The third is where businesses make money in quite a different way from those that superficially look very similar, meaning they can catch analysts out. Last are “disrupter” businesses that have taken risks in the past and have proven that the new way of doing things works, and the company still has a long “runway” of growth ahead of it.
What’s the benefit of being able to ‘short’ the market?
We “short” to try to give more protection against price falls than you would normally have if you were purely “long-only”. We tend to short-sell businesses that are the opposite of what I have been describing. We like shorting aggressively run businesses or businesses where the management are going wrong and are in denial.
What have you bought and sold recently?
We’ve recently bought Tencent, the Chinese internet and gaming business. All aspects of its business are very profitable, and it is finding it very easy to grow quickly without needing to take much risk.
We bought Anglo American, the miner, in March. Before the start of this year the people running it were still in denial, but things got so bad that they couldn’t blame anybody else and realised that if they didn’t do something they would be in serious trouble. A business needs to be battered enough to change management’s mind but also needs to be fixable.
We sold Moody’s, the ratings agency, as conditions seemed to have got a lot tougher for it recently, but management and analysts seemed to want to believe the reasons were transitory. We suspect they are not.
We also sold Whitbread, the leisure group, in February. It had an easy time growing over the past few years as it rolled out Costa Coffee and Premier Inn. Recently we have seen signs that growth is getting harder and it is having to take more risks to keep growth going.
You seem to prefer medium-sized firms. Why?
I’m a “bottom-up” stockpicker. I don’t own stocks just because they are big and I don’t put more of the fund in it just because it’s a big stock. We pick 150-200 stocks and then treat them all the same.
Do you invest your own money in the fund?
I do, I have most of my liquid assets in the fund.
What would you have done if you hadn’t been a fund manager?
I can’t do it because I have a family and children, but I would be a long-distance sailer, which I did for four years in my late 20s. Failing that my ideal existence would be to be a well-respected journalist in a field you enjoy. You get to interview and talk to lots of extremely interesting people, and it might give me some flexibility to do some long-distance sailing.
Authored by Andrew Johnston, senior investment research analyst, at Square Mile, the fund research company
Ardevora was founded in 2010 by Jeremy Lang and William Pattisson, who left Liontrust Asset Management in 2009.
The four-strong team manages a number of funds but uses a consistent investment philosophy and approach across them all. The team has an interesting approach to investing, one that sets them apart from a large number of other fund managers.
They seek to benefit from inherent biases that many people tend to display, leaning on the relatively new area of behavioural finance. This means that they focus on human behaviour, drawing conclusions about companies by analysing the actions of management, other investors and professional analysts.
In essence, they want to invest in stocks whose share prices have been negatively affected by what they deem to be an investor overreaction, or where the future growth of a company has been underestimated by market analysts. They also avoid investing in businesses that in their view are being managed in an excessively risky manner.
This fund, as the name suggests, invests on the global equity stage, although it does so by using what is termed a “long/short” portfolio. This effectively means that the team is looking to create value from stocks that both rise as well as fall in value, and will make use of derivatives, as well as investing in the companies’ shares, to do so.
While derivatives may be a mildly dirty word today, when used appropriately and by an experienced investment team, as is the case here, they can be very useful. Performance has been quite impressive since launch in early 2011, with the fund outperforming the global equity market index fairly consistently.
We would suggest that potential investors take a careful look at which share class they are using, for not all are priced equally.