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Corkins Leads Arrowpoint Across the Capital Spectrum


David Corkins, a star manager at Janus who sucessfully ran the Janus Mercury and Janus Growth & Income funds and executed an impressive turnaround on the flagship $12 billion Janus Fund, started hedge fund Arrowpoint Partners in 2009 - delivering returns of 33%.

Money Management Executive spoke with Corkins about what it takes to attract high-net-worth and institutional clients in today's market, how he is investing his clients' money differently than other managers and how his firm's flexible approach has fared so well throughout the current turbulence.

MME: How has your experience in fixed income been helpful in the current market environment?
David Corkins: At Arrowpoint Partners, our experience across the capital spectrum in both equities and credit is a a differentiating factor that helps our clients from a risk perspective, as well as on returns.

I started my career at a large bank, Chase Manhattan, working primarily in credit-making loans, securitizing loans, analyzing loans. I primarily worked in mortgage-backed securities, credit cards, automobile loans and other areas.

The firsthand experience as a young person of analyzing credit, making loans, and understanding when you are paid back (or not), became extremely valuable to me subsequently as an investor. My last job was as chief financial officer of one of their mortgage businesses, Chase U.S. Consumer Services.

Working in the real world was very valuable for someone who ends up investing on Wall Street, where there are a lot of bright people, but who have the tendency to accelerate time, and project that issues which normally take three years should take three months, or what takes three months should take three weeks. At Arrowpoint, we have real-world experience realizing the day-to-day challenges of what a manager has to go through.

So, from a lot of different perspectives, my experience at the bank-particularly in credit, working through different economic and credit cycles in the late 1980s and early 1990s-was a very good experience for a liberal arts major right out of college.

When I went to Janus, I started out managing $1 billion in the mid 1990's on the Janus Growth & Income Fund, which invested in both equities and credit, and ended managing approximately $20 billion by 2007. Managing large and diverse pools of assets in both equities and credit, through cyclical markets of the mid 1990's, the technology driven late 1990's and crash in 2000-2002, as well as the broad-based recovery thereafter, has provided a strong foundation of perspective and experience.

A good credit analyst typically focuses on when they are going to be paid back. We focus first on the balance sheet and then on the free cash-flow statement and return on invested capital of a company. Where many equity analysts are worried about the future, they look at the income statement, revenues and gross margins, which are often window dressing to the key drivers of value.

We measure the capital we are investing and what the return on that invested capital is, and we measure that in free cash flow-not earnings, EBITDA, etc.

MME: How did these principals bear out in 2008?

Corkins: Our focus first is always on the risk of an investment and within the overall portfolio. Focusing first on risk grounds expectations and allows an investor to better determine whether returns are commensurate with the downside. Then, analyzing risk across the capital spectrum often leads to better understanding of exposures as well as opportunity. Often, the credit markets have different signals than the equity markets. Sometimes the credit markets may be signaling much more caution or fear than the equity markets, or vice versa.

So, in 2008, we primarily stayed away from equities and hedged our exposure there due to signals in the credit markets. That allowed our performance to be flat for the year. Then, in 2009, we saw more opportunities in equities, so we were able to shift the investment profile, take advantage of that and deliver a performance of more than 33%.

It's actually been a fantastic investment environment for us. The volatility in 2008 and 2009 helped us demonstrate the flexibility of our approach.

In 2010, we are finding opportunities in both credit and equity. Having a product that allows us to invest in both really provides the client the best of both worlds-through better risk, protection and opportunities.

One key component that we're using now is options. You have a lot more volatility in the market, and when you have periods with extreme levels of volatility both high and low, we have been able to successfully yet conservatively use puts and calls to manage risk.

MME: What is the most important aspect of the culture that you have created at Arrowpoint Partners?