At a time in which the developed world is on the precipice of a recession that “will be remembered in a hundred years”, several high-profile fund managers were recently stripped of their Alpha Manager status by FE for being too bearish.
Hedge fund manager and founder of Odey Asset Management Crispin Odey recently issued a stark caution on the outlook for the developed world, predicting a cyclical downturn that will leave equity markets “devastated”.
Odey, who correctly predicted the onset of the credit crunch, said in a client letter last month that policymakers have little in their armoury to stave off the coming downturn and that European Central Bank president Mario Draghi “will disappoint” in his efforts to restore economic momentum in Europe.
“We are in the first stage of this downturn,” he wrote. “It is too early to see what will happen – a change of this magnitude means the darkness and mist is very great. We will see some mistakes but with our thinking we won’t make the major mistakes.”
Amid this backdrop Odey confessed to being amazed to see so many investors being fully invested given that in his view equities are already fighting the downward trend.
“Mid and small-caps have been moved into bear markets and much relies on large caps to keep the whole thing going and they are very exposed to international trade,” he added.
Despite this warning, a parade to high profile fund managers were recently chopped from the FE Alpha Manager list, with the ratings firm arguing they had fallen behind in the bull market since 2011 because they had been too defensive.
Axa Investment Managers’ Nigel Thomas, who runs the £4.5bn Axa Framlington UK Select Opportunities fund, and Blackrock UK Special Situations manager Richard Plackett, were two big names cut from the list.
FE head of research Rob Gleeson says: “The whole purpose of the list is highlighting that managers don’t go bad overnight, even though a strategy may go in and out of fashion. But maybe the way these managers thought the world worked is no longer relevant.”
FE determines the top 10 per cent of managers on their track records back to 2000, with a heavier weighting to those with more years of experience. Specifically, the research focuses on a risk-adjusted alpha, outperformance in rising and falling markets and those managers who consistently beat their benchmarks.
While Thomas has outperformed his peers over five years, his fund has slipped to third quartile over one and three year time periods. Indeed, Gleeson says over the past three years the drivers of Thomas’ returns have changed and that beta is now more than offsetting alpha.
Despite stripping out those managers whose returns have slipped owing to being bearish, Gleeson says he does broadly agree with Odey’s comments.
“The fundamentals all point in one direction,” he says. “You have the slowdown in emerging markets, an aging demographic in the West and nothing really to pick up the slack and how long the central banks can prop things up is anyone’s guess.”
The problem for Gleeson is timing. “Bear markets are always proved right eventually,” he says. “But is the market going to tumble today, next week or in five years? Managers get hit the most trying to time this and that is the point we are making with our current list of Alpha managers.”
Defending his stance, Thomas wrote in his latest note that the after-effects of the global financial crisis are still being as governments attempt to pay down debts.
“Many companies we meet are rising to the challenges of the new era, some are not,” he says. “The next 12 months will carry a great deal of uncertainty through which to invest.”
One fund manager who does not share Odey’s concerns of a slowdown is Hawksmoor’s head of research Jim Wood-Smith.
“There is a loudening cacophony that the global economy is out of puff, central banks are out of ammo and we are all off to Hades in a small wicker pannier,” Wood-Smith said in an investment note responding to Odey.
“We could be, of course, but I am not seeing it, which puts me at diametric odds with Crispin Odey.
“I have enormous respect for Odey. He has a track record of being right more often than not and his always forthright views are important to be aware of. Some doomsters are FYI only, broken clocks that must inevitably tell the right time eventually.”
Presenting an alternative view of the world, Wood-Smith firstly points out within the eurozone the bare facts remain that core inflation is still positive and in most countries growing, quantitative easing will raise GDP by about 1 per cent a year and “Greece does not matter”.
Meanwhile in the US, while the dollar is hurting profits, Wood-Smith says the oil price slump is helping, with consumer surveys being close to decade high. The housing market is also starting to recover.
As for concerns regarding deflation, Wood-Smith is convinced the reflex reaction that deflation must be bad comes from the performance of the Japanese equity market, not the economy.
“Any sensible analysis of economic history shows that inflation is the abnormality; rising prices reflect inefficiencies and regulation, falling prices are the norm of free market capitalism,” he argues.
So while admitting there are things to worry about, such as China’s growth rate and what the West will do with its debts, he argues these are reasons for caution and not the terror purported by Odey.