Richard Chandler prides himself on being a contrarian
investor. Consider his plunge into Japanese bank stocks early
In November 2002, with Japan slipping back into recession
after a decade of stagnation and with stocks at 20-year lows --
the Nikkei 225 index was more than 78 percent below its 1989
peak -- the country's banks were wallowing in bad debt.
Chandler, chairman of secretive Sovereign Global Holdings, and
his brother Christopher, the firm's co-founder and president,
began snatching up shares in the sector, paying $570 million
for a 5.1 percent stake in UFJ Holdings, which had posted a
staggering loss of $9.3 billion in its latest year. The pair
went on to buy more than 3 percent of Mizuho Financial Group as
well as stakes in Sumitomo Mitsui Banking Corp. and Mitsubishi
Tokyo Financial Group (which merged with UFJ in January).
Altogether they spent about $1 billion on their spree.
"The banks were priced for a total wipeout of equity
holders," says Sovereign's broker at the time at Nikko
Citigroup, John Nicholis. "We were advising our clients to stay
away from the sector."
The Chandlers are glad they ignored that advice. Japan's
economy recovered in 2003, the Nikkei has doubled, and the
country's banks have moved firmly back into the black. The
brothers have so far made gains of some $2 billion in Japan and
still hold the stake in Mizuho, the world's third-largest bank
By going into uncharted territory where most investors don't
dare to tread, the Chandler brothers have, in the space of 20
years, grown a family fortune of $10 million into a cool $5
billion -- and they're still in their mid-40s. Along the way
they have made waves by being among the first and biggest
investors in such emerging markets as Brazil, the Czech
Republic and Russia and playing an instrumental -- and
controversial -- role in advocating economic reform and better
corporate governance. They have waged, directly and by proxy,
several bruising governance battles, most notably in Russia,
where their militancy helped get the first independent director
appointed at state-controlled gas giant Gazprom, and in South
Korea, where their two-year campaign at refiner SK Corp. to
oust chairman and CEO Chey Tae Won, who had been convicted of
fraud, ended in failure last year. (The pair still pocketed
some $728 million in profits on their SK investment.)
Sovereign's secretive ways and history of combativeness
arouse fear and suspicion in many companies. In South Korea, SK
portrayed the firm, with no small success, as a foreign
predator interested only in short-term profits. The Chandlers'
record has earned them a reputation as brilliant and daring
investors whose extraordinary discretion falls just shy of
reclusiveness. Intensely private, the native New Zealanders
cherish their ability to maintain near-anonymity, assiduously
shunning the limelight that success brings -- their names don't
even appear on the Web site of Sovereign's main operating arm,
Sovereign Global Investment (see box, page 45). They invest
only their own money in a handful of long-term holdings,
eschewing the frantic trading strategies favored by many hedge
funds. As a result, they have attracted surprisingly little
attention, even from investment professionals. They are unknown
to all but a few in the world of finance.
Until now, that is. This fall and winter, in a series of
exclusive interviews with Institutional Investor -- the first
that he or his brother have given since founding Sovereign in
1986 -- Richard Chandler lifted the veil on the fund's
incredible success story. Even in South Korea, where
Sovereign's former chief executive, James Fitter, campaigned
publicly for support from other shareholders during the SK
battle, the Chandlers themselves never spoke or appeared in
public. Why open up now? By discussing his motivations and
methods with II, Richard says, he aims to give "management
teams that shake when we show up on the share register a
clearer, more balanced view of what we are about."
Chandler is passionate about ethics, but he insists that
Sovereign's corporate governance crusades are a by-product, not
a driver, of the brothers' investing strategy. "We do have
altruistic motives that some investors who are looking for the
path of least resistance find hard to understand," says
Chandler, 47. "But we don't want to be defined by our corporate
governance battles. We are value investors with a sense of
responsibility, not activists."
Sovereign's foray into Japanese bank stocks is a case in
point. "Japan illuminates the way we invest, the principles we
adhere to and our contrarianism better than any other
investment we've made," Chandler asserts. "There was no
research, no price-earnings ratios, basically no standard road
map or Global Positioning System for investors. The scientists
Richard spoke to II in his new Singapore office, which is
decorated with fauvist-style oil paintings by his mother,
Marija. He spends three winter months here, far from his Monaco
home, to prospect for new investments. The brothers are
searching for targets in India and China, believing that those
markets stand to benefit as the world enters an Asian century.
Three early finds in India: Housing Development Finance Corp.,
the country's largest mortgage lender, in which Sovereign has a
4.9 percent stake as well as a 4.9 percent holding in its
fast-growing subsidiary, HDFC Bank; ICICI Bank, the country's
second-biggest lender, in which Sovereign holds a 4.71 percent
stake, and UTI Bank, operator of the country's second-largest
ATM network, in which it has a 3.2 percent stake. The holdings
together are worth a little more than $1.27 billion.
"I think Asia is the best place to be for the next 20
years," says Richard.
The Chandlers' success is the product of an eclectic but
rigorous approach to investing (see box, page 50). They
consider themselves first and foremost value investors --
Richard's idols include Warren Buffett and Sir John Templeton.
