For hedge fund manager John Burbank III, the August 2007 market turmoil was a minor blip. His Passport Global Fund declined 2.4 percent that month, while the MSCI world index fell 3 percent and hedge funds run by Goldman, Sachs & Co., Renaissance Technologies Corp., D.E. Shaw & Co. and other big-name quantitative managers stumbled badly. And Burbank didn’t stay down for long. Passport Global, a $2.3 billion long-short fund, delivered a stunning 218.9 percent return for 2007, versus 5.49 percent for the Standard & Poor’s 500 index.
Burbank didn’t wait to jump on the bandwagon when rating agencies started downgrading mortgage lenders in July. He’s one of a select few investors — including Wilbur Ross, John Paulson, J. Kyle Bass and James Melcher — who profited by anticipating the residential mortgage market blowup. Burbank started shorting the mortgage pools of such subprime lenders as Long Beach Mortgage Co. and New Century Financial Corp. back in October 2005. His Global Fund wasn’t in quite the same league as the Paulson Credit Opportunities Fund, which returned 589.9 percent in 2007, or Bass’s Subprime Credit Strategies Fund, which rose 423.8 percent. But by putting some $70 million between October 1, 2005, and December 31, 2007, into credit default swaps for mortgage pools consisting of loans to borrowers who had low credit scores and lived in states with high default rates, Burbank has generated $1.1 billion for investors so far — about two thirds of Global Fund’s total returns. The rest came mainly from long equity positions in mining and Indian stocks.
“The way to make high returns is to invest in things people don’t understand,” says the 43-year-old Burbank, founder and CIO of Passport Capital, of which Global Fund is the flagship. The big question now is whether Burbank, who shares the third floor of a modest building in San Francisco’s Financial District with 25 analysts and 15 support staff, can maintain his streak. A small but loyal circle of clients is banking on a repeat performance as Burbank zeroes in on a few global sectors that he believes are as misunderstood by investors as the mortgage business was two years ago: mining, renewable energy and alternative asset management. The firm also employs two geologists in Vancouver and an analyst in Hong Kong.
“Passport has been able to identify investment themes earlier than most, and that is why they have been successful,” says Paolo Alimonti, who runs Adair Capital, a New York fund of funds that invests in about 30 hedge funds, including Global.
The oldest of four Passport funds, which Burbank started in August 2000 with $800,000 from friends, Global Fund returned an annualized 41.5 percent from inception through December 31, net of fees, easily beating its target of 30 percent. Along with its stellar 2007, the fund has registered annualized net returns of 64.7 percent over the past three years and 49.1 percent over five years. By comparison, the HFRI equity hedge index, which tracks global macro long-short funds, delivered one-, three- and five-year annualized returns of 10.7 percent, 11.0 percent and 12.2 percent, respectively — and 7.5 percent over Global Fund’s lifetime. Including Passport Materials Fund, Passport Rig Fund and Passport India Fund, all of which were started between 2004 and 2006 to invest in themes that overlap with Global Fund, the firm managed $3.6 billion in assets as of December 31 — up from $823 million just one year earlier.
Global Fund, which Burbank runs with portfolio managers Jim Cunningham and Walther Lovato, was 92 percent long and 25 percent short as of December 31. (The percentages don’t total 100 because the fund uses leverage.) The team employs a mix of strategies to express its belief in the long-term potential of commodities and emerging-markets economies , and to make tactical bets in the U.S. The fund is long on energy and power-equipment companies because of continued strong demand, Burbank says, and it’s long on commodities, which provide “the only viable hedge against inflation and a weak U.S. dollar.” Other key holdings include Indian stocks, which Burbank believes will benefit from the country’s secular growth trend; and Asian consumer companies, which he sees as superior to U.S. businesses in that sector. The fund takes a dim view of subprime mortgages and biotechnology and information technology stocks, which Burbank regards as “overowned and overrated.”
An English literature graduate of Duke University, Burbank entered the investment world in 1992 after earning an MBA from Stanford University. For four years he dabbled as an investor in San Francisco Bay Area start-ups such as fruit juice maker Odwalla, which he co-founded in 1993. (Coca-Cola Co. bought the company for $181 million in 2001.) In January 1996, Burbank became director of research at ValueVest Management Co., which managed an emerging-markets long-short fund and was run by value investor Mark Bakar from a small office on the San Francisco trading floor of its prime brokerage, Bear, Stearns & Co. Burbank urged Bakar to sell his Southeast Asian holdings on the grounds that they were not properly hedged, but Bakar demurred, and ValueVest’s portfolio lost 20 percent of its value in 1998, declining to $150 million, as a result of the Asian financial crisis.
Roger Richter, who ran JMG Triton Offshore Fund, a $1 billion market-neutral arbitrage fund, from an office down the hall at Bear Stearns, hired Burbank as a consultant in March 1999. Burbank had already picked several emerging-markets investments for Richter that had soared in value, such as Mumbai-listed oil, petrochemicals and infrastructure conglomerate Reliance Industries, which appreciated 157 percent in the year ended October 1999 — and has grown 34-fold since then. “He had an incredible ability to find these things and get in early,” says Richter.
In 2000, just as the technology bubble was bursting, Burbank decided to be his own boss. Richter helped set him up in an office with a Bloomberg terminal and introduced him to a Bay Area dot-com entrepreneur who in 2001 gave Burbank his $500,000 IRA to manage.
“The whole world was long the U.S.,” recalls Burbank. “I wanted to short the U.S. I started looking for underinvested areas that were less correlated.” Lacking a track record, he solicited clients by charging 1.5 percent of assets and 20 percent of returns, undercutting the usual 2-and-20 hedge fund formula, and requiring investors to lock up their money for only six months instead of the standard one to three years.
Global Fund got hammered when tech stocks it had shorted rallied in March 2001 in response to U.S. rate cuts. It returned just 7 percent in its first full calendar year, 2001, though it still beat the S&P 500, which fell 11.89 percent. The fund gained 22.1 percent in 2002, when the S&P fell 23.79 percent. Burbank was saved by a big bet on oil tankers, which had traded down to about 20 percent of tangible asset value before the war in Iraq and surged in the last quarter of 2002, after Congress authorized the use of U.S. troops. The fund advanced 47.3 percent in 2003 on successful bets on gold and gold-mining stocks, including Denver-based Newmont Mining Corp., which rose 61 percent for the year, but returns fell back to 12 percent in 2004 — barely beating the S&P’s 10.88 percent — because of sharp declines in Chinese and Indian stocks in the spring.
Today, Burbank is going long on private placements in several Canadian mining companies, including some with concessions in the Democratic Republic of the Congo, where the Chinese government is making major infrastructure investments. He is also buying solar and wind power companies, for which he sees a bright future as oil and gas prices soar, and manufacturers of conventional power-generation equipment. Burbank is bullish on publicly listed asset management firms in Brazil, Egypt, India, Kuwait and the United Arab Emirates that manage private equity and hedge funds in addition to employing traditional strategies, in the belief that they will benefit from growing demand for alternative investments outside the U.S.
Burbank declines to name companies he is shorting, but he attributes his success to being able to anticipate financial crises — and he believes the latest one is far from over. “Subprime was the weakest link in the financing bubble in the U.S., which was misallocating the world’s capital,” he says. “The truth is starting to get priced in. That’s why we’re making so much money.”
