What does it take be the manager of the best-returning hedge fund of 2014? For Ralph Kruger, the Arcstone Capital managing director who holds that title, the answer is courage and independence.
Kruger, who took the No. 1 spot with a 225% annual return, according to hedge fund researcher Preqin, spent seven years in the Air Force and flew for American Airlines as captain of a Boeing 767 before turning to finance.
“If you get it wrong, there’s no one around” to blame, he told Business Insider. “If you’re a fighter pilot, you’re pretty independent anyway.”
Today, Kruger splits his time between Mauritius, where he’s headquartered, Maryland, where his children live, and India, where his $US25 million “Passage to India Opportunity Fund” makes its investments. Business Insider caught up with him by phone while he was on a recent visit to Mumbai.
Anyone surprised that an India-focused hedge fund became the top performer in 2014 should take a look at the Sensex, the Bombay Stock Exchange’s benchmark index, which rose about 30% throughout the year. While that can largely be chalked up to investor excitement over last year’s election of pro-business Prime Minister Narendra Modi, Kruger got into India long before the trend began.
A SUNY graduate, Kruger flew in the Air Force from 1980 to 1987, first as a fighter pilot and then as support on an F-71 spy plane. He said the experience gave him “very good insight on how governments interact.”
Then he joined American Airlines as a commercial captain and flew to Rio, Sao Paolo, Buenos Aires, Bogota, and throughout Europe. He also joined the Air National Guard and, from 1989 to 1991, attended the Columbia Business School full-time for his MBA.
Jet-setting around the world taught Kruger a lot about emerging markets, and what to look out for as an investor, things like how inflation looks on the ground.
“In Argentina and in Venezuela, how it looks is on the menu,” he said — restaurant menu prices he saw were written in pencil because they changed so regularly.
But one place Kruger never traveled to as a pilot was India. It was not until later, while working as a portfolio manager at Maryland-based Marathon Capital Management, that he began reading about the investment opportunities there.
When Kruger did pay the country a visit, in 2005, he said, “I wanted to invest my own money in India.”
He was attracted by the market’s untapped potential combined with a surprising resemblance to US markets. For one thing, the BSE is well established (the oldest in Asia, it opened in 1875); then there is the huge number of listed companies in India (some 5,000 total); plus the Securities and Exchange Board of India, which monitors insider trading and fraud; and the fact that India is an English-speaking democracy.
‘The only guy in the room’
Sold on India, Kruger opened Arcstone Capital with a rough start: It was 2008, the peak of the market, and he’d raised only $US1.5 million. (“The idea of starting an international fund that invests in India with $US1.5 million is not a good idea,” he said. “It’s just not.”)
Though he struggled to gain investors during the financial crisis and in its aftermath, he survived. Now he manages about $US25 million for small family offices and private banks, and high-net-worth people. Kruger’s investors all have some international travel experience, which gives them a bigger, more global perspective, and helps them better understand each other. Unlike most institutional investors in India, he spends time travelling long distances to meet with virtually unknown companies. In fact, the majority of stocks he buys have no other institutional investors, domestic or international.
“That’s why it’s inefficient down there,” he said.
Arcstone does its own research and looks for those inefficiencies, which Kruger said usually lie in stocks just below the top 100. In his words: “I’m not the smartest guy in the room, but I’ll tell you what — I like it when I’m the only guy in the room.”
Right now, Kruger’s portfolio consists of about 20 small- and mid-cap companies, each with top-line growth of roughly 20%, bottom-line growth of about 30%, and very little debt. (The average debt-to-equity ratio is about 0.6, he said.)
And it’s going well. Passage to India became the top-performing Indian fund in 2012, and in 2014 it completely stole the show.
‘I read a lot’
Kruger runs shop from his remote Le Morne, Mauritius, home overlooking the Indian Ocean. There, he likes to get in his morning market research early, over a cup of coffee, before going for a run, a swim, or some windsurfing.
It’s a nice escape from the information overload that he says can drag money managers down — lengthy talks with broker-dealers and meetings with investors and managers.
“When I’m sitting in Mauritius, it’s all good information. It’s very little noise,” he said.
He has other thoughts on how to best use his time. “I read a lot. For me, if you wanna be a good investor, read.”
His syllabus ranges from 16th- and 17th-century European history (“This war, that war, this king, that king — they all had unsustainable debt,” as he says), to contemporary Indian politics. And on that front, Kruger sees positive change. A fan of both Modi and Central Bank Gov. Raghuram Rajan, he likens those men to Ronald Reagan and Paul Volcker. “Both those guys are long-term thinkers and doers,” Kruger said.
He applauds Rajan for reducing inflation to levels safe enough for rate cuts. And while Modi critics say the prime minister is acting too slowly on reforms, Kruger believes he’s “getting down in the nitty-gritty, the nuts and bolts, the slow, methodical marathon that real reform needs that isn’t necessarily visible.”
Kruger predicts at least nine years of accelerated growth for India, but admits things are not yet perfect there.
“I mean, India is totally mismanaged,” he said. “There is so much inefficiency — and that’s the opportunity.”