Sovereign traditionally buys stocks at P/E ratios of 3 or less,
although in light of current valuations and the fund's focus on
hot Asian markets, it must sometimes pay far more. (The HDFC
units, in which Sovereign has built up a $627 million stake,
were trading at more than 22 times estimated 2006 earnings last
The brothers also prize scale, believing that the way to
achieve outsize returns is to make a few big bets -- Sovereign
usually holds fewer than ten stocks -- rather than manage a
diverse portfolio. The Chandlers favor large-cap stocks in big
countries. "If you are invested in big companies in big
countries, that means there is a ready audience of
benchmark-following investors who must buy the asset," says
Richard. "By buying big -- going narrow and deep, as opposed to
diversifying -- you maximize your success."
The Chandlers stress the need to be creative in picking
stocks and frequently use unconventional methods to value
assets. This practice is important in what Richard calls the
"delta quadrant" -- transition economies or distressed sectors
where information is not easily available and standard metrics
Earlier this decade, for instance, Japanese banks had no
earnings on which to base multiples, and uncertainty about the
extent of bad loans made it difficult to forecast a turnaround.
So Richard and his analysts looked at market capitalization as
a percentage of assets; on this basis they determined that UFJ
and other megabanks traded at about 3 percent, compared with 15
percent for Citigroup at the time. The Chandlers concluded that
Japan would have to nationalize the banks or reflate the
economy with low interest rates, and bet -- correctly, as it
turns out -- on the latter scenario.
"Most fund managers are focused on what can go wrong rather
than on what can go right and were too afraid to make that
call," says Richard. "We were not."
Additionally, the Chandlers prefer to operate at a distance
from the crowd, steering clear of consensus views. One of
Richard's favorite sayings comes from legendary value investor
and Pioneer Investments founder Philip Carret, who said it is
essential to "seek facts diligently, advice never." Explains
Richard: "Money managers have to account for their actions to
their shareholders, which means they have an undue fear of
underperformance. We invest only our own money. Our investment
decisions are driven by optimism, not fear."
The brothers maintain their primary office and residences in
Monaco, not just for tax reasons but to avoid the herd of
global investors based in London. (Sovereign is headquartered
in Dubai, allowing it to take advantage of the emirate's low
tax regime and midway position between the Asian and European
time zones.) When the brothers were considering investing in
Japanese banks, Richard says, "we specifically avoided visiting
Japan while we made up our minds, since the despair and
despondency of the place could have distorted our long-term
view, even though that kind of distance is conventionally
The chandlers bring to investing a background that is
anything but conventional. The brothers grew up in Matangi, a
rural town outside the provincial city of Hamilton in the dairy
farming country of New Zealand's north island. Their
Chicago-born grandfather had emigrated to New Zealand in the
early 1900s, gone into advertising and married his secretary.
He died of an allergic reaction when his third son, Robert, was
just one year old. Although he never knew his father, Robert
was profoundly marked by the American success literature he had
left behind, notably the books of Orison Swett Marden, an
early-20th-century American journalist and author who inspired
such proponents of "positive thinking" as Dale Carnegie and
Norman Vincent Peale. Robert's sons were deeply influenced by
this worldview as well. "We are great believers in the idea of
having audacious goals, breaking out and doing something out of
the ordinary," says Richard. "It's helped us turn what most
people consider a mere profession into a vocation and, beyond
that, an art, where we frequently put ourselves in harm's
Robert served as a lieutenant on a Royal Navy minesweeper
during World War II. The conflict claimed his two older
brothers, both Spitfire pilots who were shot down. After the
war Robert went to work in a beekeeping business run by some
friends: Edmund Hillary, who with Tenzing Norgay would later be
the first to climb Mount Everest; Hillary's brother, Rex, and
their father, Percy. Robert went on to establish his own
beekeeping operation and launch a business building homes and
apartments. In 1955, during a round-the-world trip with an old
military buddy, he met his wife, Marija, the vivacious,
independent-minded daughter of an anticommunist mayor and
farmer in what is now Croatia.
Robert and Marija returned to New Zealand and spent the next
17 years leading a quiet life and raising three boys: George
(now a retired accountant in Canada), Richard and Christopher.
In 1972, with George at university and Richard and Christopher
in boarding school, Robert and Marija launched the venture that
would generate the family fortune and bankroll Sovereign.
Against the advice of most of their friends but spurred on by
Marija, Robert bought a beat-up two-story building in a
depressed area of central Hamilton, putting 5,000 New Zealand
dollars (then worth $5,975) down and taking out a mortgage of
NZ$195,000. The couple renovated the building, erecting an
elegant colonnade on the outside and a sweeping staircase
inside. Then, to the surprise of stuffy, provincial Hamilton,
they christened it Chandler House and launched what quickly
became New Zealand's most upscale department store.
With Marija scouring Europe and Asia as chief buyer, the
store sold everything from French Lalique crystal to Chinese
rugs and helped transform the neighborhood into an exclusive
shopping district. "People from all over New Zealand came to
buy at the store, which became a tourist attraction and was New
Zealand's equivalent of Neiman Marcus," says Margaret Evans, a
longtime city council member and former mayor of Hamilton.
