The first question that comes to mind is why the TCI is launched as a social business but does not comprise the social business model in it?? By this I want to say that it is a business open to all kind of investments, including those who may very well be considered socially “irresponsible”. As its CEO, Hohn, explained the fund is NOT an ethical fund and that profit maximization for the shareholders was the primary goal of this business. But, if it is so, why charge 1% of the investment sum for the investors, shareholders, as a fee to be passed at the Children’s Investment Fund Foundation? It has a business logical lack in all of this. If the fund is not “social model” oriented and does not have ethical constrictions then maybe it should not oblige its investors to pay a fee to the foundation. At the end, the TCI has similar fees as top-ranked hedge funds. It can leave it optional to every shareholder to decide by himself to donate or not, and the sum to be donated. Maybe the similarity of fees with other funds does not make The Children’s Investment Fund particularly attractive to investors.
Second point to be made here is that the foundation served as an attraction for different talented young professionals. Hohn confirms this by his statement that money are not the only thing that keep good professionals connected to a business. He notices that this fact is evident across the industry. Nevertheless, another scope of having the social component in the fund is to make sure that more money get to the problems of the society from an industry where tens of billions of profit dollars are gained each year. But the question to be raised here is still why have the social components fee obligatory? Hohn himself acknowledges that some investors were retracted from investing in the fund because of this. They even offered to pay more other fees with the condition to avoid the social contribution fees. They feared that by paying this social contributions fees pressure would rise for them to allocate even more funds to other “social responsible” businesses. By doing this they would increase their costs and minimize their profits. The only recommendation to be made here is to find the “golden balance” between the loss of potential investors and the gain, the brain-gain, of high quality professionals. The last will also serve as an attraction for other potential investors, who are going to be attracted to the fund because it has within high quality professionals who would be a guarantee to success.
A third question is about the value investment approach of the fund. A first question to be made is whether investing in monopolies and oligopolies and running a “social type” business is compatible?? Don’t monopolies harm society? But, as stated above, Hohn has been clear that the fund will not be an ethics-focused business. But, from a business point of view, if you invest in monopolies and oligopolies you have invested in a high value business, with a steady flow of cash but you have also invested in something implying certain risks. Monopolies and oligopolies are subject to governmental and market regulations. Every European state law, even the European Union joint regulations, prescribes sanctions against monopolies and oligopolies. This would mean that in a particular moment the fund could be subject to investigations or the monopoly closed down and so the investments of the fund. Even in the case of natural resources, or other government related monopolies, like the road system for example, still they imply high risks. The risks are that the focus and policies of government can change toward them and, by doing so, their value would suddenly decrease. The same can be said about markets. Free markets do not allow monopolies and oligopolies because they suppress competition. It would be more appropriate to eliminate this kind of investments in order to eliminate the risks associated with them.
Another point here is their philosophy of investing that markets are efficient only on the short term but not in the long term. So, they decided to rely on their views and not relying on the market indicators of what is going wrong. The question to be made here is how can you overcome market forces in predicting what are they going to be without taking into consideration the indications the market gives you? The only recommendation I could give is to “listen” more to market forces before trying to assess how they are going to react.
The question related to the “Investment Universe” of the fund would be: why concentrate mainly on the European market and with mid and short-cap companies? Hohn explained that the long-cap companies were heavily researched and this limited the opportunities for significant disparity between fundamental and market value. This is why mid-caps were very attractive because nobody was paying attention to them. This would give them a low market value but their fundamental value and future potential would be underestimated. Investing in these types of stocks would give the fund large margins of returns and high liquidity also. But the problem here is that the risk associated with them is also very high. The lack of market focus and interest on them means that they have a high risk. Not because they are “bad assets” or have no potential, but exactly because nobody is paying attention to them. Because the focus is on other stocks they could fail to show their potential and not be able to compete with long-caps.
A similar question arises from the “investment Portfolio” of the Children’s Investment Fund. We see from it that they did not focus on portfolio diversification but rather concentrated on a few securities that they presumed would have a high margin of profit in the long term. Hohn himself stated that the top five holdings of the fund will comprise 70%-80% of the fund. The question here is whether this is not a high risk strategy that could give the TCI high margins of profit but also a high potential of failure and bankruptcy? How can Mr. Hohn base all of its evaluations on his belief that the markets would rise over time? Would this not be a factor that affects investors by making the TCI less attractive? It would be more appropriate to diversify the portfolio of the company because this will help in decreasing the potential risks associated with the market. By avoiding risk as much as possible your company will be able to support and pass easily the shocks that occur throughout the markets. If your policy is to base all that you have on certain stocks than when a crisis happens, just like the latest one we are still passing through, your capital is highly affected. If your capital is highly affected than the profit margin of the company suffers the consequences. And the consequences are negative ones, and can even bring you to bankruptcy.
The final remark to be made is why the TCI (in particular Hohn) did not support the sharing between Deutsche Borse and London Stock Exchange? If we see the position of both the actors we are speaking about, they were on top of their competition. In fact, they were the main competitors for each other. Now that they were going to became one, their market share and positioning would be like dominant one. The other competitors within Europe were far from creating any problems to them. In fact, this was the problem for Hohn and TCI. This would mean that the new unit to be formed would have much more control over the stocks and exchange of securities. By being separate burses, the Deutsche Borse and London Stock Exchange competed with each other for companies and security exchanges but now that competition would be over. Now the gap between the market value and potential of the stock would be narrowed and this would not be in benefit of companies like TCI.