Media Dragon: Financier Stuart Roden: ‘Labour has a generational opportunity’

Financier Stuart Roden: ‘Labour has a generational opportunity’

The investor and Labour donor on the challenges facing Keir Starmer’s Britain — and why hedge fund management is like tennis

Stuart Roden can remember the exact moment he decided to get involved in politics for the first time. It was September 23 2022, the day of the disastrous “mini” Budget in which former UK chancellor Kwasi Kwarteng announced £45bn of unfunded tax cuts.

Roden, one of the most successful hedge fund managers of his generation, was listening to the announcement at his office in Mayfair. “I heard these words about reducing the top rate of income tax, and I thought, that is just so the wrong thing to do,” the 61-year-old recalls.

While he would have benefited personally from the tax cut, he opposed it on two grounds: “Morally, given what had happened to the bottom 20 per cent [of society] during austerity, while the top had done pretty well because of low interest rates . . . And because I knew that the markets would take fright.”

Later that day, he told the Labour party he was ready to answer its earlier overtures for support.

We’re sitting in Spring, a restaurant in a restored 19th-century drawing room at Somerset House, the large neoclassical complex that overlooks the river Thames. Sunlight streams through the huge windows. “It’s a great place to come in the summer,” says Roden, dressed in a pale pink shirt and navy blue linen blazer, a yellow ribbon badge for hostages in Gaza pinned to his lapel.

When I first met Roden more than a decade ago, he was one half of the renowned stockpicking duo at Lansdowne Partners, one of Europe’s oldest hedge funds, where he and Peter Davies were best known for their well-timed bet against Northern Rock during the 2007-08 financial crisis. Their forensic approach to company analysis didn’t conform to the swashbuckling masters-of-the-universe stereotype and the atmosphere at Lansdowne was more akin to a library than a trading floor.

Since retiring from Lansdowne in 2018, Roden has poured his energy into the not-for-profit sector, notably education and the arts, and more recently he became involved in politics. He has donated about £1mn to the Labour party, making him one of its largest individual donors. Behind the scenes Roden has an informal dialogue with the party leadership. “Advice is too strong a word,” he says. “I express views on some of the things I care about.”

Roden spent a four-decade career in finance weighing up risks, returns and incentives. I’m interested to hear how he thinks the new government can balance its growth agenda with fairness, a £22bn fiscal black hole, and a world in which there is free movement of capital.

The waitress comes to take our order. Roden selects salt-baked kohlrabi followed by grilled mackerel from the set menu; I choose stracciatella with fig, courgette, peaches and pistachio, followed by the mackerel. We decline the suggestion of wine.

“No wine at lunch. That’s an old [SG] Warburg rule, which has never really left me,” says Roden, referring to the investment bank where he began his City career in 1984, at its subsidiary, Mercury Asset Management.

Fund management felt like a natural career choice. Roden bought his first share — in UK company Acorn Computers — at the age of 13. He was raised by a life assurance salesman father — “not formally educated but a brilliant bridge player” — and a mother who worked as a sales assistant in Watches of Switzerland.

Growing up in north-west London, Roden liked playing poker, betting on horseracing and going to the dogs at Wembley. “I enjoyed the management of risk, the assessment of risk, the thrill of it,” he adds. Today, he owns shares in a racehorse, Emily Upjohn. Watching her win at Ascot racecourse in 2022 was, he says, “an amazing thrill”.

As a teenager, Roden ran a small delivery business, selling VHS tapes. An early Netflix, I joke. “Yeah, too early,” he laughs. “Timing in life is everything, which is one of my lessons. Timing, fortune, good luck.” Fortuitously, he started in finance just before the Big Bang deregulation of the City of London turbocharged a golden age for equity investing.

A fund management career almost eluded him. Roden, then aged 21, was observant Jewish, so couldn’t work on the Shabbat or on religious holidays. He says he turned down job offers from merchant banks Samuel Montagu & Co and then Morgan Grenfell after they wouldn’t accommodate him.

But Mercury would. It was there that Roden met Davies, almost a decade his junior, which marked “the beginning of a long and very fruitful relationship”. As we begin our light and summery starters, Roden describes how their temperamentally “very different” fund management styles complemented one another. Roden has “an obsession with downside and losing money, and classic . . . neuroses of what can go wrong. Pete is more upside, blue sky, this is possible, this can happen.”