For the quiet, family-oriented Chandlers, the success
brought visible wealth. It also opened up the world of business
to Richard and Christopher, who is one year younger than his
brother. When not at boarding school in Auckland, the siblings
got involved in the business by selling in the store,
discussing strategy at the dinner table and helping to
reconcile the books on weekends. Most important, they traveled
with their mother on buying trips. "My father is very
values-driven and helped instill in us our ethics, but my
mother is the most brilliant businessperson I've ever met and
taught us many of the key principles we follow as investors,"
The first of Marija's principles was, Never buy something
unless you know to whom you can sell it. The second was, Buy as
much as possible in a narrow range of hot items. That way, when
competitors ran out of stock, Chandler House could clean up.
Marija "was able to identify the best opportunities and be the
master of narrow and deep," says Richard. "With stocks, we do
the same thing. We back our beliefs to the hilt."
Inspired by the success of the family enterprise, Richard
went to the University of Auckland, where he obtained an
accounting degree in 1979 and a master's degree in commercial
studies two years later. There his keen intellect and passion
for corporate governance blossomed. His master's thesis was a
groundbreaking study on corporate board structure and
accountability in New Zealand. Richard sent questionnaires to
all listed New Zealand companies and 200 individual directors,
and concluded that there was a dangerous, widening rift between
ownership and control at most quoted companies. The growing
clout of institutional shareholders could provide a way to
close that rift, the paper added.
"As the son of entrepreneurs, Richard was fascinated by
succession issues, the change from direct ownership to indirect
ownership and how the boards and managements of formerly
private companies that had listed could remain accountable to
owners," says Brian Henshall, founder of the university's
business program and thesis adviser to Richard, the first
graduate on whom he had ever bestowed first-class honors.
The thesis had a lasting impact on Chandler's approach to
investing. In a letter to his former professor in 2004,
Chandler wrote, "While I did not know it then, our project was
the first sign of what would become my vocation, a passion to
see capital managed by the most competent, so that companies
and countries could enjoy sustainable prosperity."
Christopher Chandler also attended the University of
Auckland, earning a law degree in 1982. A technology buff, he
built computers and wrote software programs in his spare time.
Recently married and the father of an infant son, Christopher
is balding, compact and less intense than Richard, a lanky
bachelor with a head of wavy gray hair. Christopher, who
declined to be interviewed, enjoys windsurfing, water-skiing
and riding motorcycles, while Richard unwinds on the golf
course (he has a 12 handicap).
Richard began investing the family's money in New Zealand
stocks while in college, but he honed his skills by taking a
job at accounting firm Peat, Marwick, now part of KPMG
International, in London in 1982. He was assigned to a
50-person team under Douglas Flint that worked on corporate
restructurings, takeovers, stock offerings and bank audits.
"You can't imagine what the City of London was like for someone
from the boondocks of New Zealand," Chandler recalls. "It was
like walking around a Monopoly board."
Flint, now chief financial officer for HSBC Holdings in
London, says he was struck by Chandler's "incredible
intellectual capacity and enormous, almost unbelievable thirst
for knowledge. He used every project we worked on as an
experience to learn a new business model."
Chandler's London days came to an abrupt halt after less
than a year when his father became ill and urged him to come
home and run the family business. "It was a tough, tough
choice, but the business was a going concern and a chance to do
something on my own, so I said yes," he says.
With the New Zealand economy booming thanks to the tax and
regulatory reforms of the country's thenFinance minister,
Roger Douglas, Richard and Christopher aggressively expanded
the business. They opened another Chandler House in Auckland,
bought three clothing factories and launched a chain of eight
upscale fashion stores across the country.
The business thrived, but the Chandler brothers weren't cut
out for the rag trade. "It had three-month cycles, and we were
living with our hearts in our mouths," says Richard. The pair
decided that rather than expand overseas, they should sell the
business and turn to investing.
"Basically, we said, 'Let's do something that we love to do,
not just something that we are good at,'" recalls Richard.
After persuading their parents to go along with the idea, they
sold off the business store by store and in late 1986 launched
Sovereign Global with a modest net worth of $10 million and
enormous reserves of conviction and energy. They also decided
to relocate to Monaco, bringing Marija and Robert, who was by
then back in good health, with them.
The Chandlers made their first investment in Hong Kong,
which both men had visited frequently on buying trips for the
retail business. Spirits in the British colony were depressed
because of the negotiations to hand the territory back to
China, which would conclude in 1987. Real estate prices were
roughly 70 percent below their 1981 peaks. "The feeling was
China was going to take over Hong Kong, so most investors said,
'Who cares?'" remembers Richard. "We had read the treaty, and
it promised the status quo for 50 years, and we believed it."
