Riordan, Robertson Tiger `Cub,' Profits From Japan's Recovery
May 4 (Bloomberg) -- Quinn Riordan's sixth-floor office in central Tokyo faced a clutch of
abandoned buildings for seven years as he bet on real estate. Now, construction work takes
up much of the view.
``When you can see things going on outside your window that's been a frozen asset for six
or seven years, it makes you think that things are getting better,'' said Riordan, 40.
He cut his teeth as one of Julian Robertson's proteges -- his so-called Tiger `Cubs' -- at
Tiger Management LLC, the world's biggest hedge fund in the late 1990s before wrong-way
bets against technology shares led to its demise.
Riordan, principal of Singapore-based Elmwood Advisors Pte, has invested in undervalued
and overlooked companies that stand to gain from Japan's economic revival, such as Sun
Frontier Fudousan Co. and Toho Co. It's paid off.
The $210 million Alpha Pacific Qualified Fund, which Elmwood manages, has climbed 30
percent in the past 12 months.
That compares with an 18.9 percent return in the Eurekahedge Japan Long/Short Equity
Hedge Fund Index, which tracks 90 such hedge funds, according to Eurekahedge, a
Singapore-based hedge-fund research and publishing company. Since Elmwood started in
October 2004, the fund has more than quadrupled in size.
Riordan, who named his firm after the street where he grew up in Wichita, Kansas, has
profited from bets on medium-sized companies, between $500 million and $2 billion in
value, that have been largely neglected by analysts at major brokerages.
Overlooked
Of the fund's five biggest holdings, four are covered by just one or two analysts, data
compiled by Bloomberg showed.
The best performer among the fund's top five has been Sun Frontier, which renovates and
leases office buildings in central Tokyo to smaller-sized companies.
The company, traded on the Jasdaq Securities Exchange, is valued at about $755 million, or
a 10th the average for the 500 biggest companies in the Topix index. Shares of Sun
Frontier, which raised its full-year profit forecast by 41 percent in February, have almost
tripled in the past 12 months.
A rebound in property demand is being fueled by a recovery in Japan's economy, which is
set for its longest post-World War II expansion after suffering three recessions since 1991.
Commercial land prices in three of Japan's biggest cities, including Tokyo, rose for the first
time in 15 years last year.
Sun Frontier is followed by just two analysts, and neither Nomura Holdings Inc. nor Daiwa
Securities Group Inc., Japan's two biggest brokerages that each cover about 650
companies, has analysts that publish research on the company.
`Sweet Spot'
By comparison, Toyota Motor Corp., Japan's largest company by market capitalization, is
covered by 22 analysts.
``I think the mid-cap space is our sweet spot,'' said Riordan, who worked at Tiger's Tokyo
office from 1997 to 1999 and now splits his time between offices in Singapore and Tokyo.
``The people you're meeting are closer to the front line. If you go to Toyota, you're just
meeting some guy who's probably not.''
Some investors say property stocks are already overpriced. Real-estate shares in the Topix
trade at 40.3 times companies' forecast earnings on average. That's twice as expensive as
the average for all companies in the broader Topix index of companies listed on the Tokyo
Stock Exchange's first section.
``Real-estate shares are already pretty expensive and my three- to six-month view on the
sector is pretty cautious,'' said Soichiro Monji, who oversees about $28 billion as senior
strategist at Daiwa SB Investments Ltd. in Tokyo. ``So even if the economy is strong, I
expect that premium to come off.''
Best and Brightest
Riordan, who is fluent in Japanese, first came to Japan as a study-abroad student during his
junior year at Duke University, where he earned a bachelor's degree in economics in 1987.
He also holds a master's degree from Johns Hopkins University.
Out of money, Riordan earned a trip back to Japan after college by winning an essay contest
on U.S.-Japan relations. His essay was essay titled ``America, Ganbatte Kudasai,'' which
means ``America, Please Try Your Best.''
Once
Mori,
Bank
to be
in Japan, Riordan worked as a political secretary for former Prime Minister Yoshiro
researching issues such as international trade relations. In 1988, he joined Industrial
of Japan as a loan officer, becoming the first foreigner in the lender's 100-year history
hired as a full-time employee.
Throwback
After his stint at Tiger, Riordan spent more than four years running Bamboo Capital LLC, a
hedge fund he founded with another Tiger `Cub,' Paul Spieldenner, before starting
Elmwood.
Riordan, who was interviewed twice in April, said he takes an ``old-school'' approach to
hedge-fund investing. The strategy was pioneered by Alfred Winslow Jones,a former Fortune
magazine editor and investor, over 50 years ago, and popularized by Robertson.
It involves buying shares of companies that are undervalued and short-selling those judged
to be overpriced. When hedge funds short a stock, they sell borrowed shares on the bet
their price will drop. The fund can make a profit by buying them back at a lower price.
Toho, which produces films and operates movie theatres, is one example of a company
Riordan says is ``underappreciated'' because most investors have underestimated the value
of its real-estate holdings, which the company hasn't adjusted for appreciation for more
than 50 years. The shares of the Tokyo- based. The shares of the Tokyo-based company
have fallen by 18 percent this year.
Money for Nothing
Even so, Riordan said he doesn't stick to contrarian bets indefinitely -- a lesson learned
from witnessing Tiger's collapse. Robertson lost billions holding so-called value stocks and
betting against the technology bubble during the late 1990s.
Robertson, who made his reputation buying shares of companies that were undervalued
relative to earnings, posted returns that averaged 39 percent a year between 1980, when
he founded Tiger with $8 million, and 1998.
He liquidated the fund in 2000, just before technology shares collapsed, after losing $8
billion in net assets in 1999.
``The market can move against you for much longer than you can be in the business, which
turned out to be the case'' at Tiger, said Riordan. ``I have more appreciation for
momentum and sometimes the weakness of fundamental research. I'm not patient enough
to sit around and wait for something good to happen.''
Not all of Riordan's investment ideas have paid off. The Alpha Pacific Qualified Fund, which
can borrow twice the amount is has in assets for investment, has lost 2.3 percent in 2006.
After posting a 36 percent return last year, it was hurt by a 33 percent plunge in the Tokyo
Stock Exchange's Mothers market for start-up companies.
Livedoor
The drop was precipitated by a raid in January on Livedoor Co., an Internet services
provider, on allegations of falsifying earnings and the subsequent arrest of founder
Takafumi Horie.
Riordan says his experience and the relationships he developed in the 16 years that he's
lived in Japan -- among them with Hiroshi Mikitani, the billionaire founder and chief
executive of Rakuten Inc., Japan's biggest online retailer, as well as the son of Japan's
biggest private real-estate developer, Minoru Mori -- will help him stay ahead of the curve.
``It's a source of information most people don't have,'' Riordan said. ``It's about being
plugged into information and I think I have a little bit more insight than the average person
to what goes on behind the doors at Japanese companies.''
Last Updated: May 3, 2006 11:07 EDT