In 2010, at the peak of the eurozone crisis, one hedge fund manager captured the British public’s imagination like no other.
Hugh Hendry was already well known in the investment community for managing to make a return of 31% in 2008, at a time when everyone else was feeling proud of themselves if they’d managed anything better than a 40% drawdown.
The panic over Greece brought him to everyone else’s attention. He became a fixture on Newsnight, delivering cheeky barbs to establishment representatives including Jeffrey Sachs, Nobel prizewinner Joseph Stiglitz, and various eurozone politicians as they tried to downplay the Greek debt situation.
He was a populist before it was cool.
But Hendry struggled with the apparent absurdities of the post-2008 bull market, as did his investors. And on Friday last week, he called it a day.
In the end, the establishment won…
No one can be a master of all markets
Hugh Hendry made his name betting against the market in 2008. Now, after a long, relentless bull run, he’s throwing in the towel.
The simplistic message – and the obvious, ironic and horribly appropriate ending to the story – is that the bull market will now come to a sticky end, with Hendry going down in history as being the last bear to give up. (And that might still happen. The market is not subtle like that.)
Firstly, many people deride his track record. But in Hendry’s defence, I would note that if a fund manager is capable of making 30% during 2008, then you have to accept that the same manager is likely to struggle during a relentless bull market. (Note that he also did very well in 2011, another rough year and one in which he returned 9% while the S&P 500 made just 2%.)
Secondly, the reality is that Hendry capitulated (in terms of abandoning his bearish views) a long time ago. In late 2013, he wrote: “I cannot look at myself in the mirror; everything I have believed in I have had to reject.”
And in 2014 he gave a blisteringly honest interview to my colleague Merryn Somerset Webb. You really should watch it – it’s a quite extraordinary mea culpa and certainly not something you see every day from a fund manager.
In essence, Hendry learned to stop worrying and love the Fed. He turned bullish. And if anything, it was this change of heart that was the killing blow for Eclectica. In April 2013, it still had $1.3bn in assets under management. By the time it shut down, that had dwindled to just $30.6m.
Hendry wanted to be right. But it turned out that his investors didn’t want him to be right. They just wanted a bear fund manager. They trusted him not to lose them money if a big bear materialised. But after his change of heart, they started to question what the purpose of his fund was. They already owned cheap S&P 500 tracker funds elsewhere in their portfolio – did they really need another, more expensive, play on never-ending quantitative easing in there as well?
This is the most valuable lesson for you as an individual investor. You have to understand what each part of your portfolio is doing, and why it’s there. Why do you own this fund, or stock, or bond? What role does it play? And is this really the cheapest and most effective way to get that exposure? Or could you be invested in something less expensive that does the same or a better job?
And if you are investing with an active manager, then you need to keep a close eye on what the manager is doing. No manager can be expected to thrive in every investment environment. We all have our quirks and preferences, which mean that we’re more in tune with some investing environments than others.
So I’d rather have a clear grasp of a manager’s strategy and skills, and then decide on that basis whether I need that in my portfolio.
For example, Nick Train at Finsbury Growth & Income has a brilliant record. At some point though, his “Nifty 50”-ish style of investing will go through a fallow period. That’s just the way that markets work. But I’m pretty sure he won’t change his style, and you wouldn’t want him to. It’s more useful in terms of building a diversified portfolio to know what you’re getting, than to invest with a manager who chops and changes.
Inflation is coming – but it’s not bearish yet
One thing’s for sure though – as a consistently original thinker, Hendry is still worth listening to.
In his final letter to investors, he writes that the best historic comparison for today’s environment is the mid-1960s, or 1965 to be precise. I touched on this previously when I wrote about the credit crunch of 1966.
The point is, back then we had low-inflation and high-employment, too. In 1964, CPI core inflation was 1.7%, and in 1965 it dipped to 1.2%. And, says Hendry, “like today, there was no epic bubble or set of circumstances whose reversal could cause a slump.”
But price stability was about to be consigned to the past. “By the end of 1966 inflation had essentially got out of control and didn’t dip below 2% again until 1995, almost 30 years later.”
As a result, Hendry reckons the bond market is way too gloomy. He clearly thinks there’s a while to go before inflation actually starts to hurt – in effect, he expects an inflationary boom, which will be good for equities. And he’s not suggesting going “short” the bond market yet, which he reckons will remain stubbornly sceptical for some time – instead he suggests betting on rising bond market volatility (not easy for private investors to do, admittedly).
Is he right? I’ve been expecting an inflationary dénouement for a long time, so Hendry’s view certainly chimes with me, but clearly I’ve been early on that for a while. We’ll see.
But on that note, German financial writer Holger Zschapitz points out that in recent months, of the 19 countries in the G20 (the eurozone is included separately in the G20, along with France, Italy and Germany), 11 saw annual inflation rise in August. That’s a significant turnaround from earlier in the year, when inflation was consistently dipping month after month across the G20.
And as for what happens in the end – well, of course, the low-inflation, high employment of the 1960s, was followed in short order by the 1970s, with its society-shattering levels of inflation.