Even more important, rents were rising, and rental yields
exceeded interest rates by 5 percentage points, which
guaranteed that any investment would more than pay for its
Leveraging up, the brothers put almost all of the family
fortune into four office buildings, beginning in February 1987,
when they paid $27.6 million for D'Aguilar Place, a 22-story
building in the central business district. They put down $5.8
million of their own money and borrowed the balance from the
Hong Kong and Shanghai Bank. Then they took a page from their
parents' playbook and renovated the building, allowing them to
triple rents over three years and generate the cash to acquire
"The Chandlers were the most dynamic, creative clients we
had," says Gerry Kipling, a Hong Kong real estate consultant
who handled the brothers' account at property manager Jones
Lang LaSalle at the time. Eventually, sentiment and property
prices recovered: The Chandlers sold their buildings in 1991
for more than $110 million, boosting their wealth to just over
The Chandlers also invested in stock index futures in Hong
Kong and learned a valuable lesson. "The Hang Seng index was 60
percent property, so it seemed very closely related to our main
investments," says Richard. Because of the volatility of the
market, however, they set stop-losses to protect themselves
from a downturn. On Friday, October 16, 1987, their broker
informed them that their stops had been hit. After deliberating
briefly the brothers ordered their positions closed. They were
glad they did. The following Monday stock markets around the
world collapsed, and the Hong Kong exchange shut down for three
days. The Chandlers managed to get out with a $5 million profit
and have not bought futures or other derivatives since. "We
learned that if you get lucky once, don't press your luck,"
The experience also left the brothers with an aversion to
leverage. Since 1990, Sovereign's debt has averaged less than 1
percent of assets; the fund has not borrowed since 1998. That
enables the Chandlers to take a long-term view of risky
markets, their key competitive advantage at a time when many
investors, particularly highly leveraged hedge funds, invest
with a short-term horizon. "We're just very much a
plain-vanilla, long-only investment fund," says Richard. "We
like investments where the risk is time, not price."
Seeking "to do well by doing good," another of Richard's
favorite aphorisms, the Chandlers in the early 1990s began
looking at emerging markets. "The fax machine was becoming very
popular," Richard recalls. "We felt that value was moving from
real estate to communications. So we researched it and found
that Telebrás was the cheapest telecom company in the
Determining that value wasn't easy. Brazil's hyperinflation
at the time had rendered P/E ratios meaningless, so the
brothers turned for the first time to creative metrics -- in
this case, market capitalization per access line.
Telebrás, the national telephone monopoly, was trading
at about $200 per line, compared with $2,000 for Mexico's
Teléfono de México and an average cost of $1,600
for installing a line in Brazil. The brothers bet that the
government of thenpresident Fernando Collor de Mello would
liberalize the economy and open the country up to foreign
Working with Mark Donegan, then head of the Latin American
emerging-markets desk at James Capel & Co. and now a
partner in the London hedge fund firm Altima Capital, Sovereign
obtained government permission to invest in Brazilian equities.
The firm put $30 million into Telebrás shares in late
1991 and a smaller amount into Eletrobrás, the electric
utility. The Chandlers contend that the purchases made them the
first foreign portfolio investors in Brazil. With Collor de
Mello cutting the budget deficit and granting foreigners
broader access to the stock market, Brazilian equities tripled
in value between January and April 1992. But Collor de Mello
was soon caught in a massive kickback scheme and was impeached
that April. Stocks swooned, falling 60 percent over the next
eight months. Most foreign investors fled the market, but the
Chandlers sat tight. "As far as we were concerned, the shock
was external to the fundamentals of the company," says Richard.
"Telebrás had simply gone from extremely undervalued to
Itamar Franco, Collor de Mello's former deputy, succeeded
him as president and continued the government's liberal
economic policies. By 1993 the market had recovered about two
thirds of its lost ground. When the Chandlers sold out late
that year, they had made a fivefold return on their initial
investment and boasted wealth of more than $150 million,
according to Richard. "We learned to build our emotional
muscles, helping us make it through major market falls and
grind through the trying times without losing our equilibrium,"
he says. Donegan testifies to the brothers' fortitude. "Once
they've taken a view, volatility does not bother the
Chandlers," he says.
Telebrás and Eletrobrás weren't the pair's
only investment. Between 1991 and 1994 the Chandlers made $10
million trading Venezuelan power bonds, Argentinean Brady
bonds, Cuban government bonds and promissory notes from the
Central Bank of Nigeria. This trading would never amount to
more than a minor sideshow to their big equity bets,
After exiting Brazil the Chandlers gravitated to Eastern
Europe, attracted by the region's transition to capitalism.
They bought an undisclosed stake in the Czech Republic's
electricity monopoly, CEZ, within months of the company's
official listing on the Prague Stock Exchange in January 1994.
At the time, many Western institutions could not buy Czech
shares directly, and many individuals were unable to access the
market through their Western brokers. Working with Donegan, who
was then at Morgan Grenfell, and his colleague Mark
Foster-Brown, also now a partner at Altima Capital, the
brothers designed the Czech Republic's first global depositary
receipt program, with CEZ as the star offering. The GDR created
new liquidity, allowing the Chandlers to sell their CEZ stake
at the end of 1994 for a modest gain.
The early '90s also saw the brothers venturing into Russia.
