Swimming Fast Upstream: Q&A with Odey Asset Management & Citywire

Odey Asset Management manages $4.9bn on behalf of institutions, private banks and family offices, across global, European, and Emerging Market strategies. Founded in 1991 by Crispin Odey and synonymous with independent thinking, strong alignment, analytical rigour and differentiated returns, the investment boutique is home to some of the industry’s leading talent.

Alongside but independent of Crispin, the firm has another six multi-award winning fund management teams, James Hanbury and Jamie Grimston (Absolute Return), Oliver Kelton (European Equity), Peter Martin (Multi-Asset), Geoffrey Marson (Multi-Asset), Sophia Whitbread and Mathieu Rachmaninoff (Global Emerging Markets), and Adrian Courtenay (Event Driven). With inflationary pressures forcing an inflection in the extreme monetary environment of the last decade – and with an alarming number of industry practitioners wholly unproven in managing client portfolios in a higher inflation world – the firm’s philosophy of thinking and investing like an owner, and experience of managing client money in different market environments, feels as relevant as ever.

Q: Crispin, you established Odey AM more than 30 years ago. Do your founding principles still hold true today?

Crispin Odey (CO): The only rule that I set myself thirty-odd years ago was that I wouldn’t run other people’s money in any way differently to how I run my own. Unlike many other investors, who see volatility as loss, I see adverse movements in assets after I have taken a position as an opportunity to improve the returns. In my view, this sets me apart from most other investors and has meant that ultimately most of the money that I run is my own.

Q: You’ve won ‘Management Firm of the Year’ at EuroHedge 2022 and many of the firm’s long-only strategies also did well. With the interest rate environment normalising, it feels like a good moment for active managers. Do you see similarities to the dotcom fallout when value materially outperformed growth? 

CO: Once interest rates started to turn higher, even if in real terms they were much lower than before, all fund managers breathed a sigh of relief. There are now many ways in which investors can find attractive yielding assets. Passive investing has undoubtedly won the day. Diversification and low costs were just too attractive. Coming at a time when zero interest rates favoured long-duration (growth) stocks, the effect was painful for value stocks. Value stocks were the worst sufferers from this trend. Poor performance in this sector was compounded by switching into passive indexes as well as not being offset sufficiently by any equity flows into those indexes. Finally, companies have realised that their salvation lies in building profits and combining share buybacks with dividends. If it sounds old-fashioned, don’t be surprised that it feels that way. It is very different from 2003. In the UK there was no LDI in 2003. Pension funds in the UK had 80% of the portfolio in equities and 60% was in UK equities. Today they have 17% in equities, of which around 4% is in the UK market. We have seen a catastrophic decline in the biodiversity of stock markets. Especially in the UK market.

Q: Looking ahead you see a macro environment where globalisation has run its course and yield control does not encourage investment, and the political systems are becoming more and more strained, reduced to welfarism and tax-funded government expenditure, how is your portfolio positioned against this?

CO: Decline is always marked by rising taxation, rising regulation, ever weaker growth rates, and inflation coming from the government printing money to feed itself. Individuals should work out their own salvation. In these times, spot tax-exempt assets that offer good returns. Be mindful that history suggests governments at some point introduce exchange controls to stop savings from fleeing. Offshore funds should have a big place in people’s thinking.

Oliver Kelton (OK): The policies behind decarbonising energy, including the recent US ‘Inflation Reduction Act’ or European ‘Green Deal Industrial Plan’, are symbolic of many of these issues, and the investment difficulties that lie ahead. Who would have imagined that Europe’s leading wind turbine manufacturers, Vestas and Siemens Gamesa, would have both had substantial operating losses in 2022.

Q: James, your focus is global equities, both in Absolute Return and long-only format. You have a concentrated portfolio of often-idiosyncratic and deeply-researched companies. What are the key characteristics you look for when investing in a business and how is your portfolio different to global peers?

