Q&A with Richard L. Chilton Jr., Chairman and Chief Investment Officer, Chilton Trust Company LLC
by Boardroom Brief Staff on November 13, 2012
Richard Chilton is the Chairman, CEO and Chief Investment Officer of Chilton Investment Company, a global investment management firm he founded in 1992, which is headquartered in Stamford, Connecticut, with offices in New York, London and Hong Kong.
In 2010, Mr. Chilton founded Chilton Trust Company, which is headquartered in Palm Beach, Florida and is the first company in eight years to be awarded a trust charter in Florida.
Today, Chilton Investment Company, together with its affiliates, which include Chilton Trust Company, has a combination of investment advisory and fiduciary responsibilities for over $9 billion in assets.
1. The world of investing has changed significantly over the past two decades; the investment landscape today scarcely resembles what it did just four years ago, in 2008. Given these changes, what is the thrust of your investment philosophy? How do you successfully balance risk with reward to stay ahead of the changes that have impacted world markets?
I have been managing money since 1985 and what Chilton Investment Company does really well is understand how businesses work. Our expertise is in finding the very best business models in the world in which our clients can invest for a long period of time. Our definition of a good business model is a company that can grow sales organically, has pricing power, generates a really good return on invested capital, returns cash to shareholders in the form of dividends or stock buybacks, and has a moat around its business that allows them to weather storms. The concept of a moat around a business is a Warren Buffet idea that he explained to me a few years back. It means that a smart person with a lot of money cannot replicate that business. A moat allows one to weather downturns and also keeps others from entering that business. Our investment strategy is all about finding good companies and then sticking with them. When you are able to identify and invest in these great business models you should be rooting for the market to go up. Yet, if it does go down, you’re not dismayed because you want to buy more.
Look at what happened in 2008 when businesses were hit and stocks went down. Then, take a look at those companies with really great business models and you will see there is a resiliency in their sales, which both snap back and continue to go higher. Margins will move higher because these businesses have pricing power; these are the types of businesses in which you want your clients to be invested in for a long period of time. Being invested in great businesses for a long time allows you to compound your investment and demonstrates why compounding is the Eighth Wonder of the World.
For example, take one of the largest American-owned spirits and wine companies with one of the greatest business models in America. It missed its quarter in July of last year and the stock price dropped because of a sell-off by a typically short-sighted Wall Street. I watched it fall. Wow! I know this business and it is an unbelievable company. Although I did not own it at that time, I knew enough to go in and buy the stock at the lower price. Today, that stock is much higher than it was before the sell-off and we think that it will go much higher. Why? Because it’s a great business with lots of long-term future growth. Oftentimes, businesses don’t always run on Wall Street’s timetable. When you can leverage market volatility to get into these good businesses at strategic inflection points and compound your client’s money over long periods of time, I call that real value.
Regarding the balancing of risk with reward and staying ahead of change, there is no doubt today’s global economy means great opportunities for businesses selling their products on the world stage. However, I have watched a lot of investors who are so focused on trying to find the new and exotic investment idea that they overlook the fundamental, lasting value of a good business model. Because of the impact of technology, the Internet, globalization, economies of scale and more, there is a host of creative destruction that is happening in the marketplace. Back at the turn of the century before the automobile, everybody traveled in a horse and cart; the buggy whip industry was robust. Then the car came along. No more horses, coaches or buggy whips. Our expertise is in identifying those companies that are immune to creative destruction and are going to be here for a long, long time.
2. What was the tipping point that led you to launch a private trust management company for high-net-worth individuals and families? Why was 2010 the right time, and why Palm Beach?
I talked about doing this in Palm Beach as early as 2002 because I saw the opportunity to serve the client with greater care. I discussed my idea with Gary Lickle – President and CEO of Chilton Trust Company – and at that time, we concluded the timing was probably not right. I have always been involved with high-net-worth investors on our marketable alternatives side and I missed providing investment advice to high-net-worth individuals. Most importantly, I knew this market was not being served the way it should be; the industry was being dominated by fees and product pushing. Wealthy people were walking around with a big bull’s-eye on their backs.
