2010-04-20 23:01:00.4 GMT

By Anne-Sylvaine Chassany
April 21 (Bloomberg) — On Sunday March 8, 2009, fund
manager Edouard Carmignac was wandering in a paddy field near
Chiang Mai, Thailand as equity markets were tumbling to their
lowest point in 13 years when he decided to bet on stocks again.
In the days after, his firm, Carmignac Gestion, bought more
than 5 billion euros ($6.7 billion) of stocks and indexes, the
maximum it could invest. A week later, he purchased U.S. banking
stocks, including JPMorgan Chase & Co. and Wells Fargo & Co.
“Markets were in absolute despair,” Carmignac, 62, said
in an interview in his office overlooking the Place Vendome in
Paris, between jewellers Van Cleef & Arpels and Boucheron. “The
weekend newspapers were predicting the end of stocks. It was too
good to be true.”
The firm captured the market rebound, which started that
very Monday, and more. Carmignac Investissement, his all-equity,
6.9 billion-euro fund, posted a 42.6 percent return at the end
of the year compared with 27.4 percent for the MSCI AC World
Index. The firm’s biggest fund, the 19.8 billion-euro Carmignac
Patrimoine, which mixes stocks and bonds, ended up 17.6 percent,
after avoiding a loss in 2008, the worst year for financial
markets since 1937.
That performance helped Patrimoine to collect more money
last year from investors than any fund except Bill Gross’s PIMCO
Total Return, according to New York-based Strategic Insight
Mutual Fund Research & Consulting LLC. The firm has tripled its
assets under management since December 2008 to 40 billion euros
and expects to reach 50 billion euros this year.

Top Morningstar Rating

“Edouard Carmignac is not only experienced, he’s very
talented,” said Thomas Lancereau, an analyst at Chicago-based
mutual fund analyst Morningstar Inc., which in February named
him European manager of the year for international stocks.
Morningstar rates Carmignac’s Patrimoine and Investissement
funds “elite,” its highest rating.
The French fund manager was there at the right time with
the right products, as investors went back to basics and turned
to independent managers after suffering big losses with larger
asset managers in 2008, Strategic Insight consultant Daniel
Enskat said.
“Carmignac is the Cinderella story of the fund management
industry,” Enskat said. “He’d remained relatively small for 15
years, but with the credit crisis, everything came together and
there has been a massive snowball effect.”

Favored Stocks

The French fund manager is now buying emerging markets
stocks and commodities, which make up 52 percent of the firm’s
holdings and will drive growth this year, he said. The rest is
mostly invested in U.S. stocks, which should benefit from the
country’s recovery, he said. Europe accounts for 10 percent of
the firm’s portfolio.
Carmignac’s preferred stock is U.S. gold mining company
Freeport McMoran Copper & Gold Inc., which doubled in the past
12 months. He has boosted his stakes in China Construction Bank
Corp., All America Latina Logistica SA, Brazil’s biggest
railroad operator, and MasterCard Inc. He sold Barclays Plc
because growth in Europe will trail both the U.S. and emerging
markets, he said. Wells Fargo and JPMorgan, the two banks he
bought, rose 98 percent and 55 percent in the last year.
In principle, the decision to buy stocks that day in March
2009, when he was finishing a two-week Asian trip visiting
companies, didn’t surprise Carmignac’s 148 employees. The
magnitude did.

‘Balls and Brains’

“An average manager would have taken a gradual approach,”
said Rose Ouahba, head of bonds at Carmignac and who co-manages
Patrimoine with Carmignac. “Edouard doesn’t do things half-
“It takes balls and brains to be good at this job,”
Carmignac said.
In the week leading to the decision, the dozen indicators
the firm was monitoring such as Korean exports and copper stocks
started recovering, said Frederic Leroux, fund manager in charge
of risk management at Carmignac.
“I had urged Edouard to gradually increase our exposure to
stocks, but he would say, ‘Not yet, not yet,’” Leroux said.
The weekend newspapers’ headlines convinced Carmignac
markets had reached the bottom.
Carmignac, who as a child was educated in a British school
in Peru, has stuck to the same top-down approach of focusing on
broad investment themes and making big, concentrated bets he
developed when he started his firm in 1989. His stock-picking
takes its roots in the same trend he spotted 21 years ago:
emerging markets will drive growth and commodities prices up.

