|The Bahamas Investor Magazine
June 26, 2018
June 26, 2018
At the age of 10, when most boys are flipping through comics and reading about their favourite superheroes, Tom Vukota was already studying market trends in the finance pages. “By the time I was 15 I must have read over 30 books on investing strategies,” says the founder of Vukota Capital Management Ltd and 20-year plus veteran of the investment industry.“I don’t really know why I gravitated to investing from a young age; I have always found it very stimulating.”
Coming from an immigrant family, Vukota’s parents settled in Canada. “My family was not highly educated, nor did they have any knowledge of investing. For some reason, I just gravitated towards it. Other people get into chess, poker or video games. In a way there are similarities. It’s like a puzzle, but the pieces keep changing every day.”
His passion for investing led him to study finance at the University of Vermont, and he went on to become a Certified Management Accountant and Chartered Financial Analyst. After graduating, he took a fairly “conventional” route into a career in financial services, rising to become a managing director at Manulife Financial, which had more than $850 billion assets under management. Vukota spent more than 10 years there in the alternative asset management division and was also head of private equity real estate.
But by 2010, his entrepreneurial spirit was beginning to assert itself with more urgency so he decided to start Vukota Capital Management (VCM) to invest capital in alternative investments with, and on behalf of, high-net-worth individuals. “I obtained a strong foundational framework for investment analysis, risk management, and business and asset due diligence from working for a large global institution. You can learn a lot from organizations that have been around for 100 plus years, especially in how they manage processes, risks and their overall business. But I always knew I wanted to strike out on my own, and by then, I had the experience under my belt and personally earned enough capital from investing to do that.”
Shortly after starting VCM, his assessment of the Canadian macroeconomic prospects relative to the US became negative and he started to look for new opportunities. “Fracking technology in the oil and gas industry was a game-changer. Suddenly, you have an enormous increase in reserves and supply and your biggest customer, representing 99 per cent of exports, has the most oil reserves on the planet due to fracking technology. What drove the Canadian dollar up–high oil prices and hundreds of billions of dollars flowing globally into the oil sands, and related infrastructure and real estate–was on the verge of reversing.” Consequently, with the Canadian dollar trading well above fair value and a material long-term secular fundamental change unfolding, it was time to focus on the US, where fundamentals were improving and assets where inexpensive.
During this time, the US was still recovering from the financial crisis and the collapse of the housing market. To a forward-looking, strategic mind such as Vukota’s, this presented great opportunity. “Our assessment was that the Canadian currency was overvalued, and the US real estate market was massively undervalued. With US fracking coming on line, we could see that it was about to unlock some of the biggest reserves in the world and the inflow of capital to Canada would fall off.”
Vukota’s analysis had been correct, within only a relatively short time the Canadian currency lost close to 40 per cent of its value against the US dollar and oil prices plummeted over 60 per cent. “Getting out of Canada and relocating to the US at that time was the best decision we ever made,” he adds.
Starting by assembling a small team with local real estate knowledge and experience, Vukota began looking for real estate in areas of the US where there was likely to be growth, particularly in medium to low rent apartment buildings, where he saw the lowest risk and most potential for return on investment. At that time, the fundamental prospects and valuations in Denver were very attractive, and it wasn’t on anybody’s radar, so Vukota invested heavily in multi-family properties in the surrounding area. “Now Denver and Colorado Springs are consistently ranked as some of the best places to live and are among the fastest growing employment centres in the US,” says Vukota. “They have a tremendous growing job market, underpinned by a stable diversified employment base, and a young, well- educated demographic that bodes well for future GDP growth.”
It was the start of something big. Within a few years VCM had grown to over 150 operational and administrative staff, including 20 investment professionals, serving family offices and accredited investors. With offices in Denver, Los Angeles and most recently Nassau, the firm has assets under management (AUM) of more than $600 million and is continuing to grow rapidly.