Beginning in late 1993 they bought Russian privatization
vouchers, which had recently been introduced as a vehicle to
buy stakes in privatized companies through special state
auctions. (Russia didn't have a stock market until the June
1995 launch of the RTS exchange.) "For Richard and Christopher
the Czech Republic was really just a stepping-stone toward
understanding the kind of country risk and volatility that
would be inherent in investing in Russian equities," explains
By the end of 1994, the Chandlers had snapped up enough
vouchers to buy a 4 percent stake in Unified Energy Systems,
Russia's largest electric utility; 11 percent of Mosenergo, the
Moscow electricity distributor; 5 percent stakes in each of the
three main production arms of Yukos Oil Co.; a 15 percent stake
in Novolipetsk Metallurgical Kombinat, the country's biggest
steelmaker; and a small, undisclosed stake in Gazprom, the
world's No. 1 gas producer. The metric they used in each case
was simple: The book value of assets vastly exceeded the
companies' market capitalizations. With more than $194 million
invested at the time, the brothers say they were the largest
foreign portfolio investors in Russia.
When Mikhail Khodorkovsky's Menatep Bank took control of
Yukos in early 1996 through a state auction, the Chandlers sold
their stakes in its production companies and invested the
proceeds in a further 10 percent of steelmaker NLMK, giving
them a blocking minority stake of 25 percent plus one share.
They used this to launch a governance crusade -- the first of
its kind by a foreign investor in Russia. After armed guards
prevented their representatives from attending the company's
annual meeting in 1996, the brothers teamed with Sputnik Fund,
which also held a 25 percent stake, and sued in the Russian
courts for the right to appoint board members. "Russia is
really the place where Richard and Christopher's ability to
stomach volatility, their value-spotting talents and their
rigorous adherence to principled investment first clearly came
together," says Charles Ryan, chief executive of United
Financial Group, the Moscow firm that advised the brothers.
Sovereign and Sputnik sought to end alleged transfer pricing
practices, which they suspected NLMK was using to sell steel at
below-market prices to export agents they believed were owned
by the company's managers. Lending credence to their
allegations, NLMK's profits fell from $480 million in 1995 to
just $40 million in 1996, despite strengthening world steel
prices. Although the investors won a series of court cases in
1997, Sputnik -- an outfit controlled by Russian financier
Boris Jordan and backed by, among others, Soros Fund Management
and Harvard Management Co. -- sold its NLMK stake at a profit
before the appeals process was finished. A decade later
Sputnik's actions still rankle Richard Chandler. "We would have
hoped that Soros Fund Management and Harvard would have
recognized the opportunity to set up Novolipetsk as a model of
good corporate governance in Russia," he says.
Jack Meyer, former chief of Harvard Management, declined to
comment about NLMK or the Chandlers when contacted by e-mail.
An aide said George Soros would not comment.
"By taking principled and well-publicized positions
regarding corporate governance at NLMK, the Chandlers advanced
the level of dialogue and understanding regarding shareholder
rights in Russia," says Jim Dannis, a retired former head of
Eastern European investment banking at Salomon Brothers who
advised Sovereign and other dissidents at NLMK. "They were left
to fight this battle alone after every other investor sold
Ironically, the Chandlers did better than their erstwhile
allies, selling their NLMK stake in 1999 for more than the $50
million that Sputnik received and making an undisclosed profit.
They left a lot of money on the table, though. Novolipetsk
Steel, as the company is now known, made a secondary offering
of 7.5 percent of its shares on the London Stock Exchange in
December, raising $649 million and valuing the company at $8.7
The Chandlers' timing on the sale of their two largest
investments in Russia proved a much greater coup. Concerned
that the country's burgeoning market for Treasury bills, which
were known as GKOs and carried interest rates of as much as 100
percent, was little more than a pyramid scheme, they sold their
4 percent stake in UES and their 11 percent stake in Mosenergo
over the summer of 1997, at the height of the first Russian
stock market boom. The amounts they received -- $700 million
and $300 million, respectively -- produced a profit of 416
As jitters over the GKO market increased, Russian shares
lost 50 percent of their value between August 1997 and February
1998. Believing that the country had had a sufficient fright to
pull back from the brink of default, the Chandlers plunged
again into the Russian market that February, investing nearly
$1 billion for slightly less than 5 percent of Gazprom. Among
private investors, only Germany's Ruhrgas, which had a little
more than 5 percent, held a larger stake.
Sovereign's optimism proved premature. Gazprom's market
capitalization, which had plummeted to about $20 billion from
$47 billion at the end of August 1997, collapsed to a low of $4
billion after Russia defaulted on its debt and devalued the
ruble in August 1998. That meltdown left the brothers sitting
on an estimated loss of close to $800 million.
"I could have said to myself, 'I'm a bad investor, I got it
wrong,'" says Richard. "Instead, I said, 'We got in a bit
early, but the value is still there.' Just because the market
deserted Russia, it did not mean that Gazprom was a bad
company. It was a great company supplying 25 percent of
Europe's gas." Indeed, Gazprom held natural-gas reserves worth
a stunning $2.9 trillion.
