Sep 14, 2023 · 58m · capital-allocators
Adam Karr – Extreme Alignment at Orbis (EP.338)
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In this episode of Capital Allocators, host Ted Seides interviews Adam Karr, President and Portfolio Manager at Orbis, exploring the firm's unique zero-base refundable fee structure, perpetual foundation ownership, analyst paper shadow portfolios, and disciplined intrinsic value investing.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 17.8% of the talking time here. How this is scored →
Ted as informed peer 4.9 Guest teaching 3.6 Guest disagreement 0.9 Ted pushing back 2.4
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 44:50 Critique of macro regime distortions and cost of capital
Adam forcefully critiques the prior decade of zero interest rates and government intervention, contrasting market fads with rigorous intrinsic value fundamentals.
Hardest push from Ted ▶ 37:53 Challenging signal versus noise in analyst performance dataTed directly pushes back on the validity of Orbis's shadow portfolio analytics, asking how they can be confident they are measuring actual skill rather than market noise given low sample sizes.
Biggest teaching moment ▶ 12:08 Explaining the refundable performance fee trust mechanismAdam educates Ted on the precise mathematical and operational mechanics of their zero-base refundable fee, where fees are paid into client reserve accounts and returned during drawdowns.
Ted holds their own ▶ 50:44 Drilling down on multiple compression and entry timing on FleetcorTed demonstrates sharp investment expertise by challenging Adam on where along the valuation downgrade curve from 25x to 11x Orbis actually bought the stock.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Monologue on Back-to-School, Fantasy Football, and Reviews | 0 | 0 | 0 | 0 | Ted opens with a solo monologue touching on back-to-school season, fantasy football bonding, and a plug for iTunes reviews. As an introductory monologue, there is no guest interaction or host-guest power dynamic. | |
| Adam Karr's Early Exposure to Investing | 3 | 2 | 0 | 1 | Ted prompts Adam on his early origins and background, guiding the biographical narrative. Adam shares his serendipitous path from cleaning banks with his grandfather to Northwestern ROTC, DLJ, and HBS. | |
| Private Equity Beginnings and the Move to Orbis | 4 | 3 | 0 | 1 | Ted asks about Adam's career crossroads leaving private equity for public markets and the founding origins of Orbis under Allan Gray. Adam explains Allan Gray's background and Orbis's founding ethos of alignment and intrinsic value. | |
| Refundable Performance Fee Structure and Client Alignment | 6 | 5 | 1 | 4 | Ted presses on the mechanics of Orbis's refundable performance fee, specifically probing how a business survives without a guaranteed base management fee. Adam educates on their reserve trust account mechanism and how balance sheet reserves absorb market volatility. | |
| Foundation Ownership and the Long-Term Ownership Model | 5 | 4 | 1 | 3 | Ted inquires into Orbis's perpetual charitable foundation ownership model and how partner compensation operates without traditional equity payouts. Adam explains the 12-year tail interest for firm stewards before equity reverts back to the foundation. | |
| Talent Retention, Fiduciary Purpose, and Market Compensation | 6 | 4 | 1 | 4 | Ted probes potential talent retention tensions when competing against market compensation while owned by a philanthropic trust. Adam clarifies that employee compensation is fully benchmarked to top-tier market levels and funded by alpha generation. | |
| Paper Shadow Portfolios and the Thesis Defense Model | 5 | 5 | 2 | 2 | Adam walks through Orbis's flight simulator model where 35 global analysts manage paper shadow portfolios and defend ideas in academic-style thesis defenses. Ted listens intently as Adam rejects the typical sales-pitch dynamic found at traditional asset management firms. | |
| Global Team Structure and Contrarian Value Philosophy | 4 | 3 | 1 | 1 | Ted asks how Orbis coordinates communication across five global hubs while maintaining a coherent intrinsic value philosophy. Adam explains how decentralized regional analysts combine local context with global sector oversight. | |
| Three-Phase Research Process and Idea Winnowing | 5 | 4 | 1 | 2 | Adam explains their three-phase research pipeline, pre-meeting blind voting, and rigorous winnowing funnel where over 400 phase-one ideas boil down to 11 portfolio investments. Ted asks focused questions on how proprietary models and AI feed the funnel. | |
| Portfolio Construction, PM Sleeves, and Investment Duration | 5 | 3 | 0 | 2 | Ted asks about portfolio construction, multi-PM sleeve management, and holding durations. Adam outlines how three PMs run independent sleeves with four-year modeling horizons while maintaining risk accountability. | |
| Performance Attribution, Behavioral Biases, and Decision Analytics | 5 | 5 | 1 | 2 | Adam describes using 30 years of shadow portfolio data and behavioral decision analytics to identify cognitive biases and deliver live nudges to PMs. Ted explores how analytical attribution improves portfolio execution. | |
| Evaluating Signal vs. Noise and Maximizing Individual Superpowers | 7 | 4 | 1 | 5 | Ted questions how Orbis distinguishes signal from market noise given long holding periods and small sample sizes in decision analytics. Adam acknowledges the inherent noise and details how they test analysts in core domains before letting them expand into adjacent sectors. | |
| Contrarian Positioning and the Changing Market Environment | 6 | 4 | 2 | 3 | Ted asks how macro regimes and growth-versus-value dynamics have impacted Orbis's positioning. Adam provides historical examples of contrarian positions and highlights emerging corporate governance reforms in Japan. | |
| Deep Dive Case Study: Investing in Fleetcor | 7 | 4 | 1 | 4 | Adam presents a thorough investment thesis on Fleetcor, explaining why the EV transition bear case represents an opportunity. Ted pushes back with a shrewd allocator question regarding when they initiated the position during its valuation multiple compression. | |
| The Rarity of Extreme Alignment and Developing Talent | 5 | 4 | 1 | 2 | Ted asks why other asset managers fail to adopt Orbis's extreme alignment models. Adam explains the severe financial pain of foregoing short-term earnings and balance sheet capital commitments required to support refundable fees. |
Statements from this episode (21)
Harvard Business School admitted Karr at age 19 with deferred enrollment
“I applied to HBS when I was 19 in college, and they accepted you at the time contingent on a couple years of work experience.”