Vukota has built his business on alternative investment strategies that offer steady returns and cater to the “risk/reward requirements” of most high-net-worth investors. It is an uncorrelated and diversified approach to investing that incorporates real estate, private equity, alternative public market strategies, and secondary market life insurance investments, among other assets. “These are basically investments that are unconventional, but people make the mistake of tying alternative investments with a different or more volatile risk profile than conventional investments. In fact, we view them as lower risk–not necessarily offering higher returns, but a better risk-adjusted return or a better return per unit of risk, which is our primary focus.”
VCM’s alternative liquid investment mandate is its multi-strategy managed account/fund product. The firm utilizes integrated investment techniques to construct more efficient public market portfolios that generate less correlated returns, stable income, and employ real- time strategies to mitigate market risk. In 2010, it launched multi-strategy managed accounts and thereafter, the Vukota Multi-Strategy Fund LP. The portfolio is typically comprised of 30 to 50 individual core equity holdings, equity index futures and options, along with select positions in currencies, commodities and US Treasury bonds.
In addition, VCM invests in private markets, which serves to generate stable, less correlated returns to conventional public market investments, and mitigates against public market risk and volatility. This includes purchasing secondary market life insurance policies. “The attractiveness of this asset is that there is absolutely no correlation with any other asset, allowing the investor to achieve a much more efficient portfolio,” says Vukota. “Unlike stocks and bonds, your returns won’t get affected by unexpected geopolitical events, a slowing economy, or inflation.”
By far the largest asset class for the company is real estate, accounting for over 80 per cent AUM. Focusing on large, more affordable apartment complexes, or “workforce housing,” and medical office buildings, the company seeks out real estate assets at a “substantial discount to replacement cost.”
“Unlike conventional real estate assets, workforce housing and medical office assets provide us with a favourable asymmetric return profile. If the economy is doing well, you can raise rents above inflation and achieve mid-to-high teens rates of return. However, in a slowing economy you will still see stable cashflows and high single digit returns. When you compare them to other asset classes, they are quite attractive.”
Furthermore, both assets are underpinned by long-term secular trends; lower rates of home ownership, in the case of workforce housing, and the ageing population, in the case of medical office assets. The apartment buildings his company purchases generally range in size from 200 to 400 units, which allows for operational efficiencies as compared to buying smaller properties. It is a large asset class in the US, but with significant barriers to entry, as on the ground operational expertise and scale are important. VCM is also looking to further grow the medical office segment of the real estate portfolio.
“In similar ways to workforce housing, people will always need medical facilities. Medical tenants are quite sticky, they tend to invest significantly in these properties, so there is reduced turnover which translates into stable returns.”
The decision to shift the company’s corporate headquarters to Nassau was a “logical” choice, according to Vukota. “For Canadians, The Bahamas is a great place to get residency, so it has always been in the back of my mind.”
When the company started to look for an international presence, Vukota went to Nassau and spent a couple of weeks there “to get a feel for the place”.
“I met a lot of Canadians who were very friendly and helpful. The Bahamas has great private schools, great infrastructure, and a fantastic climate; it was not a difficult transition to set up an office here.”
Also, from a business point of view, the move to Nassau “made perfect sense”.
“If you are doing business internationally, why wouldn’t you set up in The Bahamas?” he says. “To start with, there are no corporate taxes, so that gives us more capital to invest alongside our clients, which allows us to grow our business.”
Last year, Vukota decided to establish his headquarters in the Lyford Cay area of New Providence, with a plan to migrate his senior management team and investment analysts to its headquarters.
As well as being cost-effective, the move was also part of a strategic initiative to target new markets in Latin America, particularly Brazil and Chile, and further afield in Europe and Asia.
“If you want to be a successful investor in today’s world, you need a global perspective and understanding of macroeconomic fundamentals, which ultimately drive investment returns and mitigate investment losses,” he says. “Nassau is well located, providing great access to the US as well as Central and Latin America. Moreover, there is a strong international representation on the island with more than 200 global private banks and trusts. It is one of the only offshore international financial centres where you can do business and live a normal quality life without feeling cut off from the rest of the world.”