The pair left Mercury — by then part of Merrill Lynch — to join recently formed hedge fund manager Lansdowne in 2001 to launch a UK equities fund. They had a strong run, fuelled by a large exposure to domestic UK stocks in the low interest rate environment of the early 2000s, a wager on the commodities bull run, and some early investments in technology, notably Amazon. “I remember the time investors asked us whether Amazon was a charity and whether it would ever make money,” says Roden.

But it was the 2007-08 financial crisis that really cemented Davies and Roden’s reputation: the flagship UK equities fund’s short positions in financials and housebuilders led it to a small gain when hedge funds lost an average of 18 per cent that year. They then snapped up cheap equities and caught the rebound, gaining more than 25 per cent the following year as the stock market soared.

Tougher years followed, with double-digit losses in 2011 and 2016. How does Roden cope with losing money? “Badly.” Intense boxing sessions help him during tricky periods. “But it’s very hard to be present . . . while I was physically present, I was elsewhere.”

Roden cites Roger Federer’s commencement address at Dartmouth College in June, when the retired tennis champion highlighted that while he won almost 80 per cent of the singles matches he played in his career, he only won 54 per cent of the total points in those matches. Similarly in fund management, “mistakes are intrinsic to the process and need to be accepted and dealt with accordingly”, says Roden.

Long/short equity funds, which try to buy stocks likely to do well and bet against names set to perform poorly, have suffered huge outflows since 2018. Roden rattles off several reasons why, in Europe in particular, the environment is tough for this strategy: gaining an informational edge is harder at the margin; equity markets are increasingly dominated by the US, notably the Magnificent Seven technology stocks; and there are far fewer high-growth companies.

“Markets have become harder to operate in and less efficient because of the explosion of passive funds, momentum trading and short-term trading,” he says. “Fundamental investing has got more challenging because the timing for valuation to win out has gotten longer: things can stay very cheap or very expensive for a long time . . . The question is whether you and your investor base have the longevity to ride it out.”

Turning to the UK market, he says that “today on valuation grounds, there are dozens of UK stocks that are very undervalued, but it has been like that for many years. The main money flows have concentrated their attention on the huge tech stocks, which becomes self fulfilling given their scale.”

A perennial question for hedge funds is whether they can transition to a new generation. Roden stepped back from the fund in 2016 to focus on developing fund management talent. At the time, the flagship hedge fund had gained almost 15 per cent a year since it launched in 2001. Roden tried to bring on a credit team to diversify Lansdowne’s business, but was unable to convince Davies and the firm’s two retired founding shareholders to do so and a deal was never struck. He retired two years later.

Lansdowne’s own fortunes mirror the decline of the European hedge fund industry. It closed the flagship hedge fund in 2020 after weak returns and declining assets, and the firm has tried to reposition itself as a long-only asset manager.

Can hedge funds outlast their founders? For businesses such as Lansdowne that rely on key individuals to pick stocks, it’s a question of talent, says Roden. “Boutique investment management firms don’t have a right to succeed past the founders. If they’re able to find people who are as good as [them] to take it forward, that’s fantastic. [But] finding those people is incredibly difficult.”

As we begin our main courses — delicate fillets of mackerel on a bed of chopped tomato, basil, oil and lemon juice — the conversation returns to politics. What levers does the Labour government have to restore growth?

Housing is one, says Roden, who is heartened by Labour’s plans to overhaul planning rules. Another is getting more people into work. Crucially, skills, apprenticeships and higher education “need to be rethought with the involvement of business” because there’s a mismatch “between the skills that people have versus the skills which companies want”.

We run through the economic challenges on Labour’s agenda. “The biggest thing is that you’ve got to start with stability and predictability of macroeconomic and fiscal policy,” says Roden. “Not only has Labour got to be seen as business-friendly but the policies they adopt have to back that up.”

His stance on individual policies is part pragmatism, part social conscience and part belief in the power of incentives. Roden wants to see the current non-dom regime replaced with a more nuanced one that welcomes those who create jobs and wealth for the country, perhaps exempting them from UK inheritance tax. Similarly, he thinks capital gains tax should be kept at the current rate for long-term wealth creation but could be higher for those who are trading assets in the short term.

