John Burbank founded Passport Capital in 2000 with 800 thousand dollars assets under management in San Francisco and today it manages 4.6 billion dollars. Starting with a distinct analysis of global macroeconomic trends, the fund invests in these global themes through a combination of traditional value-oriented security selection and long and short bets utilizing derivatives, commodities and credit swaps.

Since 2000, the fund has achieved an impressive annualized return of 23%. The returns to the investors, however, did not come without nerve-wrecking volatility. Back in 2005, Burbank began to build his shorts against the US mortgage markets. This contrarian stance against the then prevailing mass wisdom of ever-rising real estate prices in the US (the asset bubble after the internet) paid off handsomely in 2007 when the fund advanced by 217%, way ahead of its 23% and 14% gains in the previous two years.

Hardly having had the time to enjoy the fame (and the 300 million dollar plus pay day) of having predicted the subprime crisis, Burbank’s continuous concentration on emerging markets (especially his favorites China and India, which would be crushed beyond expectations by the global credit crunch) and commodity producers backfired in 2008: The fund lost 38% in the month of October itself and 51% for the full year. Coming out of this near-death experience, Passport gained 19% in 2009 (trailing the S&P 500) and 18.3% (ahead of S&P 500), enough to calm investors and stabilize his assets to the current quantum.

Besides the volatility and changing concentrations in positions (the fund currently has a 40% exposure to commodities and energy companies), there is a definite method to the seeming madness which keeps Burbank’s place steady among the top-performing hedge fund managers. Essentially, his allocation of themes come in this order: (1) Emerging markets represent demand higher than the developed markets, therefore the Passport Capital goes there (anywhere) to find opportunities, (2) The emergence of the “undeveloped” world represents an unprecedented usage of commodities and energy, hence his focus on the producers of commodities and energy, and (3) domestically in the US he seeks out traditional value plays with a moat (such as Budweiser) and new brands utilizing technology innovatively to create a brand (e.g. Apple). On top of that, he keeps his war-chest open to more sophisticated instruments such as derivatives in order to take any opportunistic positions (such as the truly mad sub-prime mortgage construction).

The overall investment theme is further backed by seven distinct categories of investment strategies wherein industry analysts are leveraged. In other words, Burbank is an asset allocator with the difference that he defines his asset categories according to the macro-trends he perceives (as opposed to say a simple and permanent differentiation of bonds, equity, and cash) and then utilizes a bottoms-up value orientation for security selection within his top-down analysis. Presently he categorizes the strategies into (1) Global Strategy, (2) Long Short Strategy, (3) Materials Strategy, (4) Agriculture Strategy, (5) Energy Strategy, (6) Special Opportunities Strategy, and (7) Basic Materials All Cap. It is safe to say that these are themes that will probably continue through his lifetime by virtue of the extended and fundamental nature of these macro trends. Hence, akin to his current investments, even his future investments, whether they are into public or private equity or derivatives, will be classified into one of these categories, yet expand the category as the world and his perception of it changes (for instance, his recent expansion beyond the BRIC into the GCC region for opportunities).

Manager Background:

Prior to founding Passport Capital in 2000, Burbank learned about spotting macro themes as a consultant for JMG Triton Offshore, Ltd., a 1 billion dollar market neutral arbitrage fund. Right before that he gleaned value-oriented investing prowess as a Director of Research for ValueVest Management, a 150 million dollar long/short global value fund. For his academics he earned a B.A. in English Literature from Duke University and an M.B.A. degree from the Stanford Graduate School of Business. He famously did odd jobs through his college years, ranging from a hot dog street vendor to a door-to-door cookware salesman (the latter he classifies as the hardest job he ever did). In his leisure time he enjoys baseball – of course, mainly for the strategy rather than the athletics.

QUOTES

“Price is a liar.”

“Now, the American government is so mis-regulated and had mis-managed its own finances that you have to look at the country as an emerging market. Essentially, you shouldn’t buy a security in an unstable market if you don’t understand how it may change. That is what I think we are going to be dealing with for the next 5 or 10 years.”

“Cash is most valuable when others don’t have it.”

“When someone loses money they want to sell something. When they are making money they want to put more money in.”

“I believe in persistent resource scarcity, meaning that this is the way it’s going to be for a long time. Let’s just say the next 10 years. We’re the biggest [investor] because we started focusing on the Middle East in ’06-’07 after having spent a lot of time on the billion-plus economy of China, a billion-plus economy of India, and then I thought I better start paying attention to a billion Muslims in the world.”

[At age 30], “I borrowed $50,000 worth of credit cards in 1994 and started trading in the market, really as a test to see if I enjoyed doing it and if I wanted to pursue this…This was really a hypothesis for me. Maybe I was interested in it, maybe I would do this, investing, instead of business.”

“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.”