Michael Sofaer is Managing Director of Sofaer Capital Inc
Michael Sofaer is Managing Director of Sofaer Capital Inc. He began his career as an analyst with the Schroder Group and, in 1980, he moved to Hong Kong to become head of research and manager of Schroder's Asian and International unit trusts. In 1983, he set up First Pacific Fund Management and established the first hedged funds in Asia. He founded Arral Associates Ltd. (now Sofaer Capital Inc.) and organized Arral International Hedge Fund in 1987, just a few months before world equity markets crashed. Since then, that fund as well as Arral Asian Hedge Fund, started in 1989, have both compiled impressive track records. Sofaer Capital currently manages assets in excess of $500 million with offices in London, New York, San Francisco and Hong Kong. Michael Sofaer talked to HFN publisher, Antoine Bernheim, in early May 1995.
Profile of Michael Sofaer
Profile of Michael Sofaer
Born: August 12, 1957
Education: McGill University, double honors in economics and political science
Languages spoken: English, French, Arabic
Family: Married, no children
Last vacation: Thailand
Last book read: The Sum Of All Fears by Tom Clancy
Favorite quote: "Blessed is the man who expects nothing for he shall never be disappointed," was the ninth
beatitude by Alexander Pope, letter to Fortescue,
September 23, 1725
How he best describes himself: "I would not like to
Q. You have been investing in emerging markets for 15 years. After the turmoil created by the Mexican crisis earlier this year, could you describe your current outlook?
A. When markets get hit as hard as they did in February/March, it is usually an opportunity. They have now bounced back quite substantially. As far as Latin America is concerned, I think investors are somewhat complacent at the apparent turnaround in Mexico and the strengthening of the peso. There is a tougher economic, social and political ride ahead and that is also true for Brazil where the jury is still out and the pace of reform slow. We are not long these markets now, indeed, we are looking for shorts, in Mexico particularly. Other emerging markets in Asia have been hit unfairly. They have their own problems but not the ones that have affected Mexico. Many of them are conducting very tight money policies because they became very overheated in 1994 and my own view is that the economies will respond by slowing down as the rest of the world also appears to be slowing. They are also down because of the dollar as they are principally dollar-block countries. They keep the bulk of their reserves in dollars and yet, depending on the individual country, between 30% and 50% of their debt is in yen. However this has been taken somewhat out of proportion because these loans are fairly long-term in nature. Current account deficits are a problem but tight money policy is going to improve the situation.
Q. Longer-term, do you think emerging markets will continue to be looked at as a group and what countries do you see offering the best investment opportunities?
A. They all tend to be lumped together when there is panic. When calm returns to these markets, people will look once again for growth at a price and money will start to flow to those areas which continue to provide reliable long-term gains. I think those countries are to be found more in Asia than in Latin America. Indeed, if you look at all the Asian markets in yen terms, they are selling at historic lows. Over the next twelve months or so, we particularly like Thailand, which has been hit very hard by the currency turmoil and where the current account deficit is a focus for a lot of investors. The central bank is doing exactly the right thing, having tightened credit. Meanwhile, valuations are modest, particularly amongst the banks. We also like Indonesia where corporate earnings growth is likely to be in the high 20's in 1995 and yet the market is selling at 13.5 times 1995 earnings which is at its historic low. There are values cropping up and as these markets have come down, good stocks have come down as well as bad ones. Stock selection is going to be at a premium this year.
Q. What are your current positions in the U.S., Europe and Japan and where do you see opportunities?
A. In the U.S., there is a good deal of optimism with regard to soft landing. We do not expect the U.S. stock market to continue to lead the world. We expect the Asian markets to pick up that mantle at some point in the next few months, perhaps weeks. In Europe, France could be a very interesting area. We suspect that France will stick to its Franc fort policy irrespective of the results of the elections and the French Franc bonds remain attractive and so are equities relative to the bond market. In Germany, we think rates have scope to be cut once more in this cycle given the slow growth of money supply in the last few months. Japan is a real problem. We do not have much of an exposure at all. Japan can rally if the yen does not strengthen any further but we do not have a very strong feeling on Japan because valuations are not terribly attractive. While it is an under-owned market as far as far as foreigners are concerned, it is a less compelling story than the rest of Asia.