In January 2009, after what is now being referred to as the Great Recession of 2008, I picked up the phone and called Gary Lickle again and told him, “Now is the time.” He agreed, and we opened Chilton Trust Company in Palm Beach, Florida, headquartered at 396 Royal Palm Way.
We were ready to differentiate ourselves by putting our clients first and by listening to what they wanted from their portfolios and from their assets. Today, what is most important is that we’re making a difference in a lot of people’s lives because we are, in fact, putting them first and listening to what they want and need. We have returned to real personal wealth management, with professional expertise and with strong relationships that match up with world-class money management. At 54, I was looking for a new challenge and, for me, this is exciting because I love to build businesses. I plan on doing this for a long time and truly love the relationships with our clients. We’re not going to monetize this company. We’re not building Chilton Trust so we can sell it or take it public. We are building our firm for the intergenerational future and we exist for the sole benefit of doing a good job for our clients.
3. Where do you see Chilton Trust 10 years down the road? What is your vision of services and locations and the profile of your ideal client? Discuss your family office offering and why it is different from what is available from other brands.
Today, we function as a full-scale trust company headquartered in Florida. We provide investment advice on global equity and fixed income investments through Chilton Private Clients, an affiliate of Chilton Trust Company that is headquartered in New York. We also have a full-service family office that I started as my own family office in 1999. It recently merged into Chilton Private Clients and I became its first client.
Our business is “open architecture”-based and there are a lot of great benefits that come from economies of scale. For example, in addition to our long-only money management, we also offer advice on marketable alternatives (or what one might call hedge funds). We have an individual who can sit down with your marketable alternatives, private equity or your real estate portfolio, and can advise you on select outside funds. We will not include our own products from our marketable alternatives side. I want to emphasize that our brother company, which specializes in the marketable alternatives business, is a completely separate business.
Although I believe there are good service providers out there but it seems something is always lacking and they have gotten way too big. We are set up to provide highly personal services and a comprehensive picture for our clients. We have some very talented people who are used to dealing with high-net-worth individuals and their unique, often complex, issues. Our value and expertise is in being able to provide highly sophisticated services to our clients.
4. What are some of the distinguishing services available to Chilton Trust clients, in addition to fixed income and equity strategies, which enable them to grow and preserve their wealth?
The one thing that sets us apart from other trust companies is that we have a proven culture and an ethos as world-class money managers. We extend an exceptional level of talent into everything we do. We are professional money managers as well as fiduciaries and family office professionals. We incorporate all the services that high-net-worth individuals want and need. We understand how to manage assets in a difficult environment.
Our boutique approach means our ratio of representatives-to-clients is very low. We want you to have immediate access, an answer to every question, a solution to every problem, a response to every inquiry. It’s all about service. We do not have profit goals because if you make your client’s happiness your primary goal, the profits will follow.
5. When you reflect on your extensive and successful career in an explosive and often unpredictable industry, what do you think are some of the most significant lessons you gleaned from others? What leadership legacies have you put into place at Chilton Trust?
I view the investment business as evolutionary and, as an apprenticeship business, it takes a long time to understand. You are always learning. I have made mistakes, learned from those mistakes, and as a result I understand how to simplify the investment process and distill it down to what is really significant. From a management point of view, I think the most important thing is understanding culture. I’ve taken ideas from the other places I have worked and used those ideas to build the culture of my company since starting it in 1992. It is important to me to create an environment that is very family-oriented, respectful of its employees and has low turnover because we’re all in this together. Businesses that I manage have very low turnover and that is by design because it is important to keep talented people. This extends to our clients. If I didn’t want any clients, I would just manage my own money. But I choose to take clients and I am committed to serving those clients. That’s something you don’t just learn overnight.
6: You travel quite extensively, visiting companies that you invest in for your clients and yourself. As an expert in navigating the complexities of investing on this new world stage, what are your global economic projections for 2013 and what geographical and investing sectors are of interest or of concern? What specifically is your outlook for high-growth, emerging markets in China and India?
