An independent professional's take on the latest news and trends in global financial markets

Archive for the ‘Richard Oldfield’ Category

Hoping for the best in 2011

The strategy team at Societe Generale, regularly ranked the best in the City, despite their idiosyncratic ways, chose a useful title for their annual presentation last week on the outlook for markets in the year ahead.  Hoping For The Best, Preparing For The Worst neatly summarises the bipolar nature of where I think we are in the cycle – not much to play for in terms of long term returns, but nevertheless some good reasons to think that the current market recovery can continue into 2011.

Here are a couple of keynote charts from their presentation.  One shows where the US market sits on two well-known long term valuation metrics, a cyclically-adjusted p/e ratio (named after Prof Robert Shiller, the US academic who popularised the methodology) and Tobin’s q, which measures the ratio between the current value of the equity market and the replacement cost of its component companies’ assets.

Read the rest of this entry »

Written by Jonathan Davis

January 24, 2011 at 11:40 AM

Q and A: Richard Oldfield

Richard Oldfield, the subject of our latest Q and A, is the founder and chief executive of Oldfield Partners, a privately owned investment management firm with $2.8 billion under management, invested wholly in equities “on a concentrated, value-focused, index-ignorant basis”. He is largely unknown outside the professional world, but highly regarded within it.

Before founding Oldfield Partners in 2005 he was for nine years chief executive of a family investment office. He is chairman of the Oxford University investment committee and of Keystone Investment Trust plc, and the author of Simple But Not Easy, a “slightly autobiographical and heavily biased book about investing”, first published in June 2007, which I strongly recommend and praised in The Spectator.

How generally do you see the equity markets at the moment?

We are torn between the extreme gloom about the problems of the public sector and enthusiasm for the new strength of the private sector, with strong cash flow and balance sheets and evidence of much improved demand, and valuations which are not too high. On balance we think it is positive for equities (which is a bias, but not an invariable bias, of ours).

Is the crisis in the eurozone over yet?

I think the outcome is resting on a knife-edge. On balance my sense is that the crisis will pass, and the euro will survive, at least for now. The stakes are too high for governments to let it go. I have always said however that the euro was unlikely to survive for more than 15 years, and I stick to that.

All that talk of the euro becoming a new reserve currency can be discounted. It isn’t going to happen. Central banks are not going to be rushing to buy more euros if they think they might be getting drachmas instead. On that basis that the euro does survive for now, however, that should mean we get a decent market rally.

What is the best approach to adopt in this kind of market?

The cushion of comfort is very important: risk is high. Investors need to be sure they have enough in low-risk assets so that they will not fret too much about the higher-risk ones. But once this cushion of comfort is determined, a different figure for every investor reflecting not only circumstances but temperament, investors shouldn’t be too shy of holding equities.

The answer I think you are begging with this question is “buy and hold is dead – do we need a trading strategy instead?” I am not too sure of that. The time to be skeptical of buy and hold was, in hindsight, in 2000 before equities gave a negative return for ten years.

Now, on the contrary, buy and hold may be a little hairy – hence the importance of the cushion of comfort – but the odds of an average to above-average return over the next ten years seem to me to have risen, particularly with quality stocks which really are for tucking away for the long term.

What opportunities do you see? Are there any striking valuation anomalies?

Not many major anomalies at the higher level – sectors or country. Japan though is cheap and maybe now the catalysts to this cheapness getting recognized have increased – a weaker yen, and a government determined to stimulate consumption. Quality equities, by which I mean major companies with low debt, strong cash flow, relatively unvolatile earnings, and high return on equity, do look good value.

There are plenty of anomalies, we think, at the stock level. Some excellent companies are becoming extremely cheap. The only question is whether the good companies in the private sector are going to get crushed by the public sector. On balance I still think that is unlikely.

Please give some examples of stocks you have been buying and why?

The most recent purchases this year have been Fiat and Hitachi, both based on the sum of their parts. Hitachi has been a dismal story, but there are signs at last of management change to sort out this amorphous conglomerate, and the stock is extraordinarily cheap.

Fiat is only the fourth car company we have bought in 30 years. Car companies are terrible – high debt, highly cyclical, usually union power – but in return for their terribleness there is occasionally huge upside and we think we have it here.

What would you avoid (or go short of) and why?

We would continue to be wary of China.

What are your thoughts on gold, bonds and property?

Gold: having been a bull for the last ten years, I am now wrongly somewhat more skeptical. The conditions still appear classically good for gold, but everyone is already there. On bonds, I am afraid, we are entirely consensus in being negative. Property – no clear view.

If you had just one moneymaking tip for this environment, what would it be?

But we don’t (and, seriously, we don’t believe in having one good idea; we think a portfolio should have a lot of decisions at play in it). Don’t stray too far from your comfort zone is the most important thing.

Written by Jonathan Davis

June 1, 2010 at 2:57 PM

Too Early To Panic (Though Some Are)

After another turbulent week in the markets, it seems a good point at which to stop and take stock of where we are. Equity markets are now oversold and will certainly have a bounce soon, for sure. Readers of Independent Investor will know that Jim Rogers thinks this is just a normal market correction, after the strong run from February to April.

Crispin Odey thinks the trend is still upwards. Ken Fisher does so likewise. Sanjeev Shah, Anthony Bolton’s successor at Fidelity, also thinks the market is oversold and has bought some more units in his own Special Situations fund – always an encouraging sign.

