Ed Wielechowski portfolio manager of the Odyssean Investment Trust talks to Rupert Hargreaves. Odyssean’s investment strategy is to invest in a concentrated portfolio of well-researched quoted UK smaller companies, typically too small for inclusion in the FTSE 250.
Since its inception, it has outperformed its benchmark by more than 50%. In this interview, Ed discusses the trust’s approach to finding investments, the outlook for the UK equity market, why there’s an opportunity in UK small caps and highlights two investment ideas.
You can find more information about Odyssean on their website: https://www.oitplc.com/
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TRANSCRIPT EXTRACT
RH: Welcome to MoneyWeek Interviews. In this series, I will be speaking with a wide range of fund managers to discuss their views on the market and where investors can find the best investment opportunities today.
In this interview, filmed in central London on the hottest day of the year in the UK I sat down with Ed Wielechowski portfolio manager of the Odyssean Investment Trust to talk about the firm's unique investment strategy and outlook for UK small-cap equities.
I do hope you enjoyed the interview as much as I did and please stay tuned for more MoneyWeek Interviews.
RH: Ed thank you for joining us. Odyssean takes a unique approach to finding investments and it's always taken a unique approach since it launched in 2018 and it has outperformed its Benchmark on an NAV basis by a substantial margin. So I'd be curious if you could tell me why you think that is and what works about your approach?
EW: Yeah sure - firstly thank you for for having me in today - so we set this up in 2018 with the ambition to basically make our clients money. It sounds a bit trite but that's what we're trying to do we're not trying to beat an index, we're trying to deliver a good return to our clients. We think we can double our clients' money over a five-year period, which roughly equates to a 15% annualized return and we think we can deliver that across a cycle.
The way we go about doing that is we we draw on our heritage, which both Stuart and I, who run the fund and even the chairman of our management company have which is starting our careers in private equity and we very much bring that private equity philosophy to our approach to making investments in public markets. We think that leads us to look at investments in a different way.
What we're looking for in terms of quality how we think about valuation and how we think about the investment stories we're looking for our investments as a result, we tend to construct a very different portfolio of assets to a lot of our peers in the market it means we're not growth-focused, we're not value investors as such, I know the market likes to quite often diverge into those two camps. We feel we're not either and quite different, a lot of our clients actually use this as a diversifier alongside some other strategy in that bucket so I think the core is really all about the investment approach and a different mindset we take. That means we deliver a differentiated set of returns. As you say we've been fortunate enough to have a good run since IPO.
RH: When you say you set out with the ambition to make your clients money - what made you come up with that? Do you think that's something that other investment managers don't?
ED: lt's a little bit of a silly phrase, but I think it's actually quite important. This actually does come from the chairman of our management company Jim Armitage who's very keen that as an investment manager, your objective should be to look after your clients and clients' money. Our objective isn't about beating an index or matching an index, it's about delivering those returns. Yes, it's a simple thing to say, but it's very important for us and that's how we think about all our investments. We're not focused on the short-term we're focused on the mid to long-term and really delivering those returns for our clients.
RH: You're a relatively small trust in the grand scheme of things compared to some of the mega-cap funds that are out there - do you think that gives you an advantage?
I think it gives us an advantage in the sense that we are able to focus on a certain part of the market and be strict in our focus. So we typically invest in companies with a market cap range of £100m to £1bn and we can be quite strict about that. There's a limit to how large you can grow if you're going to invest in that area and not be dragged up beyond the top end of that range. By being of a smaller size we allow some discipline in where we focus our investments. The reason we choose areas is because that's where our investment style works best - it's where we think the most opportunities in terms of mispricing and the most opportunities in terms of businesses that can go through a transformation that will deliver a differentiated return over time.
By saying to ourselves we're not just going to asset gather, but we're going to cap the size of the strategy - and we think we could probably run £500m to £600m in this area of the market - then we'd probably stop.
We'd rather be disciplined and focus on what we know what we've done before and what's worked rather than just gather assets for the sake of growing the business. That's part of the philosophy right again back to that - we're here to make people money we're not here to build an empire as it were.
RH: Most of your investing is in the UK in the UK equity market. I think it's one of the most disliked equity markets in the world at the moment. I wonder what are your views on what is happening to the UK equity market?
EW: We think it's a really interesting time for UK equities at the moment. You're right it's an unloved space and it's been unloved for well, quite a long time, but if you are familiar with a lot of market commentary at the moment, it's generally agreed that UK equities are a cheap market at the moment. We agree with that. In our conversations with clients recently, we've been pointing to a number of metrics - just on a pure multiple basis the markets look cheap - but using more fundamental analysis, looking at using tools to do discounted cash flow analysis of whole markets suggests to us the UK is certainly trading below its fundamental value today and certainly much cheaper than other geographies. If you look broadly around the world, where it's noticeable is the US remains quite highly valued, Europe probably more fairly, but the UK is a real outlier of value now for us.
That's a really interesting opportunity. We believe the starting point for great returns is to buy assets at a price below their fair value, and as a whole, we think there are a lot of opportunities in the UK today. I guess if this market's cheap today, what's going to change tomorrow?
As you say it's been unloved for quite a long time. It’s really hard to make predictions on what's going to happen in the next 3 to 6 months, but if you look through prior cycles, eventually the world does change.
…
RH: I want to move on to your positions. I think your largest position is Elementis…
EW: Yes, Elementis. This is a really interesting business. It's a speciality chemicals company, but what's different about it to most chemical businesses on the market is it's vertically integrated. It actually owns its own raw materials. It has mines, it has the only mine in the world that mines a certain type of clay called Hectorite out in the California-Nevada border. It has a number of mines up in Finland, which mines the highest grade talc in Europe - We invested back in 2020 after the Covid pandemic had just really hit. It was one of the industrial names we decided to invest in. Part of the reason for that is that vertical integration.
We look at the business and it's got market-leading positions across a number of end markets but importantly for us, going into that downturn, the vertical integration meant we felt it would be very capable of surviving any inflationary environment. Raw materials - what's a better hedge against inflation than that?
Alongside that, the group had been built up through M&A over time, and there was a significant opportunity for cost savings to be delivered by the management team. So if you think about the stories we like - good businesses that could be doing better, this was a good business, good assets, market-leading positions, margins probably weren't optimized, a new growth engine that probably could be accelerated, and there was a team in place starting to go through the process of delivering some of those changes.
So when we backed it, we thought well, our entry price was I think at about half of tangible book value, and as I say, tangible book - in this business has a real meaning - there's real assets in the ground there. Yeah, so it felt a bit of a one-way bet, and that's what we're looking for - to get into businesses where we feel our entry price is very well underpinned.
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