The introduction of the new Cartesian UK Opportunities fund gives Britannic another specialist high conviction product in a key asset class
Cartesian Capital Partners (Cartesian) is an Edinburgh-based boutique which operates autonomously and follows its own investment process and style. It is a joint venture between Britannic Asset Management and highly-reputable investment managers with a combined 28 years' investment experience, David Stevenson and Andrew Kelly.
Stevenson and Kelly manage the Britannic Cartesian UK Opportunities fund, launched in December 2005, which aims to achieve above-average returns by investing in a concentrated portfolio of high conviction stocks. The success of this approach was proven by Stevenson's management of the Scottish Value Management (SVM) UK Opportunities fund vehicle, which returned 98.4% during his period in charge (from launch in March 2000 to the middle of November 2005). This compares very favourably to the sector average of 2.6%.*
Investment boutiques have the ability to deliver strong performance track records; however they often lack the organisational support or market profile associated with the big players. The arrangement between Britannic and Cartesian is a perfect combination, with Britannic providing operational capability and the managers given free rein to do what they do best - manage money and pick stocks. The introduction of Cartesian marks the launch of Britannic's second boutique arrangement and follows the highly successful launch of Argonaut Capital Partners, in conjunction with top European fund managers Barry Norris and Oliver Russ, in May 2005.
Why UK?
While the relatively low interest rate/inflation environment offers an attractive base for long-term growth, over the short term, the market is likely to struggle to generate returns as strong as those witnessed over the past few years. However, there are still interesting investment opportunities available in the broad UK market, particularly in the mid- to small-cap arenas given the prominence of increased corporate activity levels.
The style of the Britannic Cartesian UK Opportunities fund puts great emphasis on stockpicking with a heavy bias towards the small- and mid-cap arenas. We believe the current domestic environment is more suited to stockpickers. Our process and skills thrive in this kind of market and should produce very good attractive long-term performance gains for our investors.
Unconstrained portfolio
The Britannic Cartesian UK Opportunities fund is unconstrained by benchmark composition and is able to invest across the entire UK market regardless of business sector and market capitalisation requirements. This structure allows the managers to have the flexibility to follow their convictions and look beyond the constraints of the FTSE 100 companies and explore the wide variety of stocks in the mid- and small-cap markets. It is these stocks, all too often overshadowed by their larger counterparts, which offer real value and growth opportunities. However, the fund will also have some exposure to their larger-cap cousins.
Investment style
David and Andrew are first and foremost stock-pickers, analysing business models, not share price charts. They believe it is vital to understand the building blocks of a business, how it works, and particularly the underlying fundamentals which drive long-term business growth. As Stevenson confirms: "It is about running a marathon, not a sprint, and we think we have the longer-term process that can produce outperformance."
The investment style is neutral in the sense that it's neither value nor growth biased. Stock selection is determined by locating inefficiencies in the market, which tend to be in the mid/small-cap arena, those companies that are trading below fair value and therein lies the investment opportunity. "We've got a combination of good long-term growth stories and good recovery situations in the portfolio," says Stevenson. The fund uses a combination of external and internal research to determine portfolio construction with the key emphasis being the effective utilisation of raw data to derive their own conclusions. Using these research tools and an independently minded approach, David and Andrew select stocks which meet their criteria for quality companies enjoying organic growth, underpinned by pricing power and cashflow generation.
In terms of consideration of the macro-environment, a top-down view is not adopted in any sense. Instead, the managers seek under-valued companies and build the portfolios from the bottom up. Although appreciation is given to the the overall economic picture, David and Andrew do not try to predict interest rate movements or changes to government policy etc. Their priority is to research and determine companies that will continue to grow, regardless of macroeconomic backdrop, because of the quality of their business.
Bottom-up 'must own' stock ideas
Stocks are selected on a 'must own' basis for portfolio inclusion. A combination of FTSE All Share and the Aim markets, offers the potential for over 1,000 companies which can be researched. Using this 'must own' approach the number is significantly whittled down to approximately 150 potential fund holdings, of which 30-60 form the portfolio.
All positions in the portfolio are subject to constant review and questions raised over the justification and merit of a particular stock being worthy of its place within the portfolio. There is never a shortage of investment ideas with the amount of companies available.
Market outlook
There is a general market concern over domestic inflationary pressures, stubborn levels of consumer spending and the impact of rising energy costs on corporate profitability. In addition, David Stevenson believes some of the economic tailwinds that companies have benefited from over the past few years are coming to an end. Many companies in the UK market have been re-rated over the past few years and this should tighten trading conditions in 2006.
However, this environment acts as a suitable home for the Cartesian UK Opportunities fund, because it is likely to be a stockpicker's market going forward. David adds: "We think it's time to re-focus on good, organic growth stories that are almost independent of the economic backdrop. I think there will be positive and negative surprises this year and I'm confident that we'll be able to do well in this environment."
*Source: Lipper, bid to bid net income reinvested 20 March 2000 to 11 November 2005. This period covers the time when David Stevenson and Andrew Kelly managed the SVM UK Opportunities fund. Past performance is not a guide to the future. The performance figures used do not include the initial charge. The value of investments can fall as well as rise and is not guaranteed.