Q. Do you think the lack of coordination among central banks and fiscal authorities is the key factor in the current trade frictions and currency instability?
A. No. The only time central bank policies have worked in a coordinated way was the Plaza accord in 1985. What is much more important is the actual economic fundamentals, the United States trade and budget deficits. Basically, there is a savings gap in the United States which the rest of the world has to fund. It may not be large as a proportion of its own GDP but, in absolute terms, it is colossal and it has the effect of sucking up everybody else's savings. That is one of the reasons why interest rates rose last year as all economies were growing at a reasonable rate in a fairly synchronized way.
Q. How do you assess the impact of the diminished role of the dollar as a reserve currency?
A. I do not know other than to say that it is happening now and, in Asia, central banks are moving more towards Japan. There is a possibility that longer-term they become a yen-block rather than a dollar-block but that is an event that has to be played out.
Q. For the remainder of 1995, do you see any strong themes in interest rates and/or currencies?
A. There is plenty of evidence that things are slowing in the U.S. Consequently, the U.S. deficits should improve this year. Japan is in a deflationary mode so there is nothing to push interest rates up and in Germany, the strength of the Mark has a deflationary impact as well. We think we are near the lows in the dollar but we do not see a marked decline of the yen until Japanese domestic consumption increases meaningfully.
Q. Could you describe your investment philosophy, trading style and how you control risk?
A. Our style is top-down, bottom-up. I look at macro conditions with an emphasis on identifying where liquidity is expanding and where it is contracting. We try to marry that up with an assessment of what stocks are most attractive in the individual markets we identify. As far as controlling risk is concerned, we try to preserve capital by watching the technical behavior of the markets and stocks we are in. In 1994, our risk control mechanism had difficulty dealing with the choppiness and volatility of the market but we have addressed these issues as well.
Q. How does your organization function and what individuals or kinds of information contribute to your investment decisions?
A. We have four offices around the world and cover all the time zones. There is always a partner awake during market hours anywhere in the world. My brother Philip covers Latin America and Europe from New York. Bob Rosner, in San Francisco, covers Asia together with three analysts based in Hong Kong. I make the macro decisions in conjunction with the input I receive, particularly from my partners. Their responsibility is to find the stocks that fit the macro picture.
Q. Given the global nature of your investments, could you give us an idea on how you spend your time between monitoring markets, visiting companies and managing people?
A. I spend a great proportion of my time reading, to understand what is going on in the world economies. Visiting companies accounts for a very small portion of my own time. There are five other people to do that but I always visit our core positions more than once a year so that I can conduct my own reality check on what we are doing. As far as managing people is concerned, I am lucky to have a very good team of people who are self-motivated and self-starters.
Q. Where do you want to take your company in terms of size of assets under management or other business opportunities?
A. I am not keen on growing the Asian fund much more than $400 million (we are slightly above $300 million right now) because of liquidity constraints I perceive in these markets. The global portfolio is smaller and we can grow it significantly more. That would enable us to expand part of the team in certain areas, particularly Japan. I have given great consideration to starting a Japan hedge fund but I have been unable to find the right individual to help us run it. Overall, I would say $800 million to $1 billion would be a maximum for us.
Q. You have been very successful at a young age. What is the best advice you would give people who are starting up independent hedge funds?
A. I made a tremendous number of errors particularly when I was even younger. The first piece of advice is "Don't start too young. Don't rush into it. There is really plenty of time." The second piece of advice is "Don't do it alone. Pick your people first. Always have good people around you, because that is what the business is always going to be about."u