Warren Buffett

“The world has always been my natural playground,” said
Carmignac, who has a master’s of business administration from
Columbia University in New York. “Of course, if we don’t
understand, we stay away. But unlike Warren Buffett, we try to
do more than razors and Coke.”
Patrimoine has climbed 32.4 percent in the three years
through March, beating the 5.3 percent gain in its benchmark, a
combination of the MSCI AC World and Citigroup WGBI indexes,
according to Morningstar. The fund is up 60.2 percent over five
years, against 21 percent for the benchmark.
Carmignac says his other key strategy is to use derivatives
to hedge his holdings in difficult times and change gears
quickly in rebounds. The instruments, which Leroux oversees for
Carmignac, have been critical to protect clients’ money during
the past two recessions.

Hedging Plans

The firm started using them after the Sept. 11 terrorist
attacks in the U.S. led to a 26 percent loss for Investissement
and a 3.6 percent loss for Patrimoine in 2001, Eric Le Coz, head
of strategy, said.
In 2002, Investissement posted a 3.7 percent gain, compared
with a 32.6 percent loss for the MSCI AC World. Patrimoine ended
up 5 percent while its comparable index lost 15.6 percent. The
following year, the firm more than doubled its assets under
management to 1.8 billion euros.
“Not losing money during downturns is priceless for
clients,” Le Coz said.
Leroux set up hedges for Patrimoine, including short sales
of the S&P 500 and EuroStoxx indexes, after the fund lost money
in September 2008, when Lehman Brothers Holdings Inc. filed for
bankruptcy. The hedges generated a 20 percent gain, offsetting a
20 percent loss on the portfolio, which the firm had also
redirected to defensive stocks, Leroux said.
“When Lehman happens, nothing makes sense anymore,”
Carmignac said. “There’s no good or bad investment theme.
You’ve got to admit to it and set up hedges.”

‘Tomorrow’s Blow-ups’

The challenge for Carmignac in the coming years will be to
maintain its historic performance, while assets under management
balloon, said Strategic Insight’s Enskat.
“Today’s blockbusters could be tomorrow’s blow-ups, there
have been examples in the past and Carmignac knows it,” Enskat
The fund manager’s investment philosophy is naturally going
to be tested because he has to move more assets, Geoffrey
Bobroff, president of Rhode Island-based Bobroff Consulting
Inc., which follows the mutual fund industry, said.
“It’s going to be more difficult to find the diamonds in
the rough,” Bobroff said.
The firm has proven in the past it could manage big bursts
of growth, Morningstar’s Lancereau said. “They should do OK, as
most of their holdings are companies with large, hence liquid,
market capitalizations,” Paris-based Lancereau said.

Art Collection

The French fund manager, who also collects contemporary art
and participates in the Queen’s Cup polo tournament in the U.K.
every year, said that “we’re not asset gatherers” and “what
interests us is absolute performance.” Yet, growth has its
advantages, like being better served by brokers and getting
access to top management of big companies, he said.
Morningstar says Carmignac’s expense ratio is above the
median. He dismisses it, saying he wants his firm to be “the
Hermes of the fund management business.” The minimum investment
for individuals is 300,000 euros.
Carmignac, who owns about 70 percent of his firm’s shares
and who has “almost all” his liquid assets invested in
Investissement, said he wants to emulate Boston-based Fidelity
Investments, the world’s largest mutual-fund company with $1.5
trillion under management, which has remained closely held.
That’s why his daughter Maxime, 30, joined the firm this year as
fund manager after an experience at New York-based hedge fund
Visium Asset Management LLC, he said.
Artwork by Roy Lichtenstein or Keith Haring pushes
Carmignac to think out of the box, he said. The paintings, which
hang on almost every wall, including Jean-Michel Basquiat’s
Falling Angel, also help him and the firm’s 20 fund managers and
analysts stay grounded.
“Lenin and Mao are here to remind me,” Carmignac said,
looking at the giant portraits of the Soviet and Chinese leaders
by Andy Warhol hanging on both sides of his desk. “Never take
anything for granted.”