Christopher Hohn, CFA
Founder, Managing Director & Portfolio Manager
Christopher Hohn is the Founder, Managing Director and Portfolio Manager of TCI Fund Management Limited. He is based in London and has over 20 years’ experience in the investment industry and has managed equity portfolios for over 15 years. Mr. Hohn was the Portfolio Manager of the European event driven investment strategy at Perry Capital from 1997 to the start of 2003. This strategy employed capital in the main Perry Partners L.P. fund from 1997 to 2003 and from June 2000 to May 2003 in the separate Perry Capital European Fund ("PEF"). Mr. Hohn led the establishment of a London office for Perry Capital in 1998. From 1994 to 1995 Mr. Hohn was an Associate at Apax Partners in London and from 1989 to 1991 he was a Manager in the Corporate Finance Division of Coopers and Lybrand in London. Mr. Hohn graduated from Harvard Business School in 1993 with an MBA (high distinction) and from Southampton University (UK) in 1988 with a BSc. in Accounting and Business Economics (1st Class Honours). He is a CFA Charterholder.
Greg Dowling, CFA, CAIA
Chief Investment Officer, Head of Research, FEG
Greg Dowling is Chief Investment Officer and Head of Research at FEG. Greg joined FEG in 2004 and focuses on managing the day-to-day activities of the Research department. Greg chairs the Firm’s Investment Policy Committee, which approves all manager recommendations and provides oversight on strategic asset allocations and capital market assumptions. He also is a member of the firm’s Leadership Team and Risk Committee.
Greg Dowling (00:06):
Welcome to the FEG Insight Bridge. This is Greg Dowling, head of research and CIO at FEG, an institutional investment consultant and OCIO firm serving nonprofits across the U.S. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic, and philanthropic minds to provide insights on how institutional investors can survive and even thrive in the world of markets and finance.
Greg Dowling (00:36):
Today on the FEG Insight Bridge we have, Sir Chris Hohn, founder, and portfolio manager of The Children's Investment Fund, also known as TCI. Mr. Hohn founded TCI in 2003, after spending the previous 7 years as a portfolio manager at Perry Capital. The TCI Master Fund manages over $40 billion, including $6 billion for The Children's Investment Fund Foundation, also known as CIFF. It is a charity endowed by Mr. Hohn and has become one of the world's largest charities focused on improving the lives of children. CIFF has also become one of the world's largest funders of climate change initiatives. Although one of the most successful hedge fund investors, Chris received a Knight Commander of the Order of St. Michael and George, not for his investment prowess, but for his charity work. Join us today as we discuss his background, his investment style, activism, charity, and climate change.
Greg Dowling (01:40):
Big FEG welcome to Chris Hohn of TCI funds. We're happy to have you here.
Chris Hohn (01:48):
Thank you, Greg. It's my pleasure.
Greg Dowling (01:50):
Before we get into what you do now, maybe we can start off with how you got into investing.
Chris Hohn (01:57):
My interest in investing started at Harvard Business School, where I did an MBA--graduated in 1993. I just fell in love with the investment classes, everything about business and the intellectual stimulation, and I realized that the sheer breadth of opportunity in public equities was perhaps the purest way to capitalize on intellectual knowledge as well as have fun. That was my MBA at Harvard which turned me onto investing
Greg Dowling (02:28):
Before your MBA at Harvard, what did you think you would do with your life?
Chris Hohn (02:32):
I actually thought I would be a doctor when I was 18. I did all the sciences. I had an interest in service from a young age. But I quickly realized that I didn't like the sight of blood [laughs] and that would be a major disadvantage for that profession.
Greg Dowling (02:48):
That does make it hard, for sure. Do you remember your first investment you ever made?
Chris Hohn (02:52):
I actually didn't have any money to make investments in Harvard. I had to fund myself through school. Yeah. The first investment I made when I graduated was into a nursing home operator, actually, of all things. I wasn't like Ken Griffin [laughs] trading in the dorm room. [laughs]
Greg Dowling (03:08):
[laughs] It's funny, cause you hear all these stories and it always sounds like people are investing their graduation or bar mitzvah money in the colleges. It's okay if you haven't made an investment until maybe after the age of 15 or 16. You can still do okay.
