Gerald R. Jordan, Jr. is President of Hellman, Jordan Management Co., Inc., a Boston-based registered investment adviser with $2 billion under management. He began his investment career in 1967 as an analyst and then portfolio manager with Putnam Management Company. He founded Hellman, Jordan in 1978. In addition to the institutional management business, Jerry has been managing the partners' capital and profit sharing accounts since 1978 which were then rolled into The J Fund, a Massachusetts partnership in 1991. Also that year, a companion offshore fund was started. The hedge fund accounts currently total $260 million and are up over 80% net for the first seven months of 1995. Gerald Jordan talked to HFN publisher, Antoine Bernheim, in mid-July, 1995.
Profile of Gerald R
Profile of Gerald R. Jordan, Jr.
Born: April 29, 1939
Education: Harvard College-Harvard Business School
Languages spoken: English
Family: Divorced-Two sons
Last vacation: Bare boat sailing in the Virgin Islands
Last book read: "Without Remorse" By Tom Clancy
Favorite quote: "Don't you know, it's a bull market" - Turkey Partridge in "Reminiscences of a Stock Operator" By Edwin Lefevre
How he best describes himself: "Fortunate
Q. You are having a phenomenal year. Could you tell us where your returns have come from this year?
A. Basically they have come from concentration in investments where we have been either very right or very lucky. When our market-timing model turned bullish last November, in combination with our other systems, our strategy required us to leverage the accounts with an overlay of S&P Futures of 50% to 100% of the underlying assets. In addition, we identified certain growth areas in technology where we felt the earnings momentum was high enough and the stocks undervalued enough where the opportunities were great. Within the tactical approach of having large common stock, long positions, we also bought in-the-money call options. Additionally, we traded successfully some Bond Futures positions. At the beginning of the year, we had a dozen equity positions and I would, from time to time, buy call options on our favorite longer-term stocks when they would get oversold, and trade out of them when they became overbought. I was especially fortunate in having a fair amount of success in the semiconductor area. The maximum bullish posture of the portfolio was around 200% vs. 80% today.
Q. How do you view the economic and monetary scenario over the next year?
A. While we do not have any special insights on the economy, we have historical expectations given the presidential cycle and Federal Reserve policy. We are in the sweet spot of the cycle, where the Fed has eased and the economy is soft. With the presidential election next year, we know to expect, and are already seeing a pick-up in fiscal stimulus. We strongly believe the Fed will be accommodative through 1996 for a number of obvious historical reasons. Over the next year, I expect real GDP will grow 2%-2.5% and that twelve months hence the CPI will be running also in the 2%-2.5% range with the long Treasury Bond probably yielding 5 3/4%.
Q. What is your outlook for the market and industry groups?
A. I have been very bullish on the market since last fall and continue to be so. I think that there is a 40% probability that we are going to see the S&P up over 35% this year. I also think the U.S. market is in one of those extraordinary bull periods. There is no place else in the world for big money to go. The market may be overvalued on a yield and book value measures but not on an earning or cash flow basis. The supply and demand characteristics of the market are spectacular and there is a possibility of the Dow going to 7,000 by the end of next year. Technology will continue to work through the remainder of the year, probably through March into mid-April of next year, at which time I expect to shift out of technology and into domestic growth companies, like retailers, health care providers, etc. Given my expectations on inflation, the economy, Federal Reserve policy and the presidential election, I think consumer confidence and spending will improve next year. Multinational U.S. companies whose earnings have benefited over the past three quarters from a weak Dollar will have the reverse effect on their income statements as the Dollar strengthens. Many U.S. domestic companies which posted disappointing first quarter 1995 earnings should have dramatically improved comparisons, vis-a-vis the multinational companies in the first quarter of 1996.
