With bulls and bears, hares and tortoises, ostriches and bouncing dead cats, the investment world is riddled with animal references.
A less well-known, yet interesting, animal analogy is the distinction between hedgehogs and foxes. Taking inspiration from the Greek poet Archilochus, who said, “a fox knows many things, but a hedgehog knows one big thing”, the philosopher Isaiah Berlin split history’s great intellectuals into two camps: hedgehogs and foxes.
Hedgehogs view the world through a single, big idea, while foxes draw on a wide variety of experiences and influences offering a more nuanced view of the world. He described Plato and Dante as hedgehogs, Shakespeare and James Joyce as foxes.
Both animals can also be found in the investment world. Foxes look around for different ideas, in search of inefficiencies to exploit. Flexibility, agility and timing are often key. Hedgehogs, meanwhile, have a clearly defined and specific investment philosophy and invest using this overarching theory or theme.
Hedgehog fund managers tend to be the ideal of the marketer, PR or salesperson. Their investment philosophy is clear, unchanging, easy to explain and ultimately, to sell. They can be very articulate and persuasive as to why their big idea is a good one. The media tends to love hedgehogs and so does the retail investor. They offer conviction, clarity and, when they do get it right, the results can be spectacular. Hedgehogs come with good stories and we all like stories. (Names such as Nick Train of Lindsell Train and Terry Smith of Fundsmith spring to mind).
Foxes tend to be harder to understand. They don’t stay still long enough for most people to grasp what they are up to. Sure, they’ll offer clear investor presentations with detailed breakdowns about portfolio exposures and recent buys and sells, while emphasising that their decisions always follow a clear process that is consistent and repeatable. But generally they don’t have the billboard appeal of the investor hedgehogs.
In recent years, the attraction of port-in-a-storm defensives have seen quality-hedgehogs like Messrs Smith and Train prosper. But, as I pointed out in a recent column, with the classic bond proxies under pressure ( Reckitt Benckiser is a good case in point), inflation returning to the fore and bond yields rising, the relative appeal of this part of the market is questionable.
Of course, the jury is still out on when, how and even if the rotation to the more cyclical parts of the market will play out. It’s probably best to err on the side of earnings surety — for now. That said, a lot of the “good stuff” is priced into markets, from quantitative easing to US tax reforms and a recovering global economy. As earnings season gets into full swing, the emphasis is on specific company news — and the market often overreacts to news.
As we get closer to the end of the cycle, foxes could do well, exploiting inefficiencies, finding bargains or at least those securities that can do better than the benchmarks. Ian Heslop, manager of the Old Mutual Global Equity Fund, could be seen as a classic fox. Rather than sticking to growth or value stocks, Mr Heslop and his team use a variety of styles and follow multiple themes, ensuring they cover all the different investment styles that can outperform in different market conditions.
They’re not looking to make any forecasts — there are no “big ideas” here. Instead, they “follow the money”, trying to understand the type of stocks that will outperform. The process is driven by a quant engine — a clockwork fox, if you like. The Old Mutual Global Equity Fund boasts a stellar performance and is very diversified, numbering 450-plus stocks at the end of 2017. It blows a hole in the common misconception that in order to have conviction (that is, be a true hedgehog) you need to hold a concentrated portfolio.
Jeremy Podger, a veteran global equity investor and Fidelity colleague whom I also dub a fox investor given his flexible approach, makes the point that while too many stocks can leave an investor bamboozled, concentration per se is not a determinant of performance. “People associate concentration with conviction but that is really just an emotive term. The key is good decision making.”
I tend to agree. Good active fund managers need to be self-critical, eclectic thinkers, modest about their predictive ability, quick to admit mistakes and willing to update their beliefs when the facts change. Given recent headlines around Capita and Prothena, I’m intrigued as to whether fund manager Neil Woodford fits the bill of fox or hedgehog? I’ll leave that to you to decide.
Fox or hedgehog?
Ian Heslop, manager of the Old Mutual Global Equity Fund
Nick Train, fund manager at Lindsell Train
Fox or hedgehog?
Neil Woodford, founding partner of Woodford Investment Management
The fox versus hedgehog debate can be an interesting intellectual exercise, although I will caution against applying it too closely. Most investors will sit somewhere on a spectrum between the two categories. No one can be a successful fox over the long term without some hedgehog clarity in their philosophy. A clever hedgehog will adopt foxlike characteristics, recognising when the drivers of the market are counter to their philosophy and reducing risk within the portfolio. A stubborn hedgehog is one who does not recognise structural change; the age of digital disruption often calls for the flexibility and nuanced thinking of a fox.
Ayesha Akbar, a fund of funds manager at Fidelity, says that in order to choose the right fund managers, you have to believe they will perform well; in order to do that, as an investor you need to understand where we are in the cycle. Given the distortions created by quantitative easing and other “special measures”, this is easier said than done. Ultimately, though, you need a big picture view while also understanding the detail of the manager’s investment process.
Risk does well in the early part of the cycle as growth picks up. Growth sectors such as technology perform well as economic growth stabilises, and energy or materials sectors do well towards the end of the cycle as inflation rises and growth decelerates. The hedgehog-fox distinction can help, although it’s fair to say that these aren’t the only animals in the investment kingdom.
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