By Jonathan Yates (May 2011)
Like Bruce Kovner, founder of Caxton Associates, LLC, John Burbank III, founder of Passport Capital LLC, financed his initial foray into investing with money borrowed from his credit cards. Unlike Kovner, Burbank lost almost all of the $50,000 borrowed. Like Kovner, by far the greatest return earned from the first plunge into financial markets was a lesson that would shape the rest of his investing activities. For Burbank, this lesson was that short term trading was little more than small stakes gambling. Serious money would only be made after intensive research followed with boundless patience (investments at Passport are held for up to five years, no matter the short term pain). Burbank’s study of legendary investors Warren Buffet and Sir John Templeton yielded even more guidance: diversification was only for those who did not know what they were doing.
Based on his performance as a hedge fund manager, this group certainly does not include John Burbank III. Recovering from the almost total loss of his holdings in his first trade, Burbank founded Passport Capital in 2000. For 2007, Passport Capital posted a 219 percent gain, after management fees and expenses, as Burbank correctly called and structured his portfolio to profit from the collapse in the United States housing market by shorting the stocks of subprime lenders. So confident was he of his research and his position that even as the market initially moved against his shorts, he doubled down with credit default swaps. This did not go unnoticed by the investing community: since then, Passport Capital has more than doubled in size with $4.6 billion now in assets. For investors wanting Passport to manage their money, there is a $1 million minimum with a one to three year lockup period.
As with so many other successful investors, Burbank has been able to focus the unique aspects of his personality and talents into huge financial gains for himself, his business, and his clients. With an English Literature degree from Duke and an MBA from Stanford, Burbank has travelled the world extensively, at one time teaching in Ningbo, China. His first three years in finance were spent as a researcher for ValueVest, a small hedge fund that was one of the first to specialize in emerging markets.
Burbank opened Passport with an emphasis on research and diligence, loading the staff with PhDs in hard sciences. Months are spent researching ideas before any money is committed at Passport Capital. When that time arrives, large positions are established. At present, Passport Capital is long gold with Burbank commenting that:
“The biggest reason to stay in gold is because central banks around the world can see the writing on the wall long term, which is that the dollar will be devalued one way or another and that Congress has no appetite for hard decisions which would be deflationary in nature, and therefore, make the dollar higher than gold and not as much of a necessary holding. You also have the Chinese consumer, who has become a very large buyer, matching almost the Indian consumer and I think quite clearly, will exceed the Indian consumer. I think ultimately, physical gold is the story. It is a scarcity story. The more the U.S. dithers and the more the Fed is willing to print money, as opposed to dealing with inflation properly, the more this trend will happen. That is the biggest reason to stay in gold right now. Otherwise, most of the beneficiaries of quantitative easing will be backing off as most investors get back to neutral.”
The emphasis on research by Passport Capital is demonstrated by the “boots on the ground” approach to investment analysis. Based in San Francisco, staffers at Passport literally travel the globe in search of opportunities:
“Our preference is in two areas. Physical gold and smaller cap common junior minors. We two geologists based in Vancouver, and we think we have a good edge on which explorers are the right ones to own. We are buying, even now, and will continue to be to accumulate stakes there. Barrick and Newmont have come off at least 10% in the past couple of weeks. I think the gold stocks are discounting a further fall in gold and we don’t know if it was going to happen. If there was another government intervention that provided a lot of liquidity in the world, then we would be quicker to come back in.”
The research at Passport Capital takes its investing away from the traditional vehicles. As Burbank notes, “There is no way you can make 30 percent a year going long on the S&P 500. If you’re going to hit that kind of return, you have to go to places where it is going to happen.” A major reason “to go to places” for investing happenings in gold and basic materials and other assets for Burbank and Passport Capital is the uncertain direction and lack of confidence in governments around the world. At the end of 2010, his biggest position was a $416 million put option on SPDR Gold Trust. He is also heavily invested in mining companies in Canada, Australia and others around the world.
With QE2 ending in the United States, Burbank is still waiting for direction from the Federal Reserve. As there has been massive amounts of liquidity injected into the financial markets in recent years, the predictable results of currencies falling in value and commodities rising in prices has occurred. In an interview, Burbank pointed out that when QE2 was initiated, gold was $1350 an ounce, oil was $85 a barrel and silver was at $25 an ounce. Less than a year later, all commodities were sharply up and appeared to be heading for all time highs. For the future, Burbank observes that:
“After the earthquake, Japan put a lot of liquidity into the market, which held up risk assets longer than they would have. Europe dealing with its issues with Portugal, Greece, etc. We do not know how they may change their posture. Europe has the belief that there will be some change in stance by the central bank as well as potentially by the euro community. We don’t know. Also, the end of QE2 is so heavily understood, that will happen, but not understood what will happen after that. It is possible the Fed has something up its sleeve. It knows risk assets will be selling off at the end of this. At least I hope it knows that.”
As a result of this lack of confidence in the leadership role of the United States Government, Burbank continues to be a bear on America, sticking with his position that the housing market there will continue to fall. There is not much confidence in the American consumer powering the economy, either, as he feels they are still in a retrenchment mode after overextending themselves during the housing bubble and absorbing the onslaught of The Great Recession. For the US dollar, Burbank anticipates further declines that will result in “a systemic, long-term problem” of inflation. As a result, he foresees sovereign yields as being weak and commodity returns therefore being robust.
From this, Burbank expects investors in the future to continue pouring capital into emerging markets, most notably China and India. The growth of the consumer class in these two countries will result in a continued demand for gold, silver, oil, and basic metals. Like many other hedge funds, Passport Capital is heavily invested in potash, needed to feed the growing populaces and satisfy the richer diets of emerging market nations. “The supply of oil, commodities and things that come out of the ground isn’t changing that much, and the demand keeps growing, so the price is generally going higher,” Burbank notes. About one quarter of Passport’s portfolio is in basic materials like iron ore and gold mining companies.
In 2010, Passport Capital returned 18.3 percent. Burbank has led Passport to post 23 percent annual returns since he opened up shop in 2000. His long positions include Apple Computer, Cisco Systems, Suncor Energy, Barclays Bank, Wendy’s/Arby’s and Blackrock Inc. His holdings for 2011 continue to beat the S&P by a hefty margin. Along with his investors, Burbank has done well, too: in 2007, his compensation was an estimated $370 million, the 17th highest for money managers.