Chris Hohn (03:25):
Greg Dowling (03:25):
So after a pretty short time--call it about 10 years you were private equity, you went over to Perry, another well-known hedge fund at the time--you launched The Children's Investment Fund, also known as TCI. What was the original idea behind TCI?
Chris Hohn (03:42):
I had been seven years at Perry Capital cutting my teeth in primarily European equity investing. I managed several billions of dollars for them, including in a separate European fund. I really felt that I could do better without the constraints of other people and the constraints of what was very much a special situations shop. I felt a real soul urge to become unconstrained. Also, more importantly, to create an environment where I could work with the people I enjoyed working with. There was actually nothing to do with money. I was making lots of money, and when I started TCI nearly 20 years ago, I put about $150 million into the fund on day one. So it was not a money thing. And the other aspect is I wanted to have purpose and meaning to what I did, and dedicating part of the profit share and my part of the profits to a new charitable foundation was part of the motivation as well.
Greg Dowling (04:36):
That gets back to always wanting to serve. It sounds like you've had a passion for service longer than you've had a passion for investing.
Chris Hohn (04:44):
I think that's right. I remember when I was at Perry, after a few years, they paid me a $10 million bonus. I didn't have so much money then, I had maybe, I don't know, $1, $2, or $3 million and I immediately gifted it to a charitable foundation in the U.S. A charitable foundation that I set up. I felt that I didn't want the money [laughs]. It sounds strange, but I always felt that I was a custodian rather than owner. I always had more pleasure and meaning from philanthropy than from consumption, which I never really understood.
Greg Dowling (05:16):
Well, we'll get to that a little bit more. You're actually not just Chris, you're Sir Chris because of all of the great things that you have done on the charity side, not just the, the investment side. So we're going to touch a little bit about that a little bit later, and also where your charity has kind pivoted into another area. TCI the fund, I mean, very different--maybe not as different today, but at the time everything was long and short, and you were long and short as well, but you were much more concentrated and much longer term than most hedge funds. Why did you decide to gravitate that way? Because that was different back then.
Chris Hohn (05:53):
Yeah, honestly, I never really believed in the long/short model. I've been substantively long, we've had shorts periodically, but they've been overall 0% to 20% in aggregate. They've underperformed markets, so they've added alpha if you like, but not absolute dollars. And so one of the big advantages of if you are long something you can collect carry. When I say carry, I mean carried interest, I mean the natural intrinsic value underlined of the security, whatever that number is--10%, 20%--you you've got that as a tailwind. When you're shorting things, you have to be right on the timing, which is bet on investor psychology and it's just much more difficult. As well as asymmetrical risk/reward. And so the logic of shorting never really made sense. I think a lot of funds do it to justify a high fee structure or because investors expect it of them. I followed always what I believe to be the best way to make money. If you go far back, people like Michael Steinhardt, if they liked stocks they'd be long, if they were bearish they'd be short, but they didn't tie themselves into a straightjacket to be long and short and market neutral. I always had the willingness to follow my convictions, wherever that would lead
Greg Dowling (07:05):
The other difference, especially coming from more of an event-driven type of manager like Perry... They were certainly multi-strat, they did a lot of things, but you're often playing an event.
Chris Hohn (07:15):
Greg Dowling (07:16):
A merger. And it's a specific point in time in the near future, not far out. Where you have a much longer-term view on your investments, correct?
Chris Hohn (07:25):
That's right. When I started TCI, I did do quite a bit of special situation investing. I was steeped in that culture. I understood it. But, again, it's limiting because it means you don't necessarily find the best businesses to invest in, you find those which might be having a catalyst, undergoing change, and that doesn't necessarily make the best investment. By putting yourself in a box, you're just increasing your degree of difficulty, which Warren buffet said, there's no prizes for doing that [laugh]. Take the path of least resistance and widen your universe. So if there's a great company that you can just be long, do it, you're meant to do that.