James Hanbury (JH): When looking to invest in a business we want to feel we have a good understanding of the business and the industry. We like businesses that have decent barriers to entry and, crucially, management teams that are allocating capital in value-accretive ways. Although the latter point seems obvious, management teams who behave like owners are in the minority in public markets. We, therefore, have a bias toward first-generation owner-managed businesses, as decision-making in these companies tends to be optimised for the long term given alignment. There is a high concentration in a distinct set of top positions, some of which have been held for over a decade. Our highly experienced research team provides us with a notable and extensive depth of understanding of these positions. At a geographical level, the funds look very different to global peers; typically underweight/net short the US while overweight/net long Europe and the UK. The funds’ longs tend to have significantly lower median earnings and sales multiples than both the market and the short book.

Q: Oliver, you’ve been managing European equity mandates for 20 years. Less and less primary research is being conducted, QE has resulted in significant misallocations of capital and few fund managers today have actually experienced inflation. Can you recall a better opportunity set for European equities?

OK: In many ways these factors make investing in European equities even more challenging. However, at the same time this current backdrop brings with it distinct investment opportunities, where the rewards are increasingly exciting. We have been focused for many years on the misallocation of capital emanating from prolonged extreme monetary policy in Europe and as the cost of capital has begun to normalise, the funds have continued to deliver compelling long-term returns. With still near historical low valuations, the Fund continues to be focused on banks, energy, telecoms, and general value investments across Europe.

Q: Many fund managers don’t feel the need to meet the companies they invest in, yet Odey Asset Management takes a different approach, engaging heavily with corporate management teams and employing a team of dedicated and highly experienced equity analysts to conduct deep primary research. The sell side has changed dramatically in the last decade or so – how has this impacted your investment process and has it created a bigger opportunity?

JH: Meeting management teams is the lifeblood of our research process. We really want to understand the DNA of a business and it is impossible to do this from just the numbers. The fact that the sell side capacity has been so reduced in the past few years has, along with the growth of passives, helped make the market more inefficient, which creates more opportunities for stock pickers who are prepared to take a longer-term time horizon and get into the weeds. 

OK: As brokerage commission rates have collapsed over the last 20 years, naturally so too has the quality of research available to investors from the sell side. Fundamental research remains pivotal to our investment approach. Therefore, in this new world, it is an enormous privilege to be able to balance the best of what remains available on the sell side, with external research resources and a highly experienced team of internal equity analysts.

Q: Odey AM is known for its thorough equity research built on a diverse team of highly experienced analysts. Can you describe how you use the analysts?

CO: Given that we believe volatility is our friend and the sharp price moves downward are an opportunity to buy more, reliance on our analysts at that moment is key. We need to feel we know a little bit more than the market. Commission rates and fees have fallen so far that the sell side has become less helpful. That means that valuations are cheaper – information is more difficult to come by – but our advantage as an analytical house has grown.

JH: We enjoy working with our analysts enormously. We trained as analysts and continue to engage in the granular detail of research. Our analysts are all proven alpha generators and by working with them we firstly take a belt and braces approach and secondly, we try and push each other to further our understanding, both with regards to the risks and opportunities. A key attribute of the analysts we work with is that they will challenge me; an echo chamber is one of the most dangerous environments in investing. 

OK: The analyst team plays an instrumental role in our process. On the one hand, they help drive idea generation, but their real value added is in providing the know-how, experience, information flow, and challenge to our bottom-up fundamental research.

Q: Sophia and Mathieu, you run the Brook Global Emerging Market strategy. How do you marry the house style (i.e. conviction-led and deep research) with running money in emerging markets?