Well, I like the United States for 2013 and I believe the old red, white and blue is doing a lot better than most people think. We’re a great economy, a resilient economy, and we’re still the most stable country in the world, as evidenced by how everybody wants to invest with us and in us, which is a very good thing.
There are a lot of other good economies out there that are growing rapidly, and a lot of that has to do with the world’s population. In the next 10 years, there are going to be more people going through the tipping point – defined as per capita annual incomes in excess of $2,500 (U.S. dollars) – than ever before in the history of the world. And when that happens, I believe consumption will explode on the worldwide stage. When consumption explodes, all of the ingredients associated with that consumption skyrocket – such as copper demand, oil usage, the ability to purchase diapers and Colgate toothpaste; it all explodes! We’re not just seeing it in China, but in Indonesia and in other places within Asia. We’re seeing it in Brazil, which now has the fifth largest economy in the world. These are economies that are certainly more fragile than the U.S., but they are doing really well. That growth, combined with population mass, is going to produce a lot of consumption. But, as worldwide investors, there is a price to pay for investing in China or in Brazil. They don’t have the same rules of law we have, the stability, or the ethos with respect to integrity of the numbers. But, there are a lot of opportunities. Our job is to find and analyze opportunities and good business models in those regions, and buy them at the right price.
When evaluating India and China specifically, I know these countries well, and have spent time in both. There is a lot of debate regarding which is the better economy. I think India is going to get there over time. It is a different country politically; even though it is a democracy, it has a tremendous caste system that prevents things from getting done. India doesn’t pay as much attention to the underclasses as China. For instance, India has more women who don’t work. They have more people living below the poverty line, more people who are illiterate, and they’re not trying to pull themselves up. In terms of expanding business into India, there are a lot of restrictions with respect to chain stores or hypermarkets coming in. India is a slower, more closed-loop economy than China.
China has made a conscious effort to increase the percentage of women who work, helping to reduce the number of people who are illiterate and improving the status of those living below the poverty line. China knows it needs to put about 30 million people to work every year in order to just break even. It is very conscious about making sure there is not widespread dissatisfaction among the lower-class workers in the country. The Chinese want to avoid revolt and they don’t want to return to military rule. China made a 10-year plan. One of the goals within that 10-year plan was to pave 80 percent of the roads in five years so that people in the West can have access to goods without having to come into the big cities on the East coast, where inflation is rampant – such as cities like Shanghai with its 17 million people. They could stay in Chengdu, Kunming or Chongqing, and get their goods out to market. As a result of China helping the lower classes to be a vital part of the economy – versus repressing them – factories are now being built there.
7. You have a wide variety of philanthropic interests, including extensive scholarship programs directed at helping students in China to overcome hardships created by natural disasters. Also, you are a trustee of the Metropolitan Museum of Art in New York City. How do you select your philanthropic pursuits and maintain a balance among them?
I’ve been incredibly lucky. As a kid, I was told by my father that you meet the same people on the elevator of life going up as you do coming down, and there are people who are not going to be as fortunate or as lucky as I have been. I do not get success confused with the fact that there is luck involved, whether it be situational luck, or opportunities that opened up. That is why it is important to give to those who need it. We have done some things in China after the earthquake in Chengdu in the form of scholarships, etc., but I do believe charity has to start at home. We’ve done a lot in this country to help the poor – those in need of financial aid for education – and for environmental and nature conservation.
I feel that the environment and culture are very important. I sit on the board at The Metropolitan Museum of Art and my wife is Chairman of The New York Botanical Garden. It is an honor to be involved in programs that provide an oasis for people in difficult times to feel like they are a part of something special. We all need a place to go to feel connected and that is why we visit gardens and why we have record attendance at the Metropolitan Museum. Much like the industrialists who were wealthy at the turn of the century and founded these important cultural centers, I believe it is our responsibility to continue the legacy of giving back to the next generation. Because if we don’t do it, who will?