Orbis manages approximately $35 billion in assets under management globally
“We manage about thirty five billion dollars in AUM across the globe and a handful of strategies, long only, absolute return, multi-asset.”
Orbis charges a zero base fee and refundable performance fee
“On our long only strategies, we
Have a refundable performance fee. For our larger institutional clients, there's a zero base fee. So if we don't add value, generate alpha, client pays, zero fee. If we generate outperformance, we share that with a client whereb…”
Orbis launched its refundable fee strategy in 2004
“We launched the refundable fee strategy in 2004, and it was a multi-year period that we went through that we were
Reserving on our balance sheet.”
Orbis saw under 10% net redemptions in 2008 without using lockups
“The best test case that we have is going back to the GFC in 2008. We don't have lockups, we don't have gates, and we saw less than 10% net redemptions in an environment when the global indices were down 35%.”
Orbis's balance sheet reserves can fund operations for multiple years
“We've been quite conservative in that, and it's going to depend because we've got clients across the globe
And they're on different fee structures and they're not on exactly the same fees.
So there's a mix in there, but it's more than a handful of years.”
Orbis is privately owned in perpetuity by a charitable foundation
“We are privately owned by a charitable foundation in perpetuity.”
Orbis senior partners receive a 12-year profit tail upon departure
“We participate in the firm, the most senior group of investors and leaders in the firm, which we call stewards.
And we're directly tied to the operating profits of the firm.
But what's unique about it is we have that interest while we're here in the seat drivi…”
All 35 Orbis analysts run concentrated 10-stock paper shadow portfolios
“All of our analysts run paper shadow portfolios. So we've got 35 analysts around the globe, and after generally a year or two, they will launch a paper portfolio. And that tends to be a concentrated expression of, call it their 10 highest conviction Recommenda…”
Orbis mines decades of analyst paper portfolios with AI for ideas
“We have this incredible data set across all of these paper portfolios going back since inception. And we're now using AI to replicate what we would have been buying based on the historical algorithms of what we were doing. Now that doesn't drive it to be in th…”
Only 11 of 425 Phase One ideas entered Orbis's portfolio in 2022
“Last year, 2022, we had, I think there was 425 names that came through at the phase one level. 11 of them made it into the portfolio.”
Orbis narrows 350 analyst paper portfolio ideas into 60 to 70 positions
“If you step back, we've got 35 analysts across the globe. Each of them is running, call it a 10 stock paper portfolio. So that's 350 names. And In the strategy, we're seeking to narrow that down to call it 60, 70 high conviction positions in the global strateg…”
Orbis has held some Japanese and US equities for over a decade
“We've owned some of our stocks in Japan for 20 years. I've owned some companies in the US for a decade plus.”
Orbis evaluates analysts every six months using 30-page data scorecards
“All of our analysts get scorecards every six months. These are 25, thirty-page documents. It's going to look at Success ratio. It's going to look at win or loser skew. It's going to look at slugging percentage. It's going to look at that voting track record fr…”
Karr's personal data revealed that scaling into new positions detracted value
“My view is that the riskiest position is your newest position. You've got the least insight. And so I have tended to scale into a position when I'm undertaking a new position. Turns out data says that's not right for me in particular. If it's sufficiently good…”
Orbis held zero Japanese equities in 1990 despite a 45% index weight
“You go all the way back to inception, 1990. Japan was 45% of the world index, and we had zero.”
An investment manager's time horizon is bounded by their clients' horizon
“You have to have an aligned client base that allows you to do it because your time horizon is only going to be as long as their time horizon.”
Fleetcor is Orbis's largest equity position in the United States
“In the US, our largest position is a company called Fleetcore.”
Fleetcor's CEO owns $1 billion of company stock after 20 years
“He's been running the business for 20 years. He owns a billion dollars of stock.”
Fleetcor's European EV charging business has better economics than fuel cards
“We can look at their business in Europe and we can see clearly that the economics on that are actually on par, in fact, better than their core combustible business.”
Orbis mistakenly doubled down on AIG during the 2008 liquidity crisis
“And the next morning we had an investment committee meeting to make a decision as to whether or not we were going to add or sell our position in AIG. And we decided to add to it. The mistake, which I'll never forget, is the difference between liquidity and sol…”