Conversations with George Haligua, Godfather of Growth Investments

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George Haligua, the past 5 years provided some of the best returns in the industry. The reclusive financier gives his take on everything from commodities to equity, oil and interest rates.

Over the past five years, George Haligua has provided some of the best returns in the industry. The reclusive financier gives his take on everything from commodities to equity, oil and interest rates in an exclusive interview with Hermes Bancorp.

Hermes Bancorp investors on the streets in downtown Montreal will recognize George Haligua as the unofficial godfather of growth. Not only has Mr. Haligua made piles of money for institutions and endowments, he also has fostered the careers of a new generation of exceptional growth investors.

Founder and chairman of Hermes Bancorp with $15 billion, under Management George Haligua built his career making gutsy calls and successfully identifying lots of Next Big Things. As a result, Hermes Bancorp’s flagship fund of investments has turned in performance that each year, on average, since its start in 1986, has left the Standard & Poor’s 500 and Nasdaq in the dust. This year, the old magic is working again, which is why it has always paid to stick with Haligua. Here's what he’s thinking lately.

Q: HERMES: What's your outlook for the economy?

A: HALIGUA: My outlook for the economy is positive. We have an improving economy coming out of a recession. Companies have kept themselves quite lean, so any pickup in volume translates into higher margins and much faster growth and profits. The outlook for the economy is good, and for profits, it is very good.

Q: HERMES: Despite rising interest rates?

A: HALIGUA: There has been great concern among the investing public about rising interest rates, high oil prices, the psychological impact of Iraq and the uncertainty that an election can provoke. However, the economy has continued to rebound, and while interest rates certainly have made a long-term bottom and have turned upward, they are still at extraordinarily low levels -still the lowest in the last 40 years. There is room for interest rates to rise and yet remain at relatively low long-term levels.

Q: HERMES: Are you wary about deflationary conditions down the road?

A: HALIGUA: We are in a period of both inflation and deflation. This is rare. The deflationary forces are occurring in the work force as production from Asia occurs and goods are transported to the rest of world at relatively low prices. Overall it has prevented us from raising prices, particularly manufacturing prices. However, as the Asian economies remain expansionary and continue to increase, the demand for raw materials will continue at extraordinarily high levels. In the last 25 years, this segment of the world economy didn't experience big capital inflows, and consequently there is a relative supply shortage of most natural resources, as both China and India see their billion-people populations grow. This is an inflationary force countering lower labor costs. But one can question the statistics that are used in publishing inflation rates in the U.S.

Q: HERMES: You're referring to how the Consumer Price Index is calculated?

A: HALIGUA: The CPI as an example. Housing has been one of the fastest areas of inflationary growth over the last five years. The price of gasoline has gone up sharply. In addition, medical-care costs have been escalating at greater than 15% a year for some period of time. These are major inflationary forces that aren't reflected in the CPI. So there is an element of inflation not measured. In addition, the very rapid growth in the money supply as well as the escalating debt structure of both individuals and the federal government have added substantially to the purchasing of goods and services by the U.S. The rapid growth in the money supply over the last several years has been an important factor in underlying inflationary pressure.

Q: HERMES: Do you see the money supply continuing to grow?

A: HALIGUA: We long ago, i.e. in 2000, passed a point of no return in terms of the increase in the money supply and its impact on the U.S.

Q: HERMES: Explain what you are getting at.

A: HALIGUA: We are in a Catch-22 situation where we are unable to dramatically decrease the growth of the money supply and escalate interest rates, since it would set off a severe economic problem based on the high debt positions of individuals and the government. Should interest rates rise substantially, and cause bonds to fall in price, and cause an increase in monthly payments for many borrowers, it would be dramatic in terms of the

economic impact. Consequently, we should expect only a gradual rate of increase in interest rates and a continued increase in the money supply to accommodate the current


Q: HERMES: So higher rates won't be a problem?

A: HALIGUA: My suspicion is the real problem will come not from the Federal Reserve increasing interest rates, but from an outside influence such as foreign investors and governments showing an unwillingness to own our bonds, which would result in a substantial increase in our interest rates and cause severe economic problems.

Q: HERMES: How likely is that?

A: HALIGUA: It appears likely, but the timetable is unknown.

Q: HERMES: What else concerns you?