It was not a profitable company, however. Gazprom posted
losses of $7 billion in 1998 and $2.8 billion in 1999, while
amassing debts of $9 billion. The reason, the Chandlers
suspected once again, was transfer pricing. The utility was
selling vast quantities of gas at below-market prices to a
little-known company called Itera Group that Sovereign and
others believed had close ties to Gazprom chief executive Rem
Vyakhirev and other company directors, who held five seats on
the 11-person board. (The government, which then held a 38
percent stake, had five seats and Ruhrgas, which voted with
management, one.) Gazprom also transferred control of many of
its most profitable production subsidiaries to Itera and gave
management allies interest-free loans that an independent audit
committee of the Duma, Russia's legislature, estimated in 2000
totaled $850 million. "It was a company that was rife with
investor abuse," says UFG's Ryan.
To combat the abuses and release the company's value, the
Chandlers backed a campaign by Ryan's partner, UFG chairman
Boris Fyodorov, to gain a seat on Gazprom's board and oust
Vyakhirev. A former Finance minister and one of Russia's most
prominent reformers, Fyodorov asserted that the company was
plundering corporate assets for the benefit of third
Their stance wasn't without risk. Fyodorov's Siberian husky
was killed by a rare form of cyanide, and Ryan was repeatedly
questioned by tax authorities, according to people close to the
two financiers. These sources say both men believed they were
the targets of a Gazprom-inspired campaign of terror. Neither
Fyodorov nor Ryan would comment on the alleged intimidation. To
calm his nerves, Richard took up golf in 1998 and began to make
annual two-month trips to Florence to learn Italian.
By December 2000, Gazprom had recovered from its lows, but
its market cap still stood at just $6.2 billion, leaving
Sovereign with a sizable paper loss. Chandler and others
familiar with the situation contend that management allies
repeatedly offered to buy Sovereign's stake at a price that
would have given them a profit.
"If we were in it simply for the money at Gazprom, we would
have just taken the money," says Chandler. "But it was not
about the money. In Russia we believed we could change a
culture of fraud by going after the big fish, and that was
At the company's annual general meeting in July 2000,
Sovereign and other minority investors succeeded in getting
Fyodorov elected to the board over a management candidate. By
teaming up with the five government appointees, who were
sympathetic to complaints about management abuses following the
election of President Vladimir Putin in March 2000, Fyodorov
changed the balance of power at Gazprom. In May 2001 the board
removed Vyakhirev as chief executive, kicking him upstairs to
the largely ceremonial position of chairman, and installed
Alexey Miller, then deputy Energy minister, as his replacement.
Vyakhirev stepped down a year later, replaced by current
chairman Dmitry Medvedev.
With Miller, a confidant of Putin who remains CEO, stopping
much of the transfer pricing, Gazprom's share price rebounded.
Sovereign sold off its stake between late 2002 and mid-2003,
posting a 12.5 percent total return on its investment over
nearly four and a half years. It was not the kind of result
that the brothers were used to, but in unseating Vyakhirev they
had made a point -- and saved the fund from a significant loss.
"We finally left after nearly ten years in Russia because we
felt we had done as much as we could in corporate governance
and in shareholder rights," Richard explains.
With assets totaling nearly $1.4 billion, the brothers in
late 2002 made their move into Japan's tottering banking
sector. But even as they were putting the bulk of their funds
into UFJ, Mizuho and other banks, the Chandlers decided in
March 2003 to invest $168 million in SK Corp., the flagship
company of SK Group, South Korea's third-largest chaebol, or
conglomerate. The investment gave them a 14.82 percent stake in
the oil refining company, just below the threshold that would
have obliged them to make a takeover offer. The Chandlers paid
little more than 1 times expected 2004 earnings. The reason?
They bought just days after government auditors announced that
SK had fraudulently boosted profits at its trading and gas
station affiliate, SK Networks, by $1.2 billion. It later
turned out that the unit had covered up a staggering $5.6
billion in losses.
"SK Corp.'s main business was solidly in the black, so we
thought there was very little chance the problem at SK Networks
would be big enough to bring the whole group down," says
Richard, explaining the decision to invest.
The Chandlers also believed that SK Networks' creditors
would help force the resignation of chairman and CEO Chey, who
had been arrested on charges of illegal stock trading in
February 2003 and was later charged with accounting fraud. Chey
was convicted and imprisoned that June. Notwithstanding that
conviction, Chey and his team of executives won creditors to
their side by agreeing to swap $878 million in debt owed by SK
Networks to SK Corp. into equity. Chey was released on bail in
September pending an appeal, and a court subsequently suspended
his sentence, enabling him to return to management. The company
contended that Chey deserved to retain his posts because he had
inherited the fraud when he took over the group in 1998 from
Angered by the company's stance, the Chandlers embarked on a
long and bitter campaign to oust Chey. They proposed a series
of resolutions that Sovereign's thenchief executive, James
Fitter, who left the firm last year to manage his own wealth,
presented at SK's annual meeting in March 2004. The resolutions
would have banned convicted criminals from holding any position
at SK, required a majority of the board to be independent and
created a committee to oversee all third-party transactions, to
prevent SK from using refining profits to subsidize
money-losing affiliates like SK Networks.
