Richard 'Dickie' Hodges, head of unconstrained income and manager of the Nomura Global Dynamic Bond fund, talks to Mike Sheen about how he is navigating the coronavirus crisis as it unfolds, contrarianism and why he would impose a ban on share buybacks.
Dickie Hodges' career in fixed income markets spans over three decades and includes spells at Chase Manhattan, Gartmore and LGIM, building expertise across markets.
While at LGIM, Hodges built up a £50m fund almost identical to the strategy he manages for his current employer to roughly £2.4bn in AUM during his time there.
After joining Nomura in 2017, he has since built the firm's Global Dynamic Bond fund from $10m in seed capital to almost $1.6bn.
Notably, amid the ongoing pandemic-induced crisis, Hodges is no stranger to crises, having endured every one since Black Monday in 1987.
A number of crises have been and gone over the course of your career. How does that experience impact your approach to the economic crisis we face as a result of the coronavirus pandemic?
I have been doing this for a long time. I joined Chase Manhattan after the Big Bang and, obviously, I sat there and watched Black Monday, which was enlightening.
In 2008, the fund I was running was forced under the regulations of the IMA (now IA) to hold a minimum of 20% in high yield. It was part of the rules of the sector.
So on the day Lehman Brothers defaulted, this fund was forced to hold underlying assets at 20%. Most of my peers struggled in the month that Lehmans defaulted as global high yield was down about 15% in that one month.
I spent much of that year hedging out almost all of the risk and travelling around telling everyone that we were at the beginning of a financial crisis.
That fund was very successful in as much as it was only down roughly 0.5% in 2008 and then in 2009 it was up around about 42.5%.
You have outperformed most of your peer group so far amid the sell-off. How has your positioning differed from peers this time?
There was a lot of optimism going into 2020. At the beginning of January we saw some significant returns out of all asset classes, not just equity, but out of debt asset classes as well.
You had many asset classes performing in exactly the same way and they became correlated. If all the asset classes can give positive returns, the greater the probability is that they can all give negative returns.
The most sensible option was therefore to start putting in place strategies across all asset classes to protect in the event they start all giving negative returns.
The cost of putting protective strategies across the fund to minimise capital loss was very, very cheap via put options, which we began buying on equities at the beginning of February.
These are simple option strategies that generate a positive return if equity markets fall. Most of the peer group we are compared against did not fare so well [amid the equity market sell-off], as they had much more sensitivity to equity markets, even though they were fixed income funds.
It was a very simple strategy, and it worked exceptionally well.
You have previously been vocal when your outlook is not in sync with the rest of the market - would you describe yourself as a contrarian?
I have always studied investment behaviour. It is astonishing what you can learn from understanding what investors will do.
And therefore, and as I say to everyone, much of the returns you can generate out of asset classes or strategies are based on preempting changes in market expectations.
That is much of what we look to do, but it is not necessarily contrarian because you cannot be contrarily invested all the time, but it does lead to a significant amount of opportunities.
It is really about studying market behaviour and putting on contrarian views in a cost efficient way.
While we have seen asset price declines, to what extent are you expecting the global economy to be affected by the impact of the pandemic?
One thing I can tell you is that economies do not grow when equity markets give you double-digit negative returns, they contract when companies do not spend money, they do not hire.
The current environment essentially encourages companies to use free cashflow to buy back equities and engage in shareholder-friendly activity, which does zero to improve the real economy.
I am very critical of companies behaving in this way.