Chris Hohn (08:02):
Say, "Oh, Microsoft's going to go 10 x up, but it doesn't have a catalyst" [laughs]. There's no event. Yeah. So I did evolve from that limiting way, but it definitely added value to TCI that I understood special situations investing. Many things where we had a catalyst, an event, and a good company like Time Warner Cable, Deutsche Börse, you know, many, many investments where we could combine the two, we did. But we've really moved away from ascribing importance to catalysts at the end of the day, the fundamentals of the catalysts.
Greg Dowling (08:35):
I love that Warren Buffet quote, it's one of my favorites, where he talks about, "It's not the Olympics, you don't get points for difficulty."
Chris Hohn (08:41):
Greg Dowling (08:42):
One of the better investment quotes out there. So what then becomes now the key criteria for a TCI investment?
Chris Hohn (08:50):
We're totally focused on Fortress business models, where competition is limited and very difficult and so they have very high barriers to entry. This is the classic Warren Buffet mindset, quality companies, but they come in many industries. We've thought a lot about what the real barriers to entry could be. They include physical infrastructure, which is [inaudible]. So we own a lot of railroads in North America and Canada, toll roads and airports, cell phone towers. These types of physical infrastructure could be a network effect where a winner-takes-all business or a natural monopoly--Google is such a business in search, which you only need one search engine and you'll just pick the best. Stock exchanges are like that. Visa is like that. A big network effect.
Chris Hohn (09:37):
Another major barrier to entry is high customer switching costs. The cloud, the computing world is like that. Because once you go into, say, the Microsoft cloud as a corporation, they customize the software, your IT development learns that particular system, your data gets embedded there, it just becomes very, very difficult and expensive to switch. You are locked in. So that's another barrier to entry, high customer switching costs.
Chris Hohn (10:05):
Intellectual property is another. We own a modest position in a Taiwan semiconductor company where they have such high intellectual property they have a 80% market share and growing in advanced semiconductors. Another is brands, can be a powerful barrier. We own the rating agencies Moody's and Standard and Poor's as examples of powerful brands where their parallel monopolies installed base effects and contracts such as the aftermarket business of Safran, the world's largest aircraft engine maker. Could be contractual barriers to entry. But we're very focused on moats, which are hard to disrupt. Many industries are being disrupted, and the moats of the past are not necessarily sustainable.
Greg Dowling (10:47):
Do you then have to be early to figure out that they'd have the moat or wait for a time where they maybe fall out of favor? Everybody who does investing would love a great company that's got a duopoly or a monopoly. And does that also mean that you end up being a little bit more concentrated? So talk about how do you find these companies when everybody else is looking for these companies? And then how do you think about sizing them?
Chris Hohn (11:11):
We have figured out a lot of industries which have these high and sustainable barriers to entry and we pretty much ignore all other industries. You won't find us being invested in retailers or commodity manufacturing banks, which we consider bad businesses, so we don't focus our time. We focus on a limited number of industries that we really understand and that we've done decades of work on and we understand them and research them in great depth. Once we're convinced, we stick with them long term. And so we don't need hundreds of ideas. Yeah. We're not churning our portfolio on a daily basis, like many funds. We might hold a stock 5 years, 10 years. You know, one of the important parts of our strategy is we're long-termists. We really believe in the power of not trading and low turnover and just buy and halt--as long as the company is delivering and the business models isn't at risk of disruption. Experience, you know, we've been doing this 20 years and we've really understood.
Chris Hohn (12:10):
I've been investing in rails for decades and been on the board of a class I railroad. We've been doing this a long time and so we know what are good companies and bad companies. But of course, valuations change as well. And moats change. We used to love consumer staples, but they became richly priced with a low return. We used to like media content companies, but the moats with the streaming became severely weakened. It's not to say disruption can't occur, but you've got to be alert to it. And we're always enlarging our universe that we look at, we have a quality list of a few hundred companies and we just continuously review and research them. So we are deeply fundamental with our trading. We keep things very simple. The strategy works. [laughs]
Greg Dowling (12:55):
It's worked quite well. I understand that, it makes sense to me that you have this great experience which leads to pattern recognition. And if you're doing that combined with deep, deep research, that could help. Many managers will talk about, "Hey, we're concentrated, we hold a 3% position." You hold--like Google, for example, at least at the time for this recording, is almost 20%. You hold sizable positions when you find something that you have--you have very high conviction.
