Hidden Forces: “Finding Value in an Upside-down World”

Guests: Charles Heenan & Geoff Legg (Kennox Strategic Value Fund)
Host: Demetri Kofinas
Date: January 27, 2025

Overview

In this episode, Demetri Kofinas interviews Charles Heenan and Geoff Legg, the investment directors and founders of Kennox Strategic Value Fund. The central theme is how to find genuine investment value in a world where traditional anchors of valuation seem to be ignored by markets, and where geopolitical, economic, and psychological forces have made capital allocation especially challenging. The discussion explores Kennox’s bottom-up value investing philosophy, their macro perspective, risk management, and the practicalities of finding bargains in today’s apparent market chaos.

Key Discussion Points & Insights

1. Backgrounds and Origins (05:02–10:20)

• Charles Heenan: Canadian by birth, entered investment industry in early ‘90s, motivated by the intersection of analytical rigor and narrative, drawn to owning decisions and their consequences. Moved to the UK to work with Angus Tullich in Asia-Pacific and EM just before the Asian Crisis. Founded Kennox after two decades, preferring a boutique, owner-managed model for alignment with clients/co-investors.
  • “I liked the practical side of making investments. You’ve got to own the decisions... and then you’ve got to live with that for the next five or 10 or 15 years.” (06:01)
• Geoff Legg: Background in mathematics and actuarial science, knew Charles socially in Edinburgh. Joined Kennox on launch in 2007, after being recruited for his analytical rigor.
  • “Up until that point, it had been sort of a very analytical background, but not at all in financial markets in terms of being an investor.” (07:38)
• Fund Launch and Structure: Launched in 2007 (through an Australian vehicle initially), soon re-domiciled to the UK. Investment philosophy and team have remained continuous since inception.

2. Philosophy and Alignment (11:23–12:46)

• Personal Wealth Invested: Both Heenan and Legg have all their equity wealth in the fund, reinforcing alignment with clients/co-investors.
  • “Everything I’ve got in the stock market... everything in the stocks are in the fund.” – Charles (11:28)
• Global Mandate: Can buy any listed company worldwide, increasing selectivity and flexibility.

3. Investment Framework and Market Worldview (13:05–17:22)

• Core Approach: Fundamental, bottom-up, long-term value investing. Seek sector-leading, high-quality companies at exceptional valuations.
  • “First and foremost, we’re bottom up stock pickers... We’re very keen to buy and hold and have a relationship with the companies…” – Charles (13:05)
• Contrarian Streak: Seek bargains discarded by “the herd.” Value investing now highly unfashionable, which they see as a feature, not a bug.
• Time Arbitrage: Markets are efficient on a ~1-year view but highly inefficient over 5–10 years.
  • “Markets are reasonably efficient on a one year view... but hopelessly inefficient if you’re looking at what they’re going to do over the next five or 10 years.” – Geoff (15:17)
• Risk Focus: Priority on wealth preservation ahead of maximizing short-term returns; especially relevant in today’s climate of macro risk.

4. Market Inefficiency & Current Opportunity (18:53–25:48)

• Current Market State: Markets are at their least efficient in four decades.
  • “Cliff Asness... is saying this is the most inefficient market that he’s ever seen... We agree with him.” – Charles (18:53)
• Causes:
  • Excess focus on price (indexing, benchmarking, ETF flows).
  • Social media and apps bringing trading to the masses.
  • Investors chasing momentum and liquidity over fundamentals.
  • Large funds stuck in “mega-caps”, leaving mid/small-cap bargains to niche players.
• Historical Context: Never before have so many investors used price as the main benchmark—a profound change generating opportunity for disciplined value approaches.

5. Macro Perspective: Inflation, Policy, and Regimes (27:45–36:53)

• Inflation: The panel doubts that the recent inflation spike was just a blip; sees risk of a longer secular regime.
  • “It’s having the imagination and the sense of history... to say what is extraordinary and what will rhyme and what will repeat in history.” – Charles (27:45)
• Structural Drivers:
  • Fiscal and monetary overreach (QE, ZIRP) post-GFC.
  • Trade wars, nearshoring, tariffs (“frictions” that support inflation).
  • High government and corporate debt, incentivizing authorities to let inflation run.
• Interest Rates and Investment Styles:
  • Zero interest rates previously supercharged growth stocks’ valuations.
  • In a world of positive rates, “near-term” earnings and tangible value become much more attractive.

