Focus In the Eye of the Storm

Choppy waters are meat and drink for Eclectica's Hugh Hendry

Originally published in the May 2008 issue

“A lot of people define investors as value or growth. We are neither. We are time investors,” says Hugh Hendry, the co-founder and CIO of Eclectica Asset Management. Hendry is aware that some in the investment community already think of him as something of a maverick, but is keen to assert his credentials as a fund manager prepared to adapt his strategies to meet the fast-changing opportunity set which global markets present.

It is no coincidence that Eclectica is planning to launch a long only agricultural futures fund later this year, and part of the founding team transferred from Odey in 2005, analyst George Lee, currently oversees its Agriculture Equities Fund. “We want to invest in the stocks which are relevant today,” says Hendry. “We want to invest in stocks with relative momentum.”

Hendry sees his Eclectica Fund, the flagship investment vehicle that he purchased out of Odey and which his firm is named after, as the ideas incubator for other funds, strategies and investment approaches. His aim is to provide a more thorough menu of investment products to clients in both the hedge fund and long only markets. He is sure that in a world where the rules of capital markets seem to be rewritten every month, it will take a firm with some fairly innovative approaches to investment to continue to attract capital.

The common thread running through all Eclectica’s funds is Hendry’s insistence that equity investments display strong relative performance. “All assets have the potential to go right or wrong relative to their peers before one makes or loses absolute money,” he says. Hendry adds that “emerging bull markets are notoriously volatile and we don’t want to be shaken out by the noise. When we look at a stock, we’re looking at relative strength within a two standard deviation band.” Hence, his persistent holding in mining stocks, for example.

Tapping into momentum

Like William O’Neil, the US entrepreneur, stock-broker and writer (and founder of Investor’s Business Daily), Hendry is wedded to the idea of relative momentum in stock investing, and the use of relative strength ranks. Hendry cites Elroy Dimson and Paul Marsh’s seminal work, ‘Triumph of the Optimists: 101 Years of Global Investment Returns,’ which surveys investment returns across markets and asset classes since the end of the 19th century. He claims the book’s findings offer evidence that relative momentum not only works, it is the only consistent investment model going.

And this adherence seems to be translating itself into performance. His CF Eclectica Continental European Fund was the top-performing fund in the IMA Europe ex-UK sector over three months and 11th over a year to the end of February, one of the toughest years European markets have seen for a while. Its performance was attributed primarily to bullish positions in agriculture and commodities, avoiding financials, and a focus on asset allocation. In March over 20% of the fund was committed to the agricultural sector, a sector with little representation in the main European indices. Another 30% was directed at other commodities-related stocks. High conviction calls like this are part and parcel of the Eclectica approach.

“When a sector reaches 30-35% of an index, market-beating returns are hard to come by; mean reversion is the greater risk,” Hendry explains. “This applies to banks now as it did to oil shares in 1980 and technology shares in 2000.”

In early April Hendry was sounding profoundly bearish on financials, telling a Reuters conference in London that Citigroup shares could eventually fall below $10 (at the time of writing they were $25.87). In 1980 the oil sector constituted a third of the market cap of the S&P 500. In his words, “the next 25 years were scorched earth.”

Hendry’s emphasis is on big market moves, the massive macroeconomic earthquakes that can create big bull markets like the one currently pervading the agriculture sector. He is like someone with their ear to the ground, listening for the undersea earthquake that will bring the tsunami, then riding the wave before anyone else. His analysis stretches back over decades of market and price history, hence the appeal of O’Neil, Dimson, Marshal, et al. It is because of his ability to anticipate the big shifts and dislocations, and deploy to benefit from these in a focused manner, that he can make money. It is one thing to see the credit market coming unstuck, quite another to build a strong position in agriculture and commodities in response.

Activism is so 2007

Once upon a time Hendry was grabbing headlines for his activist stance with EMI. Early last year he was calling for a seat on the music publisher’s board following two profit warnings in two months, and an accounting scandal with its Brazilian subsidiary. At the time activism was de rigueur with hedge funds, with the likes of Chris Hohn’s TCI also achieving impressive results in the European equities sphere. Hendry accepts that activism has its place, and doesn’t rule out putting on his activism boots again. After all, he says, “we are a broad church here.” He thinks the era of the activist hedge fund has largely run its course however: “Society has become less risk tolerant.”

He has also pulled away from short selling, which he feels brings mixed benefits. It is unusual to come across a long/short manager who feels there may not be merit in shorting stocks on a consistent basis, but Hendry believes very few managers are able to succeed consistently by profiting from shorting. “If you go short, you’re rejecting the dividend yield and the positive carry,” he says. Better, he argues, to employ sophisticated long only strategies within the context of a macro portfolio. Don’t wed yourself to a particular universe of stocks – large cap Europe for example. Instead seek new opportunities across the diverse range of all listed equities.

Hendry spent the period 1999 to 2005 working with Crispin Odey, and has learned much from his mentor, including, he says, the art of momentum investing. When the Odey Continental Europe unit trust was up 3% in 2002 the average fund was in negative figures, it was because the fund was focusing on what Hendry calls “the top cherries,” the fruit on the highest branches. He has alighted now on the agricultural sector, a major beneficiary of risk commodity prices, as an area where Eclectica can make money. “We’ve got the chance here to make a name for ourselves, like RAB did in industrial metals,” he says. “We were one of the first hedge funds to start tracking agricultural shares on a disciplined, systematic basis.”