Chris Hohn (13:19):
That's right. Yeah, we think about concentration as an important way to add value to our process. It was George Soros who said, "It doesn't matter if you are right or if you're wrong in investing, all that matters is how big you are when you're right and how big you are when you're wrong." That's so logical, but most people can't develop a conviction and they have extreme diversification. We've always been able to spot big outliers. Consistently, the best ideas have been the biggest positions. We've used concentration to great advantage. But of course it's a double-edged sword, and you shouldn't use it if you don't have that level of conviction. If there are times where you don't, then be diversified. It only makes sense where you have outsized risk/rewards and conviction. That's our formula, if you like, for how we size positions. We size them as a function of risk/reward and conviction.
Chris Hohn (14:10):
So, you know, we can all write down, create a financial model. Let's say this, say that, here's analysis. People say talk is cheap, but there's a concept of conviction. Okay. It's almost intuition concept. Yeah? Beyond the mental mind, the linear mind. How do we develop that? Is this an interesting secret source experience? And it's evidence--how do we know if a business model is really strong? Well, there was some clues given by the investment genius Warren Buffet. He said a really strong business has pricing power. They can raise prices above inflation-meaningfully above inflation. And we see that in the rating agencies. We see it in the rails. We see it in Google. We see it in Microsoft. So we look at the evidence, and we look at the scope for being wrong. Some industries are more risky than others.
Chris Hohn (15:04):
Railways. We we've always loved railways, they've been steady compounders. We've never loved airlines. They've been very risky investments. So one of the things about our strategy is we actually don't like a risk. [laughs] We take risk, but we want low-risk businesses that will get our capital back. That's why we don't seek the highest return. If we'd invested in Tesla, we'd have been much richer, but it's a risky company for us. Increasingly I think of us as a "stay rich" fund because the business models are so strong and we always are very focused on valuation as well. There are many investors who will buy a company, independent of valuation, as long as it's a good company despite that, but we won't. One of the things interesting things about Google, it's always been a very cheap or reasonably priced stock, it never got overvalued. I don't know why, but it didn't. That always gave us a good bedrock. So we have common sense. [laughs]
Greg Dowling (16:00):
In talking about that, maybe just kind of set parameters a little bit. We're talking about buying great companies at a reasonable price. You're not a deep value investor.
Chris Hohn (16:08):
No, I've done that investing, but oftentimes you're entering into places where there is a questionable business model, there is a governance problem, or a country which has high political risk. We would rather play in a sphere of confidence. Yeah. And we've gravitated towards quality. We believe in what Buffet said that currently cheap but questionable business is inferior to a fairly priced, high quality company, because the bad businesses surprises you on the downside and a good business on the upside. Whether people will accept it or not, forecasting the future in any precise manner isn't really possible. So we have to anchor ourselves to the business models. Usually great businesses aren't always--are generally not very cheap, but they can be, you know, because... I'll tell you what gives them sometimes a cheapness, is governance problems. So we have found a lot of valuation arbitrage in great companies which have questionable governance, because they might be in a jurisdiction that many people don't want to go to, like France, where we bought Safran at 8 times earnings, which compounded at 25% a year for us for a long time.
Chris Hohn (17:14):
It could be a special situation where bad governance is becoming good governance like Airbus when it started to privatize. That was a fantastic investment. We did a lot of privatizations over the years, like Aena, the airport group in Spain, where we quickly doubled and tripled our money from the IPO because the government of Spain privatized it and basically gave it away, we bought a [inaudible] IPO position of about 8% of the company. Or there might be management issues, bad management. So we've been activists. In our early days we removed quite a few CEOs over time. And so those are things, imperfections of governance, which can create mispricing that actually we're okay with, in some cases, if we think we can understand it better than other people or affect change. A good example is Google, where one reason Google was cheap is investors thought that the founders didn't care about shareholders, that they wanted to do--invest in the latest, crazy [inaudible] or flying cars or whatever, and it was never going to be run and they'd never give you back cash.
