Wednesday, July 15, 2009

Buffett Buffet: A Pricey Meal

Salida Capital, a small Canadian fund, will pay $1.68 million (which goes to charity) to dine with the Oracle in New York. But who picks up the tab?

07/15/09 - 12:54 PM EDT


Eric Jackson

For months, some of the brightest financial minds in the world have been debating whether there is imminent threat of inflation thanks to the monetary easing and other programs sponsored by the Federal Reserve in response to the economic crisis.

Until now, we've yet to see rampant inflation take hold, except in one corner of the economy: How much it costs each year to take Warren Buffett of Berkshire Hathaway(BRK.A Quote) to lunch where the proceeds go to the Glide Foundation of San Francisco helping the homeless in that city.

Last week's winner, Salida Capital -- a small Toronto-based fund whose performance dropped 66.5% last year -- won the annual auction to pay $1.68 million -- or about 0.6% of its total assets currently under management -- for eight people to lunch with Buffett at the Smith & Wollensky steakhouse on Third Avenue in Manhattan in the next eight months.

The Buffett Buffet

Year Winner Winning Bid
2000: Anonymous, $25,000
2001: Anonymous, $18,000
2002: Edward Jones Co. and 2 Anonymous, $25,000
2003: David Einhorn, Greenlight Capital, $250,100
2004: Jason Choo, Singapore, $202,100
2005: Anonymous, $351,100
2006: Yongping Duan, California, $620,100
2007: Mohnish Pabrai, Guy Spier, Harina Kapoor, $650,100
2008: Zhao Danyang, China, $2,110,100
2009: Salida Capital, Canada, $1,680,300


That large tab was 20% less than what last year's winner paid, Zhao Danyang - a Chinese hedge fund manager. However, Salida's winning bid was 67x more than the $25,000 paid in 2000 by the first winner of lunch who chose to remain anonymous.

It's remarkable how rapidly and steadily the price of this lunch has gone up in the last decade:
There are a few striking things about this list:

  • As the media coverage has grown over time covering the winner, the price paid has gone up exponentially.
  • With the exception of David Einhorn winning in 2003 - when he and his fund Greenlight Capital had a much lower profile than today - and the broker Edward Jones in 2002, you've likely heard of none of the winners.
  • Until this year, a company had never won the charity auction (with the exception of Edward Jones in 2002 -- although this was split three ways -- so Edward Jones itself only spent $8,333). This year, the winner was clearly identified as the firm Salida Capital and not its individual fund managers.

If you're Buffett, what's the harm in all this? After all, it's all benefitting the Glide Foundation. Since 2000, $6 million has been raised for the charity. Buffett must find it ironic that lunch with the greatest value investor in the world is now the subject of such speculation. The only concern I would have, if I were him, was being associated with a "winner" who used the lunch for questionable purposes.

Last year's winner, Zhao, was questioned by some after he mentioned to the press that he had recommended a stock (WuMart) to Buffett during their conversation. He touted it as the Wal-Mart(WMT Quote) of China and was reported to make a $14 million profit after the stock jumped 25% based on its association with Buffett's name. Zhao denied that he had been pumping the stock.

This year's winning firm, Salida Capital, describes itself as following a top-down global macro strategy, meaning that it invests based on macroeconomic themes, rather than following a bottom-up value investing approach that Buffett is famous for.

Its president, Courtenay Wolfe, was hired about a year ago with a mandate to better market the firm and raise assets. Her background is sales and marketing, with her biggest career achievement according to her bio being launching Dell's (DELL Quote) Web-based sales effort in Canada in 1996 at the beginning of the first tech bubble.

When Wolfe was asked about the questions she planned to ask Buffett during the lunch, she said she didn't know: "We have eight months now to figure that out."

Asked about what her fund's investors thought about spending almost $2 million on the lunch, Wolfe said she believed that they thought it would make Salida's managers make wiser investment decisions -- sort of like taking a two-hour off-site training course with good food.

What's clear is that Wolfe figured out winning the Buffett lunch auction was a great way of getting the name Salida Capital in front of potential investors globally. Whether the media exposure will actually lead to more assets for the company remains to be seen. According to Canada's national newspaper, the Globe & Mail of Toronto, the company is eligible to write off the $1.7 million expense as a charitable donation.

There have been conflicting reports on whether the firm's managing directors will pay the $1.7 million themselves or whether the firm will pay. If it's the firm, Salida's existing investors are footing the bill either through their management fees or as an actual operating expense of the firm (e.g., if the firm's managers designated the cost as "research" to help make its managers better investors). I contacted Courtenay Wolfe earlier this week and asked her to clarify which of these scenarios best described how Salida would pay for the lunch. She responded that it was "personal partner capital" paying for the event.

If I were an investor in Salida, and I found out that I was even partially paying for this lunch -- even through management fees, which technically would still be "partner capital" -- I would be upset, as I would interpret the managers' actions as seeking to raise the firm's profile and its assets (not make them smarter managers -- although Wolfe argues that the "firm, funds, and therefore investors will benefit from" the lunch -- or to simply help a charity, which they admitted they didn't know before bidding).

I would see part of investment being spent with the purpose of growing the firm's assets, which will benefit the firm's managers but have no impact on the future performance of my remaining assets under management with them.

It's undeniable that the winner of these lunches will continue to get at least a day of heavy media exposure. Neither Buffett nor some regulator is going to stop that. However, as the purpose of the lunches is to benefit the Glide Foundation, Buffett should require all future winners to pay personally for winning bids and refrain from mentioning any stocks discussed during the lunch to avoid questions like these in the future.

Hedge fund investors (or the due diligence consultants they hire to examine potential managers) should also educate themselves more on just how a fund charges for its expenses. For example, are they charging a “training session at a glamorous resort with spouses” as “research” or “training” which is intended to benefit investors but appear more like boondoggles. Sometimes it’s not black or white but gray. However, if you see recurrent evidence of fund managers taking liberties in how the charge certain expenses to investors, it should be a big red flag to potential investors.

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