Wednesday, June 08, 2011

Burbank Contrarian Bets

As a hedge-fund manager who thrives on turbulence in the commodities markets, John Burbank couldn’t have done better than the first week of May.

The prices of oil, metals and other raw materials nose- dived the most in two years as investors retreated from emerging markets amid surging inflation in China and India and political upheaval sweeping through the Middle East and North Africa. For Burbank, the founder and chief investment officer of San Francisco-based Passport Capital LLC, the sell-off is an opportunity. He’s looking to add to the heavy bets he’s made in the frontier market of Saudi Arabia, Bloomberg Markets magazine reports in its July issue.

The Saudi monarchy’s decision to roll tanks into neighboring Bahrain to help quell an uprising -- as well as the rebellions in Libya and Syria -- may give some investors pause. Not Burbank, a hedge-fund manager who made his name by earning a 220 percent net return in 2007 after shorting subprime mortgages.

He sees little chance that the Saudi regime will be overthrown or that crude prices will collapse. As the insular kingdom opens up to foreign investors -- it didn’t permit outsiders to buy Saudi stocks until 2008 -- Burbank says now is the time to plow into the country’s petroleum-rich economy.

He’s acquiring stakes in publicly traded petrochemical companies, banks, construction firms and even health-care providers. The Saudi investments made up about 11 percent of Passport’s $2.1 billion flagship fund, Global Strategy, as of May.

Unorthodox Methods

“The crisis isn’t affecting the long-term reality that this is where the oil is,” says Burbank, 47, a beefy man with a full beard who looks more like a longshoreman than an elite money manager. “We want exposure to the Saudi economy because the prices are very cheap and there’s going to be a lot of growth and higher returns on capital, and that’s something that’s likely to play out over a number of years.”

Burbank’s Saudi trade is right in character for a money manager with a knack for using unorthodox methods to exploit the globe’s scarcity of raw materials. While the commodities market’s two-year rally skidded in the second quarter -- crude dropped almost 15 percent and silver shed 28 percent from April 28 to May 9 -- Burbank says the ongoing development of emerging economies will convert little-known raw material producers into money machines for years to come.

Prospecting Skills

Burbank has little interest in trading commodities themselves, which are subject to price distortions as speculators move in and out of markets. Instead, he wants to make a 10-fold return on his investments by purchasing equity in undervalued companies such as oil tanker operators that are poised to grow as long as demand for raw materials steadily rises.

That often involves unearthing small firms that discover mother lodes of highly sought resources, ranging from potash in Kazakhstan to coking coal in Mozambique.

Passport’s investors have profited from Burbank’s prospecting skills. The Global Strategy fund has delivered an annualized 23.6 percent net return since its inception in August 2000, according to data obtained from Passport investors. The HFRX Global Hedge Fund Index gained 4.3 percent in that span, and the Standard & Poor’s 500 Index rose 0.6 percent.

Burbank is racing to beat multinational companies in Australia, China and India that are hunting for new sources of ore, metals and minerals. Passport reaps big dividends when these large players purchase the output of one of the hedge fund’s companies or, even better, the entire enterprise itself.

138 Percent Return

In 2007, Passport started buying shares in Riversdale Mining Ltd. (RIV), an Australian firm developing deposits in Mozambique of coking coal to be used in making steel. Last year, Riversdale was Passport’s No. 1 holding, even though it had yet to mine any coal from the find in Mozambique and lost $799 million.

Burbank’s gamble paid off when Melbourne-based Rio Tinto Ltd. (RIO) made a $3.4 billion bid for Riversdale on Dec. 6 and later increased it to $4 billion. Riversdale shares soared 138 percent in 2010 and helped lift Global Strategy to an 18.2 percent performance after fees. Passport sold most of its shares to Rio Tinto in the first quarter. In early May, Rio Tinto held 73 percent of Riversdale and planned to delist the company.

Burbank, a somewhat rumpled man who shuns neckties and suits in favor of fleece vests and chinos, has long contended our era will be defined by the acute shortage of resources and the decline of debt-strapped economies in the U.S. and Europe.

Underestimated Damage

“I believe the West is bankrupt and failing and it’s just a question of when,” he intoned in his baritone voice to more than 1,700 attendees at the SkyBridge Alternatives Conference for hedge-fund investors in Las Vegas on May 12.

Burbank’s investment record and outspokenness have won him respect from peers who see him emerging as an elite name in hedge funds.

“He’s an original thinker, and he’s got guts,” says Kyle Bass, founder of Hayman Capital Management LP in Dallas, who was at the conference.

Even so, Passport investors have been whipsawed at times during the past decade. In 2008, Burbank almost lost his firm after he underestimated how much damage the global credit crunch would inflict on emerging-market stocks. Confident his long-term bullishness on commodities producers would be rewarded, he added shares of raw materials companies even as investors exited such positions in August and September.

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