Chris Hohn (18:16):
I spent time with Larry Page [inaudible] and I came to an opinion that he was a very competitive guy [laughs] and he was very clear, he wanted to make money. He'd surrounded himself with some smart people like John Doerr on the board. And the thing that we saw as a real inflection point was when the founders stepped down from management and they stayed on the board but they handed over the reins to professional CEO, gave them a huge compensation package, subject to stock price, and they started to buy back shares. Last year $50 billion, soon to become $80 to $100 billion. And that all stemmed from handing over the reins and stepping off the management. So that managerial change was a very clear catalytic change in governance that led to this big valuation discount starting to unwind. And so we do have expertise in governance that we've developed over the years and the ability to be long term helps us capitalize on that.
Greg Dowling (19:13):
You know, one of the other levers that you have or tools in your toolbox--and you mentioned it earlier--is shareholder activism. When do you decide that you need to be active? There's a cost to that, right? So what's the decision point for that?
Chris Hohn (19:27):
I'd say frequently it's in something we already own where a problem arises. So we owned Safran and they tried to buy a company at a crazy price with shares that were very undervalued and not give us a vote. We were so convinced we were right, we ran a very hostile campaign, aggressive campaign to stop the deal and cut the price. So hostile the selling company sued us for $100 million dollars personally, me personally, in a Paris court. To cut a long story short, we forced the board to cut the price by 40%. So they still bought the company, but 40% cheaper, we stopped them using shares, only cash, because the shares quickly doubled, validating that it was undervalued shares. They gave us a vote, helped by a few profit warnings in the company while we were trying to blow the deal. They were doing a stupid thing.
Chris Hohn (20:13):
That's one example. You know, another, to take a more recent example, Canadian National is a 10% holding for us. We had held a 4% holding for some time, we liked the company but it kept underperforming and underperforming operationally and financially in share price performance for some years. And unexpectedly, they bid for Kansas City Southern in competition to another shareholder we have with Canadian Pacific. And we thought, "This is crazy, now. They'll never be allowed to buy it. The regulator will never allow it because there's too much overlap. And they're facing a great risk if they buy it and then are forced to divest it--it could be tens of billions of shareholder money down the drain." And so we just concluded that the CEO wasn't up to the job and ran a proxy campaign. We filed an EGM. We doubled our position at very cheap prices because the shoulders were scared that they were actually going to buy it and have to divest it. So the price fell about 20% and we doubled our position. The company called us opportunists [laughs], which was true--
Greg Dowling (21:11):
Chris Hohn (21:11):
--in this case. So a low share price, but that's what we meant to do. And then we proposed a new CEO and new board members who ran a slate. And in the end, the board, I think they were persuaded. The largest shareholder, with 15% of the company, is Bill Gates and made the board ousted the CEO. A new CEO, a woman, to run the company, allow $5 billion of share repurchases, slashed a huge amount of costs, started raising prices, and the stock has made a big uplift in value. It's another case of bad governance. So good company, bad governance, those are the cases where we'll get involved, particularly those types of cases.
Greg Dowling (21:47):
And I guess ideally you don't have to, right? In a perfect world. It's not like you're going into every investment doing that, it's only as a last gasp.
Chris Hohn (21:54):
It's easier to climb onboard a moving train. Activism is really hard [laughs] and you only want to do it if you... You have two ways to win. Yeah, the company is a great company and this is icing on the cake, because it's unpredictable, whether you can succeed. And we we've had cases in the past with change of CEO, but the new CEO that came in was worse than the last one [laughs]. So anyway...
Greg Dowling (22:20):
I was just curious. Oftentimes there's a great legal expense for activism, there's all these things. But in addition, usually whoever is being active, they're called all these horrible names in the press. "Opportunists" is probably the best thing you can be called. Does anybody ever thank you afterwards, if you've created value? Have you ever gotten a thank you for what you do?
