Eclectica Asset Management is one of a dying breed of hedge funds that isn’t merging into the mainstream. Its esoteric interests mean it increasingly looks for direct contact with companies.

Not all activist hedge funds are born activist. It is, after all, a strategy open to any investor with a long-term investment horizon and a strong stomach.

So whereas hedge fund groups such as the Children’s Investment Trust and GLG Partners have become synonymous with activism, others have entered the activist arena almost by accident.

Eclectica falls into the second camp after it picked a well publicised fight last year with UK music group EMI. It believed EMI assets were undervalued by the market and that the management was not acting in the shareholders’ best interests.

Through a high-profile campaign in the media, Eclectica tried to force EMI to crystallise the value in its publishing division.

Eclectica has yet to win concessions from the EMI board and has since substantially sold down its two per cent stake.

But Simon Batten, co-founder and chief executive of the firm, defends its decision to attack the company publicly.

“We felt angry that they were not taking the shareholders’ view,” Batten says. “We felt there was no harm in us being vocal. We are very small and we felt they wouldn’t listen to anyone who was small and didn’t go public.”

Nevertheless, it was an alien move for Eclectica. Batten says: “It’s not what we do. We just felt angry about the way they managed the business. There was a lot of value that could be realised and we wanted them to do something better.”

Even if it is an isolated exception for Eclectica, the episode does show that investors are less afraid to voice their concerns to companies on the public stage. Any company that believes it has a compliant shareholder base may be in for an unwelcome shock.

Learning the trade
Eclectica, as its name suggests, is willing to consider any investment strategy that produces returns.

It is driven by macro themes, following in the footsteps of great hedge fund managers such as George Soros.

In a sense, it is a throwback to an era before the institutionalisation of hedge funds began, when maverick hedge fund managers were the norm rather than the exception.

Eclectica manages $700m (€523m) in assets, of which $300m is run in a hedge fund managed by co-founder Hugh Hendry, and the rest in long-only assets.

The hedge fund was spun out of Odey Asset Management, which was set up in 1991 by renowned investor Crispin Odey and now manages more than $2bn in seven hedge funds and $4.3bn in total.

Batten, who worked at Odey from the start, was chief executive and in charge of operations while Hendry was a portfolio manager.

Although Odey was ultimately successful in producing returns and attracting new money, Batten learned that investment success does not always follow a straight line.

From inception, Odey grew from $35m in assets to $1bn in just 18 months. But after a performance blip in 1994, assets plummeted to $200m.

Batten fully recognises the debt he and Hendry, who joined Odey in 1999, owe to their previous employer.

“Hugh was a good analyst, but he will tell you he did not know how to make money. Working with Crispin gave him different skills; showed him how to use technicals and charts to help get out of positions when things go wrong.”

The techniques clearly worked: in 2001-02, Hendry’s long-only fund returned three per cent while many of his competitors were down 30 per cent and more.

With a proven ability to cope with volatility, in 2002 Hendry was given the green light by Odey to launch a hedge fund. Batten says: “That had a bouncy start too, losing ten per cent almost immediately. But by the end of the first year it was up 50 per cent.”

Since then, the sequence of annual returns to investors has been 14 per cent, eight per cent and zero last year as Hendry eyed many assets with suspicion. So far this year, returns have been five per cent.

Culture clash
Following disagreements with Crispin Odey about the direction of the firm, Batten and Hendry decided to leave and set up on their own in 2005.

They were joined by analyst George Lee. Lee says the schism centred on the growing size and scale of Odey’s business.

“I was only the second or third analyst there when I joined Odey in 2000. By the time I left, there was a team of ten guys and it was starting to get bit regimented.

"We would come in and all ten of us would sit around a table. We would do the same every evening. When there is only ten of you altogether and four doing the investments – as is the case now - it is a lot more fluid.”

Batten agrees: “When we started out, Crispin said he hated meetings. He wanted people to just come and talk to him. That’s what it is like here now.