Q. What companies do you still find attractive and why?
A. Our biggest position has been Intel which I think is one of the most remarkable companies in the world. I recognize that it is up a lot but I agree with Jeff Vinik when he said that at the beginning of the year, technology stocks were grossly undervalued and that today, they are just undervalued. It would not surprise me if Intel sold in 1996 at 25 times my earnings estimate of $6. Given my view on the long bond yield, a 25 times multiple for a company with a ten year growth record of 30% is not an unseemly expectation. Texas Instruments is also an extraordinary situation despite the fact that it has already doubled. TI is benefiting from a number of different product areas, the result of huge investments in research over the last ten years. The stock was a terrible performer as were Xerox and IBM, for the last twenty years. TI's DMD chip could revolutionize the television set monitor industry and produce a huge conceptual play in the stock next year. Again, like Intel, I believe TI is still undervalued. We also have big positions in Merrill Lynch, Tandy, Paine Webber, Ford and Travelers which will benefit from lower interest rates. Further, we had great success with younger companies like Indigo, Netcom and Cascade Communications.
Q. How far along do you think we are in this cycle for semi-conductor stocks and more generally technology stocks?
A. We are probably in the middle of a longer-term cycle. There is a shortage of capacity in the memory area and in many of the component areas. Windows 95 and the Pentium chip are completely changing the face of technology. The same macro-dynamics apply to the semiconductor industry as to the paper industry where prices have remained very firm and companies have finally realized it is better to buy back their own stocks than to invest in paper processing facilities. The big difference is that demand for integrated circuits is growing at 40% with no sign of a slowdown for the next year and a half. As stated earlier, I expect this group to peak by April of 1996, on a relative strength basis.
Q. Could you describe your decision-making process in building up your portfolio?
A. It begins with the economy in an effort to determine where we are in the financial cycle and how that relates to the equities cycle. The point being, we have no interest in being long stocks if we believe the market is full. If so, we will invest in T Bills until opportunity presents itself. Further, if consumer debt is at an all time high, it is going to be tough getting the consumer to be a big part of the picture. However, the primary thrust in building the portfolio is earnings momentum. I may occasionally buy stocks where I think the turn is coming, but if earnings have not turned, I need to have strong revenue growth. I also try and visualize where a particular industry will be in three to five years and what the bottom line of the companies participating is going to look like. I make every effort to concentrate because I know from experience that if I diversify my results will be mediocre. I am a firm believer that any individual cannot really focus and understand more than five or six significant concepts at any one time. Therefore, when I find an idea, a concept, an industry, a strategy that I really believe in, I will concentrate very heavily on that, whether it is an interest rate bet, a stock market bet or an industry play like semiconductors. Further, I will hedge the volatility of many individual holdings to suit my purposes, through a series of complex strategies.
Q. How do you typically allocate your time between research, trading and managing people?
A. I am not very good at managing people and I spend very little time on that. My primary focus is managing money, not people. We are a small firm with twenty-one people, including eight in the investment area. I occupy most of my day in a trading motif. As we have a high degree of turnover, it is very important to me that my trades be executed properly. My research effort typically is focused in the morning or after 4:30 p.m.
Q. How do you control risk in your portfolio and what is your approach to cutting losses?
A. I have a fairly sophisticated software package to assist me in the trading process. I typically cut back overboughts, I sell S&P Futures on rallies, I buy momentum lows. I typically cut back or sell losing positions that are not working, which has not been a good idea this year, but is helpful in declining markets. We have a numerical ranking of relative strength for our stocks and whenever a stock drops into the bottom 40% of our portfolio, we automatically reduce the position.
Q. Your hedge fund accounts have had an excellent record except in 1993 when, interestingly, most hedge fund managers had a record year. What happened then and what lessons have you learned from that experience?
A. Since I started this firm in 1978, I have managed my own money along with our profit sharing accounts. Through 1992, it had compounded at about 41.5%. I believed that whatever trading ability or talent I had could be transferred to trading commodities and other types of instruments where the liquidity was much greater; I was completely wrong. The trading cycles are very different. I can look out three to five years in equities. However, in commodities, while I could conceptually look out one to two years, I would discover three months later that I was completely wrong. It was a terrible experience for me both financially (we lost 20%) and emotionally and it was a bad experience for my clients and my employees. So much so that I have modified the terms of our partnership and I am prohibited from trading in commodities with the exception of S&P Futures and Bond Futures. I am a great believer that you learn by losing and I learned an enormous lesson.u