6. Portfolio Positioning & Risk Management (36:53–40:15)

• Crowded Trades & Home Bias: Warns of risk from market concentration in US mega-caps.
• No Leverage: The fund does not use leverage; further, portfolio companies are selected to avoid high-debt balance sheets.
• Shift from Cash to Bargains:
  • Before the pandemic, maintained up to 20% cash.
  • Post-pandemic, sees so many bargains (and a greater diversity thereof) that equity exposure is now fully allocated.

7. Attributes of Value in Inflationary Times (40:15–44:15)

• Pricing Power: The most important trait—ability to raise prices with costs in inflationary periods.
• Concrete Competitive Advantage: Seek “niches” with strong barriers—not just in consumer brands but in operational specializations (e.g. Stella’s runs for luxury footwear).
• Cost Control: More nuanced; while pricing power is often visible, true cost control is only revealed over time, especially in historical stress periods.
  • “Everybody says that they've got cost control until they get hit by inflation and the costs go up and you hear about it after the event.” – Geoff (44:15)

8. The Role of Dividends (50:36–55:39)

• Dividends as Signal:
  • Important as a valuation anchor and evidence of management discipline.
  • Average portfolio yield is 5%; being “paid to wait” supports patience during turnaround.
  • Management's willingness to cut dividends sensibly is seen as positive; not dogmatic income seekers, but view dividends as integral to return and risk control.
  • “It’s a lot easier to be patient [with a high dividend].” – Charles (55:04)

9. Geopolitical Risk (55:39–57:59)

• Multi-dimensional Hedging: Actively seek to diversify portfolio risks, both sectorally and geographically.
• Countercyclical Holdings: Assets like energy (e.g., Equinor) and gold miners act as hedges against disorder, regional conflict, and inflation.
• Philosophy: Don't aim to predict specific events; instead, ensure portfolio is robust to a wide matrix of “what-ifs.”
  • “If you can offset some of your own risks, you should probably own an energy company because that’s one of your corporation’s costs.” – Charles recounting his father (56:37)

Notable Quotes & Moments

• On Market Efficiency
  • “Markets are a voting machine in the short term, a weighing machine in the long term.” – Demetri (22:30)
• On Narrative Investing
  • “When money is free, what matters is who can tell the best story.” – Demetri (36:08)
• On Patience and Strategy
  • “We're focused on protecting our wealth and that of our co-investors and growing it, in that order.” – Charles (17:22)

Timestamps for Notable Segments

• Introductions and Fund Origins – 05:02
• Personal Alignment (All-in Investing) – 11:23
• Investment Philosophy & Framework – 13:05
• Time Arbitrage and Risk Focus – 15:17
• Market Inefficiency Today – 18:53
• Benchmarking and the “Price is All” Era – 23:12
• Inflation vs. Macro Myopia – 27:45
• Portfolio Construction in Inflation World – 36:53
• What to Look for: Pricing Power, Competitive Advantage – 40:35
• Dividend’s Role as Discipline & Anchor – 51:04
• Managing Geopolitical Risk – 56:08

Tone and Style

The conversation is thoughtful, measured, and refreshingly forthright. Charles and Geoff provide a careful balance of practical investing experience, historical context, and philosophical humility. They are serious about risk and process but never dour; their enthusiasm for contrarian investing and deep research comes through in their examples and in-jokes, maintaining an approachable—sometimes even witty—tone throughout.

Summary

This episode is an in-depth guide to disciplined value investing when the world appears unmoored. Charles Heenan and Geoff Legg provide a masterclass in sticking to principles, finding bargains amid market dysfunction, and calmly appraising risks new and old. Their view is clear: market inefficiency and investor impatience have seldom offered greater opportunities, but only for those disciplined enough to seize them. For students of financial markets, or anyone seeking clarity amid today’s noise, this conversation provides a valuable roadmap—and a timely reminder that fundamentals, patience, and humility still matter.