“At Odey, we grew up together and then we grew apart. Crispin’s agenda is making a bigger institution rather than the piratical outfit it started out as.”

Hendry and Batten bought out the Eclectica contract from Odey and moved to new headquarters in unfashionable Bayswater, a mile or so from the hedge fund hub of Mayfair.

Unloved stocks
Eclectica’s investing style lies similarly outside of mainstream thinking. The core strategy is to look for themes or companies that have been unloved or ignored for significant periods of time, in the belief that the wheel always turns eventually.

This thinking was behind Eclectica’s purchase of shares in Vodafone towards the end of last year. The premise was that the anti-telecoms, media and technology sentiment that had prevailed since 2000 would reverse.

Batten says: “Valuations are low in TMT and yet telecoms companies have spent a lot of money in the past ten years. Now capital expenditure is low and Vodafone is milking its assets. This provides good free cash generation.”

Eclectica has not had to wait long for a return. It invested ten per cent of the hedge fund’s assets in Vodafone and the share price has already appreciated from £1.10 at purchase to about £1.65 now.

Bombardier, a Canadian manufacturer of trains and regional jets, is another play on boom-bust cycles.

Eclectica hopes to profit from a pattern in the air travel industry whereby each peak is higher than the previous one and each trough lower.

Batten says: “After 2000-01, everyone stopped investing in new planes. This was catastrophic for aircraft makers whose orders dropped to zero. But spending is picking up again.”

Again, an investment made just a few months ago has already yielded a 30-40 per cent return.

But sometimes the wheel turns a lot slower than Eclectica anticipates. This has been the case with an investment in Global Crossing, a US telecoms infrastructure company that lost 90 per cent of value when it became the second-largest corporate collapse in 1998.

It had laid fibre across the world and then found that over-capacity destroyed its pricing model. Recent signs of recovery in the stock have been dented by profit warnings.

Lee says the market is struggling to accept that Global Crossing is a different company to that of ten years ago.

“People associate it with the bankruptcy so run for the exits whenever there is bad news. We think it may take a year or two for the shares to respond,” he says.

“We tend to invest early. These companies can give you a kicking for quite a while and it’s hard to find a reason to hold on to them. It sometimes feels like pushing water up a hill.”

Tracking bears
Eclectica likes to identify worldwide themes and then find ways of investing in them, whether through derivatives or directly by buying stakes in companies that best fit the themes.

The global demand for corn is one such theme it believes has far to run.

“We look for things that have gone through a bear market, that have fallen 80-90 per cent peak to trough,” Lee says.

“Then they go through a consolidation period when the price goes sideways and stops making new lows before taking off again. We believe corn fits the pattern.”

Corn prices peaked between 1973 and 1975 and have not risen since. With the effect of inflation, corn prices have plummeted.

But demand is picking up following the discovery that fuel can be made from corn and Eclectica believes a corn boom is just around the corner.

However, buying the coming bull market in corn is not as simple as investing in many other commodities.

Batten says: “Copper is easy, you just buy a copper mining company. But corn farms tend to be owned by individuals so you need another way of playing it.”

Eclectica’s solution has been to buy shares in fertiliser companies, suppliers of weed and insect sprays, providers of specialist seeds, manufacturers of tractors and irrigation systems, owners of grain elevators, grain terminals and loading facilities, and agricultural property companies.

The strategy is simple enough in theory, but the companies in these sectors tend to be located in emerging economies where the cost of land and labour is cheaper. This makes it far harder to research them.

This was the case when trying to find the best fertiliser companies to invest in. Using rough and ready metrics such as enterprise value to sales, Eclectica identified a Polish company, Pulawy, as an ideal target.

It had a 90 per cent local market share and yet its market capitalisation – at around €200m - was just 0.4 times annual sales, a tiny multiple.

It almost looked too good to be true, so Lee decided to investigate further. His first challenge was to negotiate the accounts, which were all in Polish.