The Chandlers rejected a compromise negotiated by Jang
Hasung, an economics professor at Korea University in Seoul and
a leading shareholder rights activist, under which Chey would
have resigned as chairman, given up his board seat and accepted
most of Sovereign's resolutions if he were allowed to stay as
CEO. Jang, who went to Monaco to pitch the plan directly to
Richard, argued that a concession was necessary for Chey to
save face, but Chandler dismissed the proposal, saying it
smacked of "situational ethics" and would not ensure real
change at SK.
"When I saw that a compromise was not possible, I washed my
hands of the whole affair," Jang tells II. "The meeting
illustrated the principles but also the arrogance of the
Chey defeated Sovereign at the 2004 meeting and remained as
chairman and CEO. The Chandlers continued to campaign for
Chey's removal but failed to block his reappointment to the
board in March 2005. Facing a legal ban on reintroducing
defeated resolutions for three years, the brothers sold their
stake for $896 million in July 2005, a more than fivefold
return on their investment.
Sovereign's efforts weren't entirely in vain. After the 2004
meeting, Chey adopted some of the fund's key demands to placate
shareholders. Seven out of ten SK board members are now
independent, and over the past two years, SK has done more than
its peers in terms of raising its dividend, reducing debt,
issuing transparent monthly financial reports and establishing
a committee to oversee third-party transactions, according to
analysts. "Those are all very positive changes, and I don't
think they would have happened without the pressure from
Sovereign," say Marc Goldstein, head of Asian research at
Institutional Shareholder Services in Tokyo.
Nevertheless, the SK experience was a bitter one for the
Chandlers. Sovereign had spent $4 million on a campaign with
the slogan "Stand Up! Korea," arguing that its proposals would
have improved corporate governance for the benefit of the
The brothers themselves stayed out of the public eye during
the campaign. "We felt that if the whole issue had been about
who we are and our performance rather than the principles we
advocate, then the world, being lazy, would just latch on to
how much money we make," says Richard. "What we wanted people
to focus on was the development of economies, property rights,
capital allocation and the good corporate governance principles
that are meant to be creating prosperity for everyone."
In the end, however, Sovereign was vilified by the local
media, politicians and many domestic shareholders as a
rapacious foreign raider. It is largely to combat that
caricature, Richard says, that he decided to speak with II.
Today the brothers' main exposure is in Japan, where
Sovereign has some $3 billion invested. Its biggest holding,
believed by people familiar with the fund to be worth at least
$2.7 billion, is its stake in Mizuho, the world's third-largest
bank, which has more than $1.3 trillion in assets and a market
cap that has soared from $10 billion to nearly $91 billion
since the Chandlers first began investing in it. President and
CEO Terunobu Maeda has spent the past three years integrating
the three institutions that merged to form Mizuho -- Dai-Ichi
Kangyo Bank, Fuji Bank and Industrial Bank of Japan -- laying
off one fifth of the combined staff and building up the retail
business to complement existing strengths in corporate lending.
Analysts expect Mizuho to post record earnings of nearly $6
billion in the year ending March 31, a dramatic turnaround from
the $19.4 billion loss three years earlier.
In addition to their Indian holdings, the Chandlers also
have dabbled in Chinese oil stocks over the past year. Richard
is cautious about China, however, contending that growth won't
necessarily translate into investment returns because of legal
uncertainty and poor corporate governance. "China still has a
long way to go to create trust in the Chinese capital markets,"
The ultimate irony is that after two decades of blazing
trails in emerging markets and out-of-favor sectors, and
becoming fabulously wealthy in the process, the Chandlers now
find themselves heavily invested in some of the most
fashionable markets on earth. So have they lost their appetite
for risk and gone mainstream? Richard insists not.
The adoption of orthodox economic policies has transformed
many emerging markets and reduced risk over the past ten to 15
years, he acknowledges. Asian markets no longer offer many
great value plays, but he believes there is still great
potential for investors who can identify the companies that are
likely to profit from the region's extraordinary growth and
become global leaders.
"Our talent is to understand the long-term potential of a
business," Richard says. And when they do, the Chandlers will
back their hunches 100 percent.
The Sovereign method
Sovereign Global Investment has built a staff of about 20
professionals as its portfolio has blossomed to some $5
billion, but the firm is at heart a two-man partnership.
Richard and Christopher Chandler generate most of their
investment ideas in private discussions that cover everything
from technical analysis and market psychology to macro trends
like the transition to capitalism in Eastern Europe and the
rise of Asian economies. Richard likens their working
relationship to that of another celebrated pair of investors,
Warren Buffett and Charlie Munger.
