SPECIALS
The Fool Meets Tony Dye

By Rob Davies
March 20, 2001

Two things happened a year ago. The Nasdaq stock market peaked at over 5,000 and Tony Dye stood down as the head of fund management at UBS Philips and Drew. He left because he was famously bearish about the market and the funds under his control had underperformed, mainly because it had a bias to value shares. They had not kept pace with the giddy rise of a stock market rich in technology stocks.

Hindsight is a wonderful thing and a year on the change in attitude seems so obvious now. But going against the herd twelve months ago was not easy. Because of this massive about-turn in sentiment I thought it would be interesting to meet Tony Dye and to ask how he felt about the market now, and his own plans for the future.

He didn't say "I told you so". He has been in the market long enough to know that what happened last year was a bubble, plain and simple. But his experience is a salutary reminder of what happens to those who try and spoil the party for others. Dye's experience stretches back to 1974, the mother of all bear markets, so he is well placed to know what he is talking about. In his view the current bubble started in 1995, much earlier than I would have placed it, but it also lasted much longer than he expected. But that is often the case: calling the top is a mug's game.

Dye's view is that the authorities should have moved much sooner. In particular he thinks Alan Greenspan (head of the US Federal Reserve) should have acted rather than just talking about the over-valuation of the market. His famous phrase, "irrational exuberance" soon became a joke as markets powered ahead fuelled by cheap money. In Mr Dye's view asset price inflation is still inflation. Thinking about this afterwards I did wonder why it is that share prices, i.e. the price of companies, are not included in the inflation calculations. After all, a major expense for all of us is "buying" a pension, and that means investing in equities.

Dye believes that speculation is an inbuilt feature of the market and the resultant bubbles are just something we have to live with. Nevertheless the subsequent declines cause real damage, and that is to be regretted. What happens in a bubble, he says, is that growth is borrowed from the future as people anticipate higher trend growth. Then afterwards, we get sub-trend growth, which is what we are moving into now, where expectations are much lower. It was assumptions of higher sustainable growth that led to massive overinvestment in the TMT (telecomms, media and technology) sectors as virtually free capital was sprayed around. Increased liquidity to deal with the Y2K issue probably contributed to the effect as well, he thinks.

It is this overinvestment in a wide range of industries that has to be worked off now, and the parallels with Japan are chilling. (And, by the way, he thinks something like a revolution is required to sort that economy out.) In essence what he is saying is that there was a gross mis-allocation of capital, but it was very hard to fight. The mind-set a year ago was that valuation did not matter, but history shows us that in the end it usually does. He also believes that trackers played a role in the excesses of the market, and he is not keen on them, although he does admit their utility for the private investor.

In his new role he is running a hedge fund together with Ed Knox, another former fund manager, and one and a half other people (one is part-time). This fund will ignore the main bulk of the market, where valuations are not compelling either way, but will concentrate on the extremes at either end of the valuation scale. Those companies that are either very undervalued or very overvalued offer real opportunities, he believes. He chose a hedge fund because they have a lighter regulatory environment than a fund that is only allowed to be "long" of stocks and he enjoys the ability to short a stock, something he couldn't do before.

His fund is stock-specific; it does not take macro-bets on the direction of the economy, though he admits it will probably do better in a bear market than a bull market. He declined to say how big it was, or what shares it included, but his ultimate aim is to grow it to about £200m. He believes he could manage that with only 8 or 9 people. Like many of us he thinks that the city is grossly over-manned and over-analysed, and that meetings with companies are overrated. Modern communications, especially the Internet, have vastly speeded up and improved the whole process of equity analysis enabling a reduction in the manpower required for equity research.

This is the first time he has run a fund with short positions, and that takes him into the interesting area of the psychology of investing and how that affects behaviour. He admits it is a very touchy-feely thing, but thinks things like press comment can be useful in judging the movements of the mass of investors.

At heart he seems to be just a contrarian value investor, a bit like TMFPyad really. There aren't many around, which is probably just as well. After all, what would you call a gathering of contrarians? Whatever happens, his company's fund (the company is called Dye Asset Management) should be worth keeping an eye on.

More: Value investing discussion board | Communion of Bears