Chris Hohn (22:38):
Safron management did later thank us, because objectively we slashed the price, so how can they complain? Another classic case was when we put up for sale, we [inaudible] Aegon to put ABN AMRO Bank up for sale with 1% of the shares and management that were really hostile to us. And in the end, 70% of the shareholders voted for it. It was sold for close to a $100 billion, all cash. But actually, yeah, nobody thanked us. [laughs].
Greg Dowling (23:04):
Chris Hohn (23:06):
Certainly not the three buyers who later went bankrupt.
Greg Dowling (23:09):
It can be a thankless job, but the nice thing is that you have this tie-in to your other passion in charities. So I wanted to spend a little bit of time on the charity, kind of what it's done historically. And then I wanted to talk a little bit just on climate, because that's been an area where you focused a lot of time and attention recently. So why did you do decide to tie investments to a charity and what has the charity done initially?
Chris Hohn (23:35):
It was actually my ex-wife's idea that we should be public about philanthropy to encourage others. In fact, she said she wouldn't support me in the new fund if I didn't do it publicly. And it caused a bit of difficulty in fundraising, because at the time there were activist funds called--one called Pirate Capital [laughs], so the Children's Fund didn't really cut it in.
Greg Dowling (23:59):
Chris Hohn (24:00):
We were later called a wolf in sheep's clothing, but I think it's very important to have purpose and meaning. If you talk to young people, they'll tell you that's what they want. Yeah. They don't really care about money, they want meaning and purpose. And they want sole connection, mode, par excellence, or obtaining that, and all the fulfillment and happiness is service and giving. I intuitively understood that, but we had pushback from a lot of investors who said, "Look, we don't care if you get rich and spend your money on whatever--fast cars, prostitutes--but not charity, that's weird." They said to me [laughs].
Chris Hohn (24:43):
So anyway, I think we realized that, Greg, I didn't really take much notice of what people thought because most investors cared about one thing, which is what I always loved about the investment business. It was meritocratic. It didn't matter what the color of your skin was, whether you came from a poor family, a rich family, it didn't matter. All that mattered was: could you make money? That rule never changed in all my time in investing. And that's one of the reasons I went into investing, because I knew I had an aptitude in pattern recognition, but I didn't have political skills [laughs]. We couldn't say, "Well, Steve Schwarzman, the founder of Blackstone said, "People give us money because they like us." No one ever said that to us [laughs].
Greg Dowling (25:27):
Chris Hohn (25:29):
It's a commonly stated thing that money doesn't make you happy. But people then say, "Well, what does make you happy?" [laugh] Many still search for it. I know so many wealthy people in my industry, very unhappy. I've always found a fulfillment and meaning from the service side. And so we started--the first few years we started compounding at 40% a year. I gifted $2 billion of incentive fees to the charity and turned it into about close to $9 billion. And we've given away $3 billion so I can make money. We focus on children's health in poor countries, Africa and India, even rich countries, it was little bit [inaudible] we were a little bit of Robinhood characters [laughs].
Chris Hohn (26:13):
We did a lot of basic things, malnutrition, contraceptives in Africa, neglected tropical diseases where we have very high value for money. As an investor, I look for a return on investment. For $10 you can avoid an unwanted pregnancy, half the pregnancies in Africa are unwanted. It's a crazy statistic. That's one reason why population is projected to grow from 1 to 4 billion by the turn of the century, which is an impossibility in terms of sustainability. For $50 of therapeutic food, you'd save a life. Yeah. It's very, very high return on investment in public health. Not so many people are doing it other than Bill Gates. And so we always found satisfaction and we were sort of an activist investor as well. You know, private equity approach and as a philanthropist.
Chris Hohn (26:57):
The other area we got into was climate change. Very early on, more than 15 years ago, because I saw that the soils were going to dry out through drought, which is happening. A third of the U.S. is structural drought, many, many parts of Africa. And and as that occurs, crop yields deteriorate. And as food prices go higher and higher, you get more malnutrition. So that was the logic of why I got into climate change.
