Jeremy Lang of Ardevora Asset Management, and Portfolio Manager of the Nedgroup Investments Global Diversified Equity Fund, provides an overview of the Fund’s performance for the last quarter and their unusual investment approach.
To watch a recording of the webinar go to YouTube.
Investment process overview
The Fund is a long-only global equity fund with a bottom-up fundamental process, and results in a combination of both growth and value stocks. We focus on cognitive psychology and the conditions under which people make biased decisions. We believe that CEOs can be risky and error prone unless they face environments that encourage them to be sensible. Our stock selection can be quite complex, but we believe that stock prices are influenced by the behaviour of three broad groups of people – CEOs, investors and expert analysts. We are quite good at spotting unusual investment opportunities by recognizing and understanding the types of conditions where these three groups can behave unusually and make mistakes. We end up with 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. The Fund therefore has 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.
This strategy