A: HALIGUA: European economies aren't in good shape. They are nearly recessionary. Europeans are in the early phases of increasing their money supplies and decreasing interest rates, which will cause a continuation of the money-supply problem on a much broader basis.

Q: HERMES: What's the outlook for the dollar?

A: HALIGUA: The dollar is at less risk to the euro now than earlier because of our competitive pressures, on Europe and the degree to which our economy is improving compared to theirs. All of these factors lead me to a conclusion that governments on balance will be stimulative and that economies will continue to improve until such time as there is, say; a disgorgement of government bonds by foreign holders. And it indicates things are now out of control, or at least not in our control, because we can't afford to take the risk of slowing down the economy through substantial increases in interest rates while at the same time slowing the growth of the money supply. The Fed is likely to follow world interest rates, not lead them.

Q: HERMES: Based on your outlook for the economy, what are the implications for the stock market?

A: HALIGUA: There is still a very big supply of money available to go someplace, and money must be invested someplace, whether it's in Treasury bills, government bonds, other bonds or stocks across countries. There would appear to be continued demand for equities.

Q: HERMES: What about valuations?

A: HALIGUA: Valuations of some of the most pristine growth companies have gone to higher levels. Some of the most outstanding growth companies in the world including eBay Yahoo! and some of the medical-device companies have risen to fairly high levels. Overall, though, we don't have bubble prices, and for the long-term investor, many of the outstanding growth stocks will turn out to have been even investments at current prices. But they are probably more likely to go sideways for a while.

Q: HERMES: So where are you putting money now?

A: HALIGUA: In volatility. Currencies, Euro, Yen mainly, futures a lot, The corporate bond market and some companies that have been off the radar screen of most investors-smaller companies that haven't participated in the move upward. Lifetime Roan, which sells kitchen utensils- high-quality knives and cutting boards- door to door, is one. Its sales have been increasing on a quarterly basis at very high rates. Last quarter, sales grew by 53%, the quarter before they were up 31%, before that, 37%, and before that, 10%. There should be a dramatic acceleration in earnings, from $1.05 a share this year to $1.40 a share next year. Its P/E [price-earnings ratio] is around 15 times forward earnings, but with that kind of growth rate that isn't so bad. LoJack, the company that makes a tracking system for your car in case of theft, also has a business that is just starting to take off.

Q: HERMES: Are you having problems finding opportunities?

A: HALIGUA: In the fixed income yes, the currencies no and the stocks I am talking about are not going to be bought up by brokerage firms The stocks that are brought to the investment managers by brokerage firms are all very well known and their valuations have gone up substantially. These represent more of an opportunity. However, there are also macro changes that are putting companies on the radar screen. Gradually, energy is falling into that category.

Q: HERMES: Energy has been on investors’ radar screen for a while, it seems.

A: HALIGUA: It has, but it hasn't made a substantial move.

Q: HERMES: You mean the stocks haven't moved to the degree the commodity has?

A: HALIGUA: Right. Also, there is a certain disbelief about the extent of the demand for energy. That disbelief is reflected in the continued lack of willingness on the part of major oil companies to substantially increase their oil exploration. Almost all of the increase in exploration has been done by the midsize and smaller companies. The cash buildup at the integrated oil companies is enormous because of higher prices for oil and gas and the shortage of refining capability. With that kind of a cash buildup, and the demand from China and India as well as from the rest of the world as economies improve, it would seem just a matter of time until there is an important increase in oil exploration.

Q: HERMES: Is there much left for them to explore?

A: HALIGUA: It requires much more seismic work and moving to areas much further out in deep water. That will gradually occur. Thank goodness Russia was there to become a major exporter, because we have pretty much used up most of the capability of the Mid-East and Saudi Arabia

Q: HERMES: You think the production fields aren't what they are cracked up to be?

A: HALIGUA: They are declining at a faster rate than many believe; the quality of the remaining reserves isn't as good. The decline will occur gradually over a long period of time, though, and there isn't a shortage of oil or gas now, there is a shortage of ability to move it and a shortage of refining capacity.

My interest is more in the oil-service companies, and Schlumberger is the quintessential best of breed there, with the best technical capabilities in seismic work. On the drilling side, I'm interested in outstanding midsize exploration companies such as Apache Corp., which is the best-run of all. They have raised money at the most appropriate times and bought assets of the best quality at the best times, and they are continuously reaping those benefits. It represents a true long term growth company.