Sophia Whitbread (SW) and Mathieu Rachmaninoff (MR): Emerging markets and their companies tend to be under-researched relative to their developed market counterparts, with lower relative participation by institutional investors. This allows greater and longer-lasting market inefficiencies for an active manager with strong analytical skill to exploit. Well-researched conviction, combined with a long-term time horizon, allows us to use the volatility of emerging markets in our favour. With the confidence of our analysis, we build positions in companies when sentiment is low, with a time horizon that allows us to harvest the share price appreciation associated with recognition of the longer-term investment cases hidden within shorter-term swings in market mood. Our biggest thematic exposure is to solar energy. Growth in demand for solar energy is highly structural, and long-term, as the world seeks to mitigate the impacts of climate change, while developing greater energy security. Solar is a predominantly Chinese investment opportunity, as the vast majority of capacity for polysilicon wafers, the core component with high barriers to entry, is found in China. This year brings rapid expansion in raw material supply, prompting a major catalyst for demand.

Q: Adrian, you joined from DE Shaw in 2016 and run the Odey Special Situations Fund. Why is Odey a good place to run money and what makes your strategy unique within the UCITS long-short strategy universe? 

Adrian Courtenay (AC): In our view, the most important variable to effective money management is independent thinking. This is true both in terms of the design of an investment strategy that is operated, but also the day-to-day working method from which the decision-making process is originated. The Odey culture has independence from groupthink at its core, and this can be seen in the way that the funds have produced returns outside of the peer group averages, particularly during market dislocation events, over multiple historical periods.

The Odey Special Situations Fund targets attractive situations across three domains: merger arbitrage, high yield bonds and selected long equity situations. The design rejects leverage, has the freedom to deploy capital across developed markets globally (primarily Europe, the US and Australia), and operates with a mission statement embracing realism, we target protection of capital and a healthy return.

Q: Peter and Geoff, you run long-only multi-asset portfolios for the firm, albeit in a more dynamic and highly differentiated manner to industry peers. What is the difference between your two strategies? Has a decade of QE jeopardised the traditional 60/40 model?

Peter Martin (PM) and Geoff Marson (GM): The Odey Portfolio Fund and Odey Opportunity Fund, managed respectively by Peter Martin and Geoff Marson are the multi-award-winning strategies that are the bedrock of our multi-asset offering within our stable of Odey funds. The Opportunity fund is more suitable for those with defensive balanced risk appetites and goals, while those who look for a more return-seeking strategy should consider the Portfolio fund. With over 67 years’ experience between them managing money for HNW, Charity and Trust clients, they devote considerable time and effort identifying the major themes and trends within financial markets and position their strategies accordingly. QE has fundamentally distorted the cost of capital, so 60/40 managers typically adapted by taking on more risk than they ought to by being overweight speculative tech stocks and going into higher yielding, lower quality corporate bonds, setting themselves up to fail spectacularly as we saw last year when central banks started raising rates, given the correlated nature of their underlying holdings. This is, however, a very good environment for a 60/40 manager – indeed, our strategies were able to continue delivering first-quartile returns as we were able to rotate in and out of growth and value names and switch into energy and material stocks at the end of 2021.

Q: What is your outlook for the multi-asset industry in a world of higher inflation? 

PM and GM: It is clear investors have been wrongfooted by being overweight long-duration assets (such as speculative stocks) going into this inflationary environment. If further evidence was needed, Covid also demonstrated that investors were not typically nimble enough either to manage the value and growth rotations. So, in an inflationary world exhibiting shorter and more volatile economic cycles, we believe that a flexible and dynamic multi-asset strategy can be a winning approach if implemented correctly. Indeed, while bonds have been shunned for more than a decade by many multi-asset managers, we now consider for instance that index-linked bonds are a key part of our toolkit. The market occasionally throws fantastic opportunities at you, such as last year’s disastrous mini-budget, and this again emphasises the importance of selecting investment managers who are nimble enough to back their ideas with the courage of their conviction. 

Q: Your long-term track record across your conventional and hedge fund portfolios is remarkable. What’s the secret of being a successful long-term investor?

CO: When my investors are pulling most of their money, frightened by the volatility, I am getting excited about the fact that my medium-term view of something hasn’t changed but the entry price has vastly improved. Putting money into my funds when other investors are selling has proven very successful. My own money accounts for over 50% of the funds I manage. My style of investing is proven to be successful, but it will always be rarely copied. It is not how you grow your assets under management, just your own assets.

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