This process reflects the value of the Eclectica master fund as an incubator of investment ideas. Hendry picked up on the merits of the sector early on, and has stayed long the sector fairly consistently ever since. It is now a sector that high corn and wheat prices are starting to drive forwards with the kind of momentum Hendryloves, and yet the number of funds available to investors remains limited. And unlike Schroders, which has raised $5 billion for a fund based on agricultural futures, Hendry wants his product to tap into the momentum-based characteristics of agricultural stocks, like Lindsay Corp, Agrium, and Archer-Daniels-Midland.

Beating the bear

The Eclectica CIO is seemingly able to stand out in bear markets, as he did in 2002 when he was running another European fund for Odey. Back then, the Odey Continental European Fund beat the market by c60% during 2000-02, focusing on gold shares, bonds, and cash. Instead of relying on shorts, Hendry’s anti-risk play is now fixed interest.

He is conscious that the market has been driven to its heights by leverage, and that the de-leveraging process will be long, slow and painful. Taking the CF Eclectica Continental European Fund as an example, it had around 15% in cash and bonds in March, allowing Hendry to protect some of the fund’s value. He has used put options in the past, but as volatility has exploded in price, is now avoiding them.

“For periods of up to 25 years stock-markets oscillate sideways,” says Hendry. “Companies like Cisco, Microsoft, and Intel are where they were 10 years ago. We see our job as to highlight and invest in tiny microcosms.” Agriculture is one such microcosm. At the time of this interview, the issue of food prices was only just beginning to creep into the global news agenda. Now, Hendry’s microcosm is occupying the front covers of Time and The Economist. “We’re time investors, and right now, agriculture is the only sector with profit warnings on the upside,” he says.

It is obvious that Hendry is in the process of turning his back on the classic long/short equity model as a housing for momentum-based investment strategy. He is leaning heavily towards the classic long only equity fund.

He is even sceptical about the current boom in 13030 strategies. “It feels like a late cycle trend,” he says. “It may decline. The problem in essence is that the manager has more, not less at risk.” More conservative investment vehicles also mean Eclectica has been able to tap into the retail market, and is currently seeing some of its funds being distributed via IFA platforms in the UK. This could be the start of a move towards creating a more diversified, retail offering that draws the firm away from its reliance on the core Eclectica macro fund, perhaps evolving into a bigger, more institutional fund management business.


Hendry is a disciple of the multi-manager approach that many established hedge fund firms are adopting these days. And like Odey, Thames River, and Threadneedle, amongst others, he thinks it should be perfectly normal to have both long only retail funds sitting in the same stable with hedge funds. Not only that, but there is still a case, he argues, for long only strategies to be structured and marketed like hedge funds, even though they technically lack a short component. In order to do so, however, the manager needs to be doing something special. It is less about the structure, more about the people behind the fund. “In the 1970s hedge fund managers were considered strange, diffident people,” says Hendry. Original thinking, intelligent investing, will be the differentiator, if it can be translated into solid and consistent performance numbers.


CIO, Eclectica Asset Management

Hugh Hendry is the principal portfolio manager at Eclectica, and leads the firm both in shaping its investment philosophy, but also oversees its research team. He has 18 years of experience in the asset management industry with firms like Baillie Gifford, CSAM, and Odey Asset Management. At Odey he managed a range of funds from $1 billion of long only European mandates to the Eclectica Fund itself. In 2005 Hendry and colleague Simon Batten purchased the management contract of the Eclectica Fund from Odey in order to establish Eclectica as a stand-alone fund manager. Hendry graduated from Strathclyde University in 1990.

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Canadian Oil Sands Trust Biography

Provides a pure investment opportunity in Alberta’s oil sands through its 36.74% interest in the Syncrude Project. Syncrude operates oil sands and mines and an upgrading facility that produces a light, sweet, crude oil. Although cash flow per share was 87 cents following first quarter earnings estimates released in April (versus consensus estimates of 88cents/share), there has been a healthy increase in quarterly distributions. Indeed, distributions have been trending upwards radically since November 2005, when the trust paid out 20 cents on the unit. It will pay out C$1 on the unit in May. UBS analyst Andrew Potter increased his price target on the stock from $38.50 to $43 on 29 April. The stock yields 9% in Canadian dollars and has at least 40 years of reserves making it a unique asset.

Tyson Foods

The largest processor and marketer of chicken, beef, and pork in North America, and the second largest food production company in the Fortune 500. Tyson posted a $5 million loss in April 2008, or two cents per share. This compared with a profit of $68 million last April. It reported that sales for the first quarter of this year had risen slightly to $6.61 billion from $6.5 billion. The chicken industry, currently burdened by higher feed prices eating into its profit margins, will be forced to cut production to re-establish pricing power. Technically Eclectica received its first buy signal in February as, despite terrible news flow, the stock ceased making new lows, suggesting a turn in the chicken cycle.

Potash Corp

Potash Corporation is the biggest single producer of the raw material potash, one of the three main raw materials of agricultural fertiliser. As such, it is a very focused agricultural sector play. The benchmark price for standard grade potash was $252tonne in October 2007, up 44% over 12 months. While Potash Corp reported in December plans to build a $1.8 billion mine which will boost its capacity by over 30% by 2012, its inventories were down by 40% at the end of last year. This, despite a Q3 2007 increase of production by more than 25%. Increasing demand for potash from China has led to radical price hikes in 2008, with Canpotex, the offshore marketing company for Saskatchewan potash producers, reaching an agreement with China’s Sinofert Holdings to sell it potash at $400 per tonne, and this with a commitment to sell only one million tonnes.