Greg Dowling (27:22):
And that's also bled over to your investment approach a little bit. I wanted to ask this question--forgive me, I'm taking the devil's advocate approach here--but in a truly mercenary, meritocracy investment world, why should I care about a company's carbon footprint?
Chris Hohn (27:39):
Regulation and taxation are inevitable. In Europe there's already a very large carbon taxation called the emission trading scheme that means that heavy industry who doesn't have any mitigation to their carbon is paying fines of billions of euros a year. If you are a coal-fired power station, you don't run, because you're outcompeted by cleaner technologies because of the carbon tax that you have to pay, whereas they don't have to pay it. Regulation or emissions in Europe put laws that say the internal combustion engine will not be permitted to be sold during 2030 in the UK in 2035 in that range for the EU, and carbon regulation of emissions is beginning, litigation is beginning. A landmark litigation last year where a Dutch court ruled that they had to cut their production in half by 2030. Hard ruling. They just received--board of directors are just being sued by charitable activists for breach of fiduciary duty.
Chris Hohn (28:31):
And there's a war now happening. And in many companies--I'm seeing this in the railroad industry--realize it's in their self-interest to advocate for regulation. Sounds counterintuitive, but they realize that if they don't have regulation, they'll be at a first-mover disadvantage, and they realize that regulation is coming. So trucks recently in the U.S. got a very aggressive emissions regulation. And as I said to the CEOs of these railroads, "Do you really think they're regulating aggressively emissions of cars, trucks, and they're going to forget about railways?" They say, "No, we're on the list." So I say, "You better start now." And so they collaborated. So we're seeing a movement there, but it's needed some persuasion. We've filed many contested AGM resolutions asking for climate action plans. A year ago, we were rejected by the shareholders of the Union Pacific Railroad, where we asked to publish a plan laying out how they would reduce submissions.
Chris Hohn (29:24):
The shoulders voted against me because they said, "Well, the company has a target." I said, "But they don't have a plan. They have a 2040 target, but [laughs] they have no plan." So a really simple concept that we pushed and pushed was that companies should have a climate action plan to reduce emissions. And we were thrilled to see yesterday that the SEC has announced that climate action plans to reduce emissions are now going to be mandatory for U.S. companies, because how are you going to move forward if you don't have even a plan? So we're seeing change coming.
Chris Hohn (29:53):
But it's in the company's self-interest. Employees don't want to work for a dirty company. Investors want to avoid it. The cost of capital is much higher for a dirty company because people realize that sooner or later, regulation and taxation is inevitable. And it's already happening. Canada's going to introduce a carbon tax, it's clear, and states are going to introduce different regulations. Yep, it'll happen at the state level in the U.S. And your customers are going to ask, "Show me your carbon footprint." Young people care, customers care. We're convinced that it's in a company's best interest. In the case of the railways, they're so much more fuel efficient--four times more fuel efficient than trucks--it's a business opportunity, the greener they are, because companies are going to take transport off trucks and onto rail if they can demonstrate a lower footprint. But they've got to move away from diesel as a fuel to synthetic fuels or electrification or hydrogen and become as green as possible.
Greg Dowling (30:42):
So you rolled out the Say on Climate Change. What is that?
Chris Hohn (30:46):
So there's three components to it. One is an AGM resolution to personally instruct a board of directors to publish their emissions. Two, publish a climate action plan to reduce those emissions. And three, have an annual vote on it, like the Say on Pay approval or disapproval vote. So the first two of those in the U.S. were made mandatory by the SEC. They made it mandatory to publish emissions and a climate action plan. Now the annual vote is a concept to...an approval or disapproval vote to create an accountability mechanism on management to make sure their performance is delivering. Because a plan is just a plan. You say, Greg, "I'm going to go on a diet. I'm going to eat salad, go on my treadmill every day, lose x kilos in a month. And I say, "That's a great plan. But, Greg, every month, your weight's going up." [laughs] So it's the performance that matters not the plan.