In a short Q and A last week, Richard Oldfield, the founder of Oldfield Partners, a specialist equity fund manager which has no public profile but is much admired by those who know it, is keeping his pro-equity bias in place, though he also said that he has learnt to ignore at this peril technical indicators such as Investors Intelligence’s bullish/bearish sentiment indicator, which has been flashing a clear warning sign.

So, at the very least, even if you don’t dare to be bullish, don’t be fooled by dramatic media headlines into thinking that the equity market rally is necessarily yet over. The crisis in the eurozone is real enough, and has been confounded by the unimpressive response of Europe’s political leadership to date. There is no doubt that there is an element of investor panic out there in the response to the unfolding eurozone crisis.

You can see this in a number of different indicators. The VIX index, which is often used as an indicator of fear in the market, has risen sharply in the last two weeks.

More worryingly, so too has the Libor rate, the key interbank lending rate which can also be interpreted as an indication of how willing banks are to lend money to each other.

This underlines the fact that behind the worries over the eurozone is the fear of further banking collapses. The rescue of the Spanish bank this weekend underlines how weak many lenders in the eurozone still are.

If banks start to stop lending to each other again, and liquidity dries up again because of fears over bank solvency, we will heading back towards a new crisis.

The technical condition of the stock market has deteriorated in the last few weeks. Richard Russell, the doyen of all technical analysts, now in his ‘80s, reports from his San Diego home in dramatic tones that the stock market has entered a primary downtrend.

All this may help to explain why Philip Gibbs, the financial expert at Jupiter, moved a lot of his funds out of equities and into cash earlier this year, fearful of the impact that the new crisis over sovereign debt might have. Against is the fact that Jupiter has announced last week its intention to float on the stock market, not something the firm would presumably try if the hugely influential Mr Gibbs was as bearish as he was in the run up to the 2008-09 banking crisis.

The risk of a new financial crisis, as has been noted here before, has never gone away, but the odds against it happening have been lengthening. Now the odds have taken a hit back in the opposite direction. A new crisis can still be avoided, but investors need to be aware that the possibility remains, even if it is still more likely that the equity market will start to pick up, as it was clearly beginning to do on Friday before news of the Spanish bank rescue.

While I remain confident that the case for equities remains robust, therefore, it is clearly sensible to remain alert to the danger of a new crisis, and be prepared to act accordingly if the market fails to bounce back. The next couple of weeks will give us more clues as to whether another dramatic stock market crisis is imminent.

Written by Jonathan Davis

May 24, 2010 at 8:33 AM

The SEC and Goldman Sachs: Danger Ahead

The SEC’s action against Goldman Sachs is just the kind of dramatic and unforeseen event that could stop the equity market’s strong rally in its tracks. By chance the day before yesterday’s SEC announcement hit the news wires, I spent some time discussing the state of the markets with Richard Oldfield, a highly regarded investment manager who runs the successful boutique firm Oldfield Partners, and among other things sits on the Investment Committee for Oxford University’s endowment. (He is also the author of a splendidly readable book, entitled Simple But Not Easy, which explains in plain language some of the home truths about the business of investment management that you won’t hear from most practitioners).

Discussing how far and how fast the markets have turned round over the past 12 months, Richard noted how whereas being bullish a year ago was patently a minority view, more recently it has become mainstream, even if volumes remain light by historical standards. Although you can justify the market’s current levels on valuation grounds, given the positive surprises about earnings and economic recovery that continue to come out of the United States, we are reaching a stage where markets become vulnerable to an adverse movement in sentiment. With Wall Street already looking somewhat overbought on technical grounds, it might not take much, he thought, to stop the rally. 

Among other telltale indicators that Richard tracks, he has learnt to keep a close eye on the Bullish/Bearish adviser sentiment index tracked by the technical analysts at Investors Intelligence. When the proposition of bullish advisers exceeds 50% it is a classic warning signal. “I have ignored it in the past and usually come to regret it” , he told me. With the most recent reading at 49% bullishness in the US adviser community against just 18% bearishness, we are approaching just such a point when it leaves the market vulnerable to an unexpected piece of bad news. Barely 24 hours later we have just such a potentially damaging story hitting the headlines.

Why could today’s Goldman Sachs story be that news? Partly of course because Goldman is the pre-eminent investment bank in the world. If the SEC succeeds in proving a case against them for its part in the subprime mortgage scandal, it could well be the trigger for actions against other participants as well. It also signals the strength of the political imperative for the authorities to be seen to taking action against those who were prominently involved in the subprime disaster.

More importantly, try as hard as it might, Goldman has been unable to refute convincingly the unsavoury suggestion that it was effectively playing both sides of the trade as the subprime mortgage market collapsed – helping to create the CDOs that hedge fund managers such as Jim Paulsen wanted to short and then selling them to others of its own clients. The apparent conflict of interest is not only unseemly but potentially, if proved, highly damaging to Goldman’s brand name and franchise.

The 12% drop in the investment bank’s share price yesterday is not an encouraging omen, implying as it does that the market is all too aware of the potentially adverse implications of the SEC’s action. Needless to say, immediate market reactions are often wildly overstated and it may be that Goldman will be able to fight back successfully and contain the damage as we move forward. If the share price recovers quickly, the story may well disappear and the market can continue its upward momentum. I have certainly learnt many times the importance of not over-reacting to dramatic sounding market news, especially when as now equities are due a pause after a strong run.

Nevertheless, to my mind this has all the makings of a red flag which could in time turn out to have wider market implications, of the kind that Richard Oldfield raised as a possibility. Against a still positive outlook for equities, a note of caution is called for.

Written by Jonathan Davis

April 17, 2010 at 9:25 AM