"I do the analysis and develop the concept," he says. "Then
I take the concept to Christopher and ask him, 'Hey, is this
crazy or not?' A sense of value ultimately comes down to being
able to project a future and see where a business case really
goes in five or ten years. No one I know is better at that than
Since 1991, when they turned to equity investing, the
brothers have retained at least two full-time analysts to
research potential targets. Frequently, given the distressed
state of some of the markets and companies in which Sovereign
invests, the analysts have to resort to what Richard calls
"creative metrics." Brazil's hyperinflation in the early 1990s
made price-earnings ratios virtually impossible to calculate,
so Sovereign looked at market capitalization per access line to
evaluate the national telephone monopoly, Telebrás, and
found it was dirt cheap at $200 per line, compared with $2,000
for Mexico's Telmex.
The fund's staff of researchers, traders, lawyers and
accountants are a group of mostly 30-something professionals
hired from leading financial services firms. President David
Mapplebeck joined Sovereign in 2004 after working in the
enforcement division of Britain's Financial Services Authority
and as European general counsel at Charles Schwab Corp. Chief
trader Pekka Johnson, whom Richard Chandler calls his "eyes and
ears'' in the markets, worked in Asian equity sales in Hong
Kong for nine years, most recently as an executive director at
UBS, before joining Sovereign in May 2005. Investment manager
Derek Sheeler, who also came to the firm last year, had worked
variously as an analyst and portfolio manager at Saudi
investment firm Olayan Group in New York, Gabelli Asset
Management and Wellington Management. The staff like to kick
around ideas over espresso at the well-appointed canteen of
Sovereign's headquarters on the ninth floor of the Dubai
Sovereign usually holds fewer than ten equity positions at
any one time. Though it typically holds its larger positions
for two to five years, the firm regularly trades in and out of
some stocks to test the waters and take advantage of price
movements. In a recent nine-month period, Richard Chandler
says, Johnson has traded some $6 billion worth of stocks. That
includes the sale of Sovereign's 14.82 percent stake in South
Korean refiner SK Corp. and the purchase of stakes in ICICI
Bank and Housing Development Finance Corp. in India, as well as
trading smaller positions in a few Hong Konglisted oil
Once they've done their homework and decided to make an
investment, the Chandler brothers like to move fast. "The
market gives you the opportunity to arbitrage what the
emotional investor will pay or sell at versus the fundamental
value of a company, but you've got to pull the trigger promptly
without hesitating," says Richard. "We've disciplined ourselves
mentally and prepared ourselves in terms of information, as
well as relationships with brokers, to do that." --D.L.
Stepping gingerly into the light
Although Richard and Christopher Chandler say that social
obligations lie at the heart of their investing activities, the
two brothers have remained remarkably private individuals.
On its Web site (www.sov.com), the brothers' Sovereign
Global Investment proclaims its goal to be nothing less than
seeking "prosperity for all by promoting effective capital
allocation and good corporate governance." The firm lists its
core values as honesty, integrity, justice and mutual respect
and vows to live by the golden rule: "to treat others as we
would like others to treat us." But the site avoids any mention
of the Chandlers themselves, saying only that Sovereign was
founded by two New Zealanders.
Richard Chandler acknowledges that the brothers' secrecy
might seem at odds with their self-proclaimed social mission
and devotion to transparency in corporate governance, but as
custodians of only their own wealth, they have until now felt
no obligation to speak publicly.
That stance may have cost them in South Korea, where their
effort to force management changes at oil refiner SK Corp. were
successfully blocked. SK's spin portrayed Sovereign as being
interested solely in short-term profits. Michael Breen, a
journalist and the author of The Koreans, says that Christopher
Chandler had him flown from Seoul to Sovereign's Dubai offices
to discuss ways to boost the fund's image in South Korea.
Breen's advice: "Meet with and court the Korean press." The
brothers, protective of their privacy, never followed it.
It was partly as a result of that experience, and partly in
response to the efforts of Institutional Investor Staff Writer
David Lanchner to dig up the Sovereign story, that Richard
Chandler agreed to give his first-ever interview. His aim, he
says, is to explain Sovereign's history and the importance of
its investing principles. But he declined our request for a
photo shoot and instead forwarded a few polished shots by
Singapore photographer Russell Wong (see Inside II, page 5).
"We are not perfect," say the Sovereign duo in their Web site
manifesto. "We seek progress, not perfection." Still, it seems
they'd rather not risk any blemishes or flyaways.
Although they can seem uncompromising and painfully earnest
to some who have dealt with them, friends say the Chandlers
have a lighter side. "They are extremely serious when it comes
to moral convictions, but they don't hit you over the head with
them," says Mark Foster-Brown, a partner in London hedge fund
Altima Capital, who has known the Chandlers since trading for
them at Morgan Grenfell in the '90s. He and his partner, Mark
Donegan, who also has handled trades for the Chandlers in the
past, bring the brothers and their father, Robert, to London's
Twickenham Stadium whenever New Zealand's rugby team, the All
Blacks, play against England. "It's a moment of pure
relaxation," says Foster-Brown.
A few big bets
Over the past 15 years, a mere five investments have
generated 90 percent of Sovereign's gains.
|Unified Energy Systems
|Mizuho Financial Group
|*Current value of holding.
|Sources: Sovereign Global, Institutional