Zhang Lei: Four Elements of an Outstanding Asset Manager

Peter Peterson, Blackstone cofounder and former Lehman Brothers chairman and CEO: “Looking back, every opportunity I encountered ultimately became a choice between immediate and long-term interests. My choice was always the long term.” ———————————— Successful asset managers need four elements: First, Uphold an Investment Philosophy and Build a Broad Perspective A fund manager’s perspective is not merely a broad international outlook, bold investment strategy, or accurate market judgment. At its heart lies the investment philosophy they uphold. Investing requires a return to fundamentals: think logically about the key questions in an environment you understand. Hillhouse Capital has three investment philosophies. First: “Govern with uprightness; deploy troops with ingenuity,” from Laozi’s Dao De Jing. Fund managers must maintain high ethical discipline and personal independence. Only by acting with integrity can they resist temptation, think independently, and create unexpected opportunities. Second: “Of three thousand waters, take but one ladle,” from Dream of the Red Chamber. There are not too few investment opportunities, but too many. Investors must practice restraint, select opportunities that truly suit them, and develop depth and expertise in familiar areas. This is responsibility to both oneself and one’s investors. Third: “Peach and plum trees do not speak, yet a path forms beneath them,” from Records of the Grand Historian. Do the right things without promoting yourself everywhere, and people with shared beliefs will work with you. Outstanding entrepreneurs will find you. Adhering to a philosophy is not rigidity. It means studying markets rigorously, distilling fundamental values and methods, while embracing change. Hillhouse is fundamentally an institution that “invests in change.” Capital markets always change, and only deep fundamental research enables a profound understanding of those changes. Second, Stay Even-Tempered and Return to Investment Common Sense For a professional asset manager, an even temperament is particularly important. There is more money in the world than anyone can earn. Finding the best balance between risk and profit, while remaining calm, humble, and respectful of uncertainty amid fear and greed, is essential to an excellent investor. Investing always requires common-sense wisdom: returns should come from corporate profits and growth. Investors should not chase concepts or seek gains from short-term games. Be rational, focus on fundamental research, understand the drivers of market returns and their inherent risks, and return to common sense. John Bogle, father of index funds: “The essence of investing is pursuing long-term, sustainable returns adjusted for risk and cost, overcoming fear and greed, and trusting simple common sense.” The best investment needs no exit. Holding one investment only while looking for a better one is not our approach. We care more about a company’s potential for sustained long-term growth. A good company is worth accompanying for ten, twenty, or thirty years. Warren Buffett: “If you are not willing to hold a stock for ten years, you should not hold it even for ten minutes.” We should also recognize that the best companies are often led by the best entrepreneurs. Outstanding entrepreneurs will create extraordinary value, but that takes time. Investing must therefore befriend time and trust truth and common sense. Third, Preserve Entrepreneurial Spirit and Build Institutional Character An excellent asset manager starts with investors’ interests, always puts fund holders first, and respects entrepreneurial spirit. That is how it wins the future. In the information age, externally hyped opportunities and temptations abound, and people grow increasingly impatient. Without resolve and independent, honest governance, resisting temptation is difficult. Rejecting short-term gains, preserving an investor’s character, and treating the discovery and creation of value as a great undertaking are true expressions of entrepreneurial spirit. Fund managers also need empathy: understand customers, employees, and even competitors. Great entrepreneurs are both rivals and partners, often with open minds and expansive perspectives. Asset managers share the goal of advancing the real economy. Strong operating businesses then reward good asset managers with investment returns, forming a positive cycle rather than diverting resources from the real economy into financial speculation or forcing premature growth. Fourth, Develop Talent and Build a Team of Mutual Trust For a one-year plan, plant grain; for ten years, plant trees; for a lifetime, cultivate people. Many venture investments require an exit, but talent is an investment that never does. Hillhouse emphasizes research, adherence to investment philosophy, and continual openness to change. People are the key. Discovering and developing talent is always a top priority and requires greater resources. It also requires a complete, sustainable system and ecosystem with the right goals, so talent keeps emerging. Team members must trust and inspire one another, flourishing together. “Extraordinary achievements await extraordinary people!” ——— Zhang Lei, founder of Hillhouse Capital Four Elements of an Outstanding Asset Management Institution