Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
In short, we look to invest in companies that are sensibly managed and misunderstood by the market. Our investment process focuses on human behaviour and the decision-making of three key groups of people: management (and CEOs in particular), analysts and investors. We aim to invest in businesses where we see evidence of responsible management behaviour and the risks being taken are reasonable in the context of the business conditions they face. This sets out the framework for our assessment of risk. When we consider ‘reward' we look at what analysts think about a company's prospects as well as the behaviour of investors and what this tells us about the anxiety in a share price.
To help us understand a company in more detail we also do our own fundamental research and look at the language management use when talking about themselves. We are very adept at recognising the kinds of conditions and the signals CEOs give off (via their language and the information flowing from the Report & Accounts) when they are finding it easy to execute their plans.
Within the context of this investment approach, we look for two kinds of stock to buy: those with which offer the prospect of ‘unusual growth' and those which have a plausible plan to recover when they have run into difficulties.
Our investment team is led by three portfolio managers - myself, William Pattisson and Ben Fitchew - we have all worked together for a considerable time and have managed Ardevora's portfolios since its inception. We are supported by a strong and diverse team of 14 analysts.
How are you positioning your portfolio to prepare for the global recovery from the Covid-19 pandemic?
As stock pickers, we try to look at stocks in an open-minded way, this allows us to find emergent trends, such as the balance between recovery and growth stocks. To my mind, the dominant theme at the moment is the potential for an unusually powerful recovery and the driver behind this powerful recovery, which is linked to our investment approach outlined above, is how realistic CEO plans are.
The economy has suffered a significant macro shock and environments such as this one tend to give a ‘free pass' to CEOs to put through major restructuring plans for previously struggling businesses.
What we mean by this is it is much easier for CEO's to admit that their plans are not currently working when the environment shifts through no fault of their own, and the same shift applies to everybody.
In light of this, we have altered our portfolio mix by selling some growth and buying more recovering value which is where we see the biggest opportunity in a COVID-19 recovery. At some stage, attention will shift to what happens after the recovery, at which point we may look to growth vs. value, however we expect that this will be a 2022 event.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio?
It is important to highlight that we like to run diversified portfolios with exposure to a broad range of interesting opportunities.
As bottom-up investors, we are currently identifying more businesses with credible recovery plans. This has led us to alter our portfolio mix by selling some growth and buying more recovering value. It is worth noting that the portfolio mix we currently have, a slight overweight to recovering value, is very different to what we have seen over recent years which demonstrates the impact of an exceptional macro shock environment.
With regards to specific investment opportunities, in late April we began to buy a small number of bank stocks which we have historically excluded from our portfolio due to opaque financial statements amongst other factors which made it difficult to assess risk in management behaviour.
Fast forward and the COVID crisis has confirmed that the post-2008 financial crisis regulatory architecture has successfully created a resilient banking system. Accordingly, it is reasonable to expect no further material tightening of regulatory requirements. Interest rates are now either close to, or below zero almost everywhere, hence it is reasonable to expect reduced pressure on net interest margins from here onwards. Assuming stable regulatory requirements and interest rates, we can expect low-risk management behaviour to become more important in bank stock performance.