“Morally, it’s absolutely right to tax private equity carried interest as income [rather than capital gains] because it is income. It’s how they make their living. But whether it’s the right thing to do today is a broader question. Clearly it’s one of those taxes that could encourage some people to leave the country.”

As chair of the board of trustees at London’s Design Museum and a trustee of the National Gallery, Roden has seen how a departure of non-doms from the UK is hurting arts funding. The sector, already under pressure from rising costs, is reeling from a campaign against Baillie Gifford, a prominent sponsor of UK book festivals. The asset manager was targeted by protesters for its purported links to the fossil fuel industry and Israel, prompting book festivals, including Hay and Edinburgh, to cut ties.

The Baillie Gifford protest was flawed, he says: the protesters didn’t understand the nature of fund management, where asset managers invest on behalf of their clients; the boycott didn’t “have any impact on the causes that they claimed they were fighting against”; and “it has led to a withdrawal of funds across the entire sector, which is a disgraceful outcome”.

So who is “clean” enough to fund the arts? It’s a “much more practical issue”, rather than being “ethics as such, in the classic sense of right or wrong”, he adds. “It’s a nuanced issue about what is best for the museum in terms of safety of the collection, the staff, other potential funders, and obviously legality.”

An interest in the arts came to Roden relatively late in life after a chance encounter at a party with renowned art dealer Danny Katz. “I heard him talk enthusiastically about works of art” — their history and provenance, and the inspiration for them — “and I got totally taken in by that world.” Now Roden and his wife Bianca host artist residencies at their home in Hampshire.

The waitress brings the dessert menus. We both opt for the gooseberry ice cream, which arrives pink and deliciously tangy, followed by coffee.

As lunch draws to a close, I am interested to hear what informs Roden’s philanthropy. “It definitely comes from my father. My father had no financial means, but he always worked in the voluntary sector.” The tenets of Judaism also played a part. “Judaism has this idea of giving as a duty.” Roden came from a non-religious background but embraced Orthodox Judaism when he attended a religious primary school and practised for about two decades.

Later, “it was hard to reconcile some of the very core tenets of the religion . . . which basically relies on a pure belief in a revelation to a select group of people”, he says. “And then general objections about trying to understand how the world is so messed up, and cruelty; it’s always the Achilles heel.”

His own philanthropic efforts are largely devoted to education. Roden was a donor — although not, he hastens to add, a trustee — to charity Kids Company before its collapse in 2015 amid allegations of mismanagement. He then co-founded and helped to fund Unlocking Potential, a charity that helps children and young people with social, emotional and mental health difficulties.

The charity runs a therapeutic primary school in north-west London for children that uses pioneering techniques such as therapy dogs, drama therapy and sensory activities to repair emotional health. Early intervention (a principle of Labour’s education policy) is crucial, says Roden. “Intervening later is much harder, and much more costly, and these kids are often set in their ways.”

Two days after the October 7 attacks on Israel, he was leaving the Labour party conference in Liverpool when he encountered a group of Free Palestine protesters. Roden who, in his own words, is “generally quite measured” was “incensed”. He was captured on video confronting the protesters, shouting “this is not the time to be doing this”.

While Roden is confident that Labour has stamped out antisemitism in its leadership team, he points to an increase in antisemitic incidents in the UK in the aftermath of October 7. He is worried that this reflects part of “an underbelly of hatred” and fracturing social cohesion in Britain. “There’s a lot of work that needs to be done in communities,” says Roden. “It’s not immigration . . . it’s how you integrate.”

Politically, Roden thinks that “Labour has a generational opportunity to occupy the middle ground of the political spectrum by differentiating itself from the more extreme elements on the right and left”. His hope is that the government maintains stability in the cabinet and re-establishes “trust, integrity, respect, which have been shot to pieces in the last 15 years”.

We’ve been talking for almost two hours. As the bill arrives, my guest asks if we can “spoof” it. “What do you mean?” I ask. Apparently “spoof” is a gambling game where, in this instance, the object is to correctly guess the total bill. But I’ve already glanced at the amount, so I rule myself out. His appetite for smart hedge fund wagers clearly not having left him, Roden presses on. “£110,” he ventures. He’s out by just a pound.

Harriet Agnew is the FT’s asset management editor

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Sunday, August 18, 2024

Financier Stuart Roden: ‘Labour has a generational opportunity’

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