Fund profile: Ardevora Global Equity

Money Observer Rated Fund Ardevora Global Equity has strongly outperformed the Investment Management Association's (IMA's) global sector since its launch in 2011, returning 60 per cent in the three years to 12 December compared to an average of 40 per cent from the latter.

Over one year the fund has delivered an arguably more impressive 15.7 per cent, more than double that of the global sector's 7.7 per cent average return as most global equity markets have struggled to make gains.

As manager Jeremy Lang explains, this has much to do with the fund's 150/50 long/short strategy in which 150 per cent of the portfolio is invested in conventional equity positions while 50 per cent is in derivative positions 'shorting' other equities, or betting that their share prices will fall.

The profits from the short positions are then recycled back into the long positions, mitigating losses in the former.

SHORT GAME

'Shorting the market is really for protection rather than making extra gains. It's called a bleed strategy in the hedging world; most of the time you expect to bleed losses on it, but this year we were making returns when the sector was making losses and that's what we would hope happens,' says Lang.

Lang began using long/short strategies during his time at Liontrust where he and co-founder of Ardevora William Pattisson both ran a hedge fund. When the financial crash of 2008 hit, the short portfolio helped keep the fund afloat, underlining the benefits of combining short and long positions to deliver steadier returns.

When he and Pattisson set up Ardevora in 2010 it was with the express intention of creating a vehicle like this that both managers could invest their own money into and they remain significantly invested.

However, Lang admits that the structure can be a little too 'spicy' for some, which is why they also run a long-only version of the fund as well as a UK equity and UK income fund.

For Lang shorting stocks is helpful not just for mitigating losses, but also for helping him to think in a different way about the stocks he might choose in his long portfolio.

'As a fund manager you often spend a lot of time and energy looking at things to buy and then selling when you have a better idea, however as you go on you realise that selling is just as important as buying.

'As an extension of that you have to get into a mind to look at what would make you sell something regardless of whether you have bought it, and that uncovers a whole bunch of things that you should look at when buying as well as selling,' he says.

blow-up potential

Lang says that the types of businesses he shorts tend to be 'basically risky businesses with blow-up potential' that the market has not yet become sceptical of.

He cites Groupon as an example, whose management Lang believes is leveraging the company out of existence in a 'double or quits' strategy designed to revitalise a business that has lost much of its market share.

This focus on the behaviour of management is intrinsic to Lang's entire investment approach, in which he aims to avoid the type of managers and environments other managers often look to invest in.

Turning risk slightly on its head, Lang claims that the ideal investible company is one whose management is being forced to sit on its hands due to some company or industry specific issue, as only then can their very risky natures be held in check.

'Investors don't like risk whereas company managers are risk loving; they tend to be big, egotistical, self-believing people. Getting to a position of power requires a personality type that is very risk-taking and quite political because they have to climb up the greasy corporate pole.

'You can't avoid them because every business you invest in is run by some sociopath. It's much safer to assume they're all the same, then look at their environment; there are certain environments where managers are forced to behave in a low-risk way and that's what you need to be looking for,' he says.

negative sentiment

Lang gives Spanish wind turbine manufacturer Gamesa as an example. Like many in the renewable energy sector, Gamesa enjoyed a huge surge in demand in the years leading up to the financial crisis, during which time management leveraged the company to fund expansion. Following 2008, however, demand dropped off considerably and the firms' share price bombed.

Despite being one of the few manufacturers to survive this, Lang claims Gamesa is still suffering under a lot of negative sentiment and distrust, forcing management to behave in a conservative, shareholder-friendly way in which they are using the firm's current assets and strengths to grow.

For Lang, this negative sentiment is all the better: 'That's the opportunity: you've got a perception of risk that's very high but actually when you look at different information it's very low.

'A lot of people think of investment as finding good companies, working out the intrinsic value of businesses etc., but for me it's all about mistakes. It's all about working out when someone else in the market is wrong because you can only make money if someone else has made a mistake,' he says.

To find these 'mistakes' Lang says that he and Pattisson scan around 3,000 of the more liquid and transparent stocks, finding on average around 150 that they then equally weight throughout the portfolio, rebalancing every three months.

'We've got an equally low conviction in everything that we buy. We do everything we can to ensure we are right, but 40 per cent of the time we're probably wrong and you have to accept that; you have to expect that you are going to get a lot of things wrong and then structure the way you make decisions to be accepting of your own mistakes,' he says.

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