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HUGH HENDRY FINDING INVESTMENT OPPORTUNITIES IN EUROPE – CF Eclectica Continental European Fund up almost 14% relative to market 19/03/2008
The CF Eclectica Continental European fund is the top performing fund in the IMA Europe excluding UK sector year-to-date and has outperformed its index by almost 14% during the same time period.

Manager Hugh Hendry attributes the ability of the fund to weather recent market turmoil to several factors including:

investments in agriculture and commodities
avoidance of financials
a focus on asset allocation
Over 20% of the fund is currently invested in European equities related to agriculture – a sector with virtually no representation within the index. A further 30% is invested in commodity equities and equities related to capital expenditure in the commodity area.

Hugh Hendry said, “We believe the markets are embracing a historic revaluation of hard assets versus their financial counterparts. This reflation will be different to previous examples and the change in the economic weather is catching out many of the stock market legends. “

Syngenta, makers of genetically modified seeds, and Yara, the world’s number one supplier of mineral fertilizers, are two of the companies Hugh is investing in to play this theme.

Asset allocation also plays a vital role in the investment strategy of the fund. The manager is willing to make high conviction calls such as the almost total avoidance of financials within the portfolio.

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

The fund has held no financials for two years.

Relatively high cash and bond positions, around 15% of the fund, have also allowed Hugh to protect the fund’s assets. In recent times put options have also been a feature but these have been de-emphasised as volatility has exploded in price.

This strategy is serving the fund well, as it did in 2002 when Hugh’s previous European ex UK fund was the only one to make money. The Odey Continental European fund that Hugh managed from 1999 until 2005 beat the market by around 70% and, during the 2000-2002 bear market, distinguished itself by making money. Back then Hugh employed a similar approach and again strategic asset allocation drove returns – avoiding financials, investing in gold shares, bonds and cash.

Hugh expects further interest rate cuts will be made in an effort to aid the financial sector but to little effect in the real economy. However this will be fuel on the fire of commodity prices.

This in Wednesday, via a Reuters conference in London: Hugh Hendry, CIO of hedge fund Eclectica Asset Management, declared that financial stocks could take 25 years to recover from the subprime disaster and added that Citigroup Inc. would fall below $10 a share.

His logic: Subprime represents the puncturing of a bubble that began the last time Citi collapsed, in 1991 (bottoming at less than $10 a share). “The origination of the bubble in U.S. financing is circa 1991, with the bailout of Citigroup,” Hendry said. “It is my presumption that we will return to such levels.” Hendry argues that when a bubble is created in a sector’s stock it takes a quarter of a century to return to prebubble levels. Oil stocks, he said, made up a third of the S&P in 1980, then suffered a 25-year period of “scorched earth” before their recent recovery.

There are a number of oddities here, some of which may come from the rather sketchy Reuters story itself. Twenty-five years is a long period in the markets, and over that stretch market fundamentals tend to be swamped by real economy factors. The Japanese bust and deflation lasted more than a decade, despite multiple policy errors. Based on Hendry’s notion, it took until 1954 to recover from the Crash of 1929, with the ultimate real-world event — World War II — playing a small role in the middle. Is our situation analogous to that? What role will policy — good, bad, indifferent — play?

Hendry’s theory raises other questions. Does his 25-year cycle apply to single firms — Citi, say — or entire sectors? Is, say, Morgan Stanley on the same treadmill as Citi? The usual notion is that real economy supply and demand — from OPEC to China — determined the ’70s bubble and our current runup in prices and shares. Did China suddenly get thirsty for oil because 25 years have passed? Why would the subprime bubble have begun in 1991 with the Citi “bailout” — technically it was less a bailout by the Fed than benign neglect — which involved highly leveraged loans and commercial real estate? We’ve had ups and downs since then, including a tech bubble, a recession and down real estate markets, all of which hammered financial stocks. Why is 25 years the magic interval? And what’s so magic about $10 a share? Hendry, a longtime bear, has suggested in the past that there’s a sort central bank conspiracy — he’s not an Alan Greenspan fan — to flood the world in liquidity and that we’ve been living a loose-money, false prosperity for years. Has that now come to an end? Or is he communing with some deeper technical wisdom that’s not evident? Has subprime exposed a fundamental flaw in financial stocks, beside a collective speculative boo-boo, that will keep them prostrate until 2033?

We may well be in for an ugly stretch here, and financials may be down for awhile. But the future is still uncertain, and Hendry is cavalier-bordering-on-the-absurd with his use of the term “bubble,” which, like any cycle theory, can be tossed around so promiscuously because the future is so unknowable. It’s good conference fodder, but just that, particularly in these gloomy times. Maybe Hendry has a quarter-century short on. - Robert Teitelman

This in Wednesday, via a Reuters conference in London: Hugh Hendry, CIO of hedge fund Eclectica Asset Management, declared that financial stocks could take 25 years to recover from the subprime disaster and added that Citigroup Inc. would fall below $10 a share.



His logic: Subprime represents the puncturing of a bubble that began the last time Citi collapsed, in 1991 (bottoming at less than $10 a share). "The origination of the bubble in U.S. financing is circa 1991, with the bailout of Citigroup," Hendry said. "It is my presumption that we will return to such levels." Hendry argues that when a bubble is created in a sector's stock it takes a quarter of a century to return to prebubble levels. Oil stocks, he said, made up a third of the S&P in 1980, then suffered a 25-year period of "scorched earth" before their recent recovery.

There are a number of oddities here, some of which may come from the rather sketchy Reuters story itself. Twenty-five years is a long period in the markets, and over that stretch market fundamentals tend to be swamped by real economy factors. The Japanese bust and deflation lasted more than a decade, despite multiple policy errors. Based on Hendry's notion, it took until 1954 to recover from the Crash of 1929, with the ultimate real-world event -- World War II -- playing a small role in the middle. Is our situation analogous to that? What role will policy -- good, bad, indifferent -- play?

Hendry's theory raises other questions. Does his 25-year cycle apply to single firms -- Citi, say -- or entire sectors? Is, say, Morgan Stanley on the same treadmill as Citi? The usual notion is that real economy supply and demand -- from OPEC to China -- determined the '70s bubble and our current runup in prices and shares. Did China suddenly get thirsty for oil because 25 years have passed? Why would the subprime bubble have begun in 1991 with the Citi "bailout" -- technically it was less a bailout by the Fed than benign neglect -- which involved highly leveraged loans and commercial real estate? We've had ups and downs since then, including a tech bubble, a recession and down real estate markets, all of which hammered financial stocks. Why is 25 years the magic interval? And what's so magic about $10 a share? Hendry, a longtime bear, has suggested in the past that there's a sort central bank conspiracy -- he's not an Alan Greenspan fan -- to flood the world in liquidity and that we've been living a loose-money, false prosperity for years. Has that now come to an end? Or is he communing with some deeper technical wisdom that's not evident? Has subprime exposed a fundamental flaw in financial stocks, beside a collective speculative boo-boo, that will keep them prostrate until 2033?

We may well be in for an ugly stretch here, and financials may be down for awhile. But the future is still uncertain, and Hendry is cavalier-bordering-on-the-absurd with his use of the term "bubble," which, like any cycle theory, can be tossed around so promiscuously because the future is so unknowable. It's good conference fodder, but just that, particularly in these gloomy times. Maybe Hendry has a quarter-century short on. - Robert Teitelman

in http://www.thedeal.com