The first thing visitors to the Odey Asset Management website will see is a quote: “To be a successful long term investor you must think like an owner – know when to take risk and when to preserve capital.” Crispin Odey launched Odey Asset Management in 1991 and this principle has guided his activities since then to the benefit of a grateful clientele.
Long-term increases in stock price are only half the story. “The secret is how you capture earnings,” Odey explains. When he launched his flagship hedge fund, the market was on a P/E of roughly 10. “Over 20 years, market earnings have doubled and the multiple has gone up to 15 times. We have made 17 times our money over that period, but most significant is the growth in earnings,” he says. “If you are an original investor in our fund, some 40% of that earnings growth is paid out in dividend. So the dividend now is about 60% of the capital you put in.”
Frontline view
Unusually among asset managers, Odey is both a portfolio manager and a trader. The former he describes as essentially “an optimistic group of people”, particularly in their long-only incarnations. The latter, by contrast, tend to pessimism. “The trading side of me asks, ‘What is the downside here?’ I tend to have a much less optimistic view on life and have done over time,” he says. That clearly worked in his favour at the start of the last financial crisis.
“In 2007 and 2008, going into the beginning of 2009, when most people lost a lot of money, we made a lot of money,” Odey says, though acknowledging that such prescience comes at a price. “It was somewhat painful having that view in 2005 and 2006,” says Odey. “When everybody else was saying, ‘This is wonderful!’, I felt frankly like Noah building his ark, without as much encouragement from those around me as Noah got.”
Similarly, Odey sees an advantage in being able to link macro and micro strategies. “With macro, I can’t resist getting involved in a ‘pub brawl’ as I go past it, as in lots of ways it is about solving problems. When you find what seems to be an insoluble problem, that is when you become interested,” he says. He offers the example of the housing market before the crash, when in 2007, he identified such a problem: authorities were encouraging people to borrow at 300 basis points over LIBOR – then 5% – and buy into property, which has a natural yield of 3%. “Anybody could spot there was a negative carry of 5%,” says Odey.
In addition, high leverage ratios exacerbated the potential consequences of a slowdown in asset price rises. “It was ultimately a solvency problem and the only way you solve a solvency problem is to go back to positive carry,” he stresses. Given the unappealing choice between a drastic fall in asset prices and a drastic fall in interest rates, governments chose the latter.
What’s next
The impact of quantitative easing has, however, been to make all asset classes unattractive and Odey is bracing for more trouble. “There is a strange sense this year that the world needs a bit of crisis, because otherwise what will happen is everyone will put their money into illiquid assets and trade those,” he predicts. “Whereas 2008 was a solvency crisis, this time round it could be a liquidity crisis. Having put their money into illiquid assets which they saw as high yielding, people may find that they can’t get their money out.”
A long-term perspective helps Odey – and his clients – remain sanguine at such times.
“We have some very strong fundamental views about things, but you have got to overlay them with an understanding of where you are in the cycle,” he says. He points to an outcry in the UK media earlier this year over the shooting in Malta of migrating birds. “I don’t want people to shoot song birds,” he says, “but if you want to shoot song birds, shoot them in Autumn, when there are lots of them, because they have produced; not in Spring.”