“Accounts in foreign languages are often surprisingly easy,” he says. “I found accounts in English from a previous report and put the two side-by-side. You can’t get everything but you can certainly work out sales and Ebit.”

Impressed by what he discovered, he decided to pay the company a visit to “see if they really did what they said they did”.

Direct access
Many of Eclectica’s investments are made on the basis of computer modelling, but its move into more esoteric areas is increasingly requiring direct meetings with companies.

And in the emerging economies where it sees opportunities, IR is sometimes less than sophisticated.

Lee says: “For smaller companies in continental Europe, the IR contact is often the chief executive’s PA who may not be able to add to what is on the website.”

At Pulawy, the main contact was the head of the company’s chemicals division. “He didn’t give too much exact information, but we could say, for instance, what we thought his margins were and we could tell if we were close by his reaction,” Lee says.

“You are not necessarily looking for total accuracy - it is more a touchy-feely kind of thing.”

But compared with other companies, this represented an excellent degree of access. “There is a company in Germany that just won’t see us at all because its shareholder base is very domestic and long-term,” Lee says.

“However, if the company is interesting enough there are other ways of winkling out information.”

In this case, there was a section entirely devoted to the company in another company’s listing prospectus.

“You can find clues in the strangest of places,” says Lee. “We invested in the German company because the valuation was so compelling it almost didn’t matter that they didn’t want to see us. If they want to see us at some point, then great.”

With German companies in particular, there can be an adverse reaction to approaches from hedge funds, which are widely seen as predatory.

“This has been the case in the past but Germany has changed a lot in the past few years,” says Lee.

“I’ve been to Germany several times this year and the companies have been brilliant. You can always get the odd one where the managers are a bit secretive or protective.

"But you can’t generalise about French or German companies, or anyone else. There are plenty of American companies out there that won’t see you.”

Eclectica rarely seeks access to the top echelons of a company, believing that valuable information can be found at all strata.

Lee says: “Sometimes the chief executive is really just a salesman and gives you the standard marketing presentation. A lot of the time you are really looking for the gossip on everyone else.

"The majority of what we do is understanding how an industry works. If we know that, we can predict what will happen to the business in question. An IRO can often provide that just as well as the CEO.”

He admits that talking to English-speaking executives is a distinct advantage. “I have had to use translators in Eastern Europe and for French and Japanese companies. But translation just takes so long. Everything is done in duplicate and triplicate.”

The key to successful company meetings is more to do with goodwill on both sides – this can overcome most technical difficulties.

Such goodwill does not always exist, as Eclectica found out during a recent meeting with a Swiss chemical company.

“We thought we were asking pretty sensible questions,” says Lee. “For about 45 minutes the IR was reasonably helpful.

Then suddenly it became clear that the meeting was over and we still had three pages of questions left to ask.” Trying to prolong the meeting, Eclectica, asked about industry trends and other companies, but was met with silence.

Lee says: “We felt they could have been a lot more helpful. Especially since the person was the IR contact – it wasn’t like we were distracting the CEO or CFO from a crucial meeting.”

Eclectica finds that small-cap companies often have a good understanding of IR issues. Lee remembers a meeting with a German company where the chief executive showed up alongside the IR.

“They were very good with their time, going through each of their divisions, all the numbers, and not afraid to talk about the industry and their competitors.”

The chief executive then left the meeting and the IR provided a more in-depth look at company plans.

These two experiences were at the opposite ends of the IR spectrum, but do they actually make a difference to Eclectica’s decision about whether to invest?

Lee says: “If we understand the industry really well, then the fact that the company is unhelpful matters less – it’s just annoying.

“We saw a complicated Swiss company recently, the structure of which was not at all transparent. The IRO was profoundly unhelpful and that put us off because we just couldn’t understand the investment proposition.

"There are two ways of looking at it: you could be missing out on a good investment, but at the same time maybe there is no story to tell.” Eclectica took the second viewpoint and has not regretted its decision.

Partnerships