainly not the only investors to have called the Japanese recovery correctly. Private equity groups, such as Ripplewood and Cerberus, have also made billions of dollars this decade by getting into the restructuring of distressed Japanese banks, for example.
And some hedge funds have produced dazzling returns in recent years, particularly in the volatile small-cap sector - although many of these past gains have been wiped out by bad performance this year.
However, what makes the Chandlers' success so striking is that the fund appears to shun leverage or derivatives. Moreover, the brothers do not trade their investments frequently, preferring to take just a few, large contrary bets. Consequently, research by Institutional Investor suggests that just five investments have made 90 per cent of their returns in the past 15 years.
Whether this approach will continue to produce such magical results is unknown, given that this month the brothers divided Sovereign into two separate groups - Orient Global and Legatum, led by Richard and Christopher respectively.
What triggered that split remains - like so much about the Chandlers - unclear.
However, one thing that has emerged is that the brothers have recently taken huge bets on India, with their reshuffle of assets having triggered massive block trades in the Indian markets.
Indeed, some observers estimate that the Chandlers now have $2bn or more staked on the subcontinent, apparently focused on Indian banks.
Legatum is wary of predicting that India will repeat its Japanese success. "We would not compare the two situations. Every investment is unique, not only because companies differ, but because context changes," the fund says.
"India is a steady, long-term development story, as compared to the transitional turnround catalyst which we saw in Japan."
The brothers' new adventure in the subcontinent will be closely watched, not least because it might offer clues about where future dazzling trades might lie.
Source: The Financial Times