Chris Hohn (31:36):
And so we need to measure you and, if you're failing, to hold you to account--including voting against directors. But the problem with the concept is in certain jurisdictions--in particular, the U.S., because there's so much index money who have no climate expertise--that investors rubberstamp. Whatever the management say or the board recommends, they support it. The only way around that is where there is failure to go for disapproval votes. Okay. So don't ask for an approval vote only file for a disapproval vote. And the other thing that's been necessary is to hold companies to account on the nature of their plans. So there's Ceres, who is a U.S. NGO that manages Climate Action 100, the hundred largest asset managers who are supporting action on climate change. They have benchmark press practices of what a plan should contain. To cut a long story short, we've filed these [inaudible] climate resolutions on over a dozen companies--Moody's and Standard & Poor's--and they adopted it. So they have an annual vote.
Chris Hohn (32:30):
Canadian National, Canadian Pacific, they adopted it. Unilever has adopted it. Royal Dutch Shell, Nestle, Aena in Spain, Banksy, Eurotunnel, so many companies now are doing it. And actually, the UK is going to make it mandatory too, which is actually where it all has to end in regulation. It can't be the domain of charities and NGOs to do all this heavy lifting. That charity fund, a U.S. NGO that started up called As You Sow, which refers to the biblical reference to karma: as you sow, you shall you reap. They started filing AGM resolutions when some [inaudible] churches lent them their shares from their pension fund [laughs]. But AGM resolutions are going to be increasingly aggressive to hold boards to account, remove directors, and the SECs very [inaudible] allow pretty much all climate resolutions. And investors care about this because the end investors, the pension funds, realize that climate change is going to impact them in the long term. And it's happening. The long term is not that long. The longer people defer action, the more pain it's going to be. To meet the Paris Agreement, companies have got to reduce emissions by 7% a year net of growth. When in fact, in aggregate, corporate emissions are rising. There is a collective failure of the corporate world to take action because governments believe that voluntary actions will get the job done, but it's wrong.
Greg Dowling (33:56):
It's always easier to say than do, for sure. We're running out time and I wanted to ask you a few other questions. You have such a great passion for investing and charity. Do you have any other hobbies outside of investing and charity?
Chris Hohn (34:10):
I like soccer, I'm a supporter of Chelsea [laughs], which is having some [laughs] governance problems of its own [laughs] at the moment.
Greg Dowling (34:19):
Chris Hohn (34:19):
I like reading and I'm very interested in the spiritual world, that's another major passion. I'm not religious, but spiritual. I meditate on a regular basis. But I like--yeah, nature. I like going into nature and stilling the mind. Those are my other passions.
Greg Dowling (34:38):
Well, we certainly have a few Chelsea fans here in the office and I've heard a lot from them in the past year after some of their success. They've been a little bit more quiet recently with the whole oligarch issue, but a great team. Because you're such an avid reader, any book recommendations on investing? What are some of your favorite investment books?
Chris Hohn (34:57):
I like the biography of Warren Buffet, Snowball. I think that's a great book on his life. Books on some of the great icons, Jean-Marie Eveillard, The First Eagle. Books on George Soros, The Alchemy of Finance and Reflexivity. Seth Klarman's early work--it's now outdated. But The Outliers is a good book. Joel Greenblatt's book--there's many,
Greg Dowling (35:21):
Those were all great books. There's so many books, it's always great to get the right books to read, because there are some crazy books out there on day trading and flipping stocks and real estate. Those are the wrong books. What you just named are some foundational books.
Chris Hohn (35:34):
Charlie's Almanack about Charlie Munger, that's quite a good one too.
Greg Dowling (35:38):
That's an excellent one. Absolutely. I've enjoyed this immensely. This was a lot of fun. I will say this, that if we can knight rock stars, we should be able to knight people in charities. I love the work that you're doing, and we also appreciate the work that you're doing for your investors too, so thank you so much, Chris.
Chris Hohn (35:58):
Thank you, Greg.
Greg Dowling (36:00):
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