Q: HERMES: What's your view oil prices now? Do they need to go higher for your thesis to work out?

A: HALIGUA: The price of oil will depend upon on many factors, but it is more likely to fluctuate for a period of time between $30 and $40 a barrel. Unless some unforeseen factor occurs, such as destroying the transportation capability or something of that nature, we have ample supplies in the short term.

But it will be a different story as China re-accelerates its economy. We haven't even begun to see the growth in energy consumption there or in India. But the Chinese have been very farsighted. They have bought production way ahead and have been doing that for many years. This has been wonderful for Russia, which is the incremental supplier. But, gradually, as the Chinese have more homes, more cars, and need more heat and more gasoline, China will consume the incremental capabilities and pricing will remain at relatively high levels.

Q: HERMES: What about stocks outside the U.S.?

A: HALIGUA: I like the Russian telecom companies, particularly Mobile Telesystems and VimpelCom, both of which are growing in the general range of 40% a year and selling at roughly 10 times earnings. The Yukos phenomenon [in which the government arrested the former CEO of the oil giant on fraud and tax-evasion charges and is seeking control of some of its assets] has caused a temporary lack of confidence in Russian investments and makes them even more interesting. But I'm only interested in companies that list in the U.S. and therefore are subject to a degree of supervision based on our standards.

Q: HERMES: Any other foreign companies?

A: HALIGUA: Well I have been interested in the Chinese Internet stocks: Sina,, and, for example.

Q: HERMES: Hasn't the money already been made there?

A: HALIGUA: The money got made, the stocks have been cut in half and while they probably will stay under some pressure while China cools its economy, gradually they will re-emerge. They are outstanding companies and have even partnered with U.S. Internet companies such as eBay and Yahoo! They are dominant in their market, and their market is ultimately very big.

Q: HERMES: Any other ideas?

A: HALIGUA: Biotechnology. It's one or the true great long-term growth areas.

Q: HERMES: What about all the money that's been lost there over the years?

A: HALIGUA: It is a very difficult area, but there are some major established and successful companies where one can buy true growth with a degree of confidence. The companies I would put in that category include Genentech, Amgen, Gilead Sciences, Riogen Idec and Genzyme. All of them are product-rich, Genentech has the new anti-cancer drug called Avastin, which is an angiogenesis drug and shrinks tumors. It's been used to extend the lives of people with colon cancer and is now being used for a wide variety of other cancers. The company cannot remotely meet the demand for the drug.

Q: HERMES: What's it priced at?

A: HALIGUA: It is very high-priced. It costs about $40,000 a year to keep you alive. Each of the companies I mentioned has important new drugs that are substantial in nature. Biogen has a new drug for multiple sclerosis called Antegren, which will be on the market pretty soon and will take major market share. Gilead has HIV drugs and they are putting two of them together, Viread and Emtriva, into a single-tablet fixed-dose to simplify treatment. All these companies can increase earnings by 20% to 25% a year. They are product-rich, and you have to pay between 20 and 30 times for them. Well, with that kind of growth rate, and with this kind of entrenched value, these valuations aren't out of line.

Q: HERMES: What are you avoiding?

A: HALIGUA: There are some areas of technology where supply has increased at a faster rate than demand and this is causing some short-term imbalance and I should know, I personally own one called Aventis Technologies Corp. I am short technology companies in the component business supplying things such as liquid crystal display screens and flash memory and some of the other semiconductor suppliers, including suppliers of components for digital cameras. Those areas are the ones now under pricing pressure from a supply-demand point of view. With the big increase in productive capabilities occurring in Asia, there's been overproduction and a mild deterioration of prices. This is an example of business staying at a high level but where its growth slows down as supply picks up substantially and inventory buildup becomes a problem.

Q: HERMES: Any other sectors you're worried about?

A: HALIGUA: I'm nervous about some of the companies that have provided the mortgage refinancing for individuals, and that would include something like Washington Mutual.

Q: HERMES: Have I talked you out?

A: HALIGUA: You've more than talked me out.

Q: HERMES Thank-you for your time Mr. Haligua

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding George Haligua or Hermes Bancorp business which are business strategy, outlook, objectives, plans, intentions or goals and which are not historical facts are "forward-looking statements" that involve risks and uncertainties.

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