Manager Gifford Combs seeks out stocks that are priced below their fair value, aiming to preserve and grow capital. The investment process at Los Angeles based Dalton Investments LLC starts with a partly quantitative filter whereby Dalton’s global investment staff, including London, Shanghai, Singapore and Tokyo offices and compromising close to half of Dalton’s overall staff of 30, filters a global universe of 28,000 investable stocks typically down to 500 that meet Dalton’s investment criteria. Further qualitative analysis decreases the potential investment pool down to 100 of which 20 to 40 may become long holdings. While the Fund could short up to 20 securities, it has not had any meaningful short positions since 2008.
Combs pays special attention analyzing whether he believes that interests and incentives are appropriately aligned between management and shareholders. Strong shareholder returns, conservative accounting policies and share buy-back programmes are typically all prerequisites for longs. To the extent applicable, the opposite characteristics are sought after for shorts.
This is a high concentration fund that can invest up to 10% into one company, and may allocate as much as 20% per sector based at time of purchase price. When Combs does not believe that there are sufficiently attractive opportunities warranting the fund’s investment, he holds cash as dry powder for better future opportunities. Currently, the fund holds typically 50% in cash.
Combs has made many historically bold and contrarian decisions – included buying Asian equities after the Asian crisis in 1999, when the fund was almost entirely invested in companies with Asia exposure. A year later, at the apex of the technology bubble in the spring of 2000, Combs invested large portfolio positions in tobacco companies which he believed offered more compelling risk/value, and invested some of the Fund in technology shorts.
Since August 2011, Combs has believed that US financials potentially offered the most inefficiently priced stocks. The largest current holding is insurance group AIG, where Combs stated that he believed “repurchasing shares below book value will be highly accretive to common shareholders’ value”. He further stated his belief that “although AIG’s return on equity looks low, the crisis and regulations have left all financial stocks making far lower returns on equity than they did pre 2007”. His investment thesis is based on that AIG has set in motion several processes that should act as positive catalysts for the stock, including 1) the many buybacks, that should increase its equity return; 2) paying down expensive debt; 3) shedding underperforming assets to shrink the capital base, and 4) conservatively provisioning in the general insurance business Chartis. These actions all create the scope to enhance future returns. AIG is not the only US financial stock where Combs expects valuations to revert closer to book values. Morgan Stanley and Citicorp are included in the Fund’s top ten holdings.
GAM’s fund of funds business first discovered Combs via his private fund, which launched in October 1998. Having been early investors in the private fund, which has consistently returned market outperformance, GAM asked Combs to manage a UCITS version for clients who could not invest in his private funds – including retail investors. Combs managed UCITS- launched in November 2009, and when he believes that an investment for his private fund is appropriate for the UCIT- given the difference in liquidity terms (i.e. UCITs is daily liquidity while Combs’ private fund is monthly) will generally attempt to trade positions pari passu with Combs’ private fund. As of the end of February, the positions in UCIT portfolio are very comparable to the holding in Combs’ offshore private fund. However, the stricter regulatory and different terms of the UCIT vs. Combs’ private offshore fund will make it highly unlikely that the UCITs will be identical to Combs’ private offshore fund in terms of holdings or concentration levels. In addition, should Combs invest in short positions, the UCITS will hold the positions as derivatives only.
Combs does not currently see many value opportunities in most of the world’s equity markets. Rather, he feels that generally equities are fairly valued, i.e. neither under-valued nor over-valued. But for Combs the patience he employs for holding his stock positions (sometimes for as long as 4 to 5 years) is mirrored as he awaits for opportunities meeting his stringent requirements to deploy the fund’s dry powder.