Jeremy Lang of Ardevora Asset Management, Portfolio Manager of the Nedgroup Investments Global Diversified Equity Fund, shares the team’s unique investment approach, how the Fund performed in 2020 and whether vaccines will mean a V-shaped recovery.
Ardevora is a privately owned, global equity boutique with about £8bn assets under management. It’s a young business started in 2010 with no external shareholders or debt.
Investment process overview
We are a long-only global equity fund with a bottom-up fundamental process that is a combination growth and value. We focus on cognitive psychology and the conditions under which people make biased decisions or mistakes and especially CEO behaviour. We believe CEOs are unusually untrustworthy and can be overambitious and unrealistic about their business plans, which can be dangerous and painful for investors. We try hard to make it safe by finding the conditions that make it unusually easy for these sorts of people to strike realistic plans. As an extra insurance policy, we stick to business models that are less likely to blow up quickly if and when those plans go wrong. This approach leads us broadly to two basic types of investment opportunity. The first is businesses with unusually easy growth. We think that analysts and investors are more interested in growth levels rather than how easy it is or for how long unusual businesses can actually achieve the growth and that’s more important to us. The second type are safe, value companies. Most CEOs in our view like taking risks and don’t like being wrong. Occasionally, if they’re wrong for long enough, enough pressure can build on them to change and they can be coerced into de-risking their businesses. This can happen at a time when investors are traumatized and won’t trust the recovery plan, which is an environment in which we think you can make money.
We have had lots of small positions that are diversified by style and sector. It is equally weighted by region with no ‘favourite’ stocks. Our downside protection and upside capture numbers are therefore quite good and we’ve been able to perform in a wide range of market environments.
We entered 2020 in a cautious frame of mind, reviewing 2019 and where the consensus was in terms of investor behaviour. There was a lot of anxiety in 2019 regarding Trump’s trade war, whether the Fed would get skittish about inflation and raise rates. A lot of this anxiety had unwound by the start of 2020 and the consensus seemed to be pretty relaxed about global growth. Most strategists were advocating putting money in riskier stocks and markets, such as small cap market cyclicals. We felt that CEO behaviour had been getting risk loving and relaxed and that there was a lot of risk around. We felt it was therefore sensible to shift out of previously successful recovery stocks and go back into stocks with more steady conservative growth plans. This was a reactive move in terms of investor sentiment. In early February, we saw strange CEO statements from some of our stocks where their supply chains relied heavily on Chinese factories. CEOs were largely dismissive, but it was causing an unusual supply chain shock. So, we bailed out of some of those stocks that were especially vulnerable to supply shock, which were mainly in the electronic component sector. Before Covid really started to have an impact, we’d managed to position our portfolio quite defensively, but had done it in a reactive way. We did not see Covid coming and were not taking bold predictions about there being an imminent global recession. We were reacting to what we saw emerging from CEO and analyst behaviour. When the pandemic hit, stock markets panicked, everything got clobbered and we went down with the rest, but not quite as much as we had a bit of downside protection.
In April, resisting the temptation to run for cover, we trawled through the beaten-up stocks as we felt the conditions made it unusually easy for investors to overreact. At the same time, we could see that the CEOs we watch were willing to embrace recovery plans in a detailed way, which was unusual. Governments were also pulling out all the stops to try and hold economies together. We started to look for recovery value type stocks in areas hard hit by the pandemic. By the end of May, we had shifted our mix more towards value recovery stocks. We didn’t do a lot in Q3 as we felt that markets and economies were on a recovery path. There was a behavioural cycle where anxiety and fear was receding, which we expected to give an upward push to recovery stocks. In Q4, we did what felt like a normal portfolio review where we looked for new ideas, growth and recovery plans and reviewed our existing holdings to identify those whose recovery path we felt was going to get more difficult. Then the vaccine news hit and recovery stocks ripped upwards and we were able to do well in the vaccine rally. We ended the year in pretty reasonable state, but it was wild!
Q4 winners & losers
The top 5 performers for the period were Pinduoduo, Snap, Trade Desk, CAE and KIA Motors Corporation. Tradedesk, one of the portfolio’s growth stocks is a global technology company that markets a software platform used by digital advertising buyers to purchase data-driven digital advertising campaigns across various advertising formats and devices. It has an unusual marketplace business model that makes them unusually effective and fits what we like in a business model. We thought analysts were struggling to understand just how good the business model was and how it would cope in a recession. We saw that as the year progressed, Covid was a net boom for them as it accelerated the shift to their advertising services. We got the double benefit of a growth stock and in an area where demand was expected to accelerate.
One of the value winners was CAE, a company that builds and runs flight simulators to train airline pilots. They are very strong and it’s a difficult area for new competition to break in. You would expect them to have been heavily impacted with planes being grounded. It was affected early on in the pandemic, but pilots still had to be trained despite lower demand and they had to be more flexible as planes were now being used for different purposes. As a result, CAE was not as hard hit and recovered more quickly than expected and will benefit when travel returns.
The year ahead
It looks like the consensus is that a vaccine means a V-shape recovery. Most strategists are advocating putting money into the same things as last year – risky markets and small cap market cyclicals. We’re pretty sure there will be an economic recovery, but are not sure how quickly that will happen. Vaccine rollouts will have to go flawlessly. We don’t think herd immunity will be achieved without more stress to the healthcare system and this will determine how governments react. The recovery will not be as straight forward as the consensus believes and we will start shifting away from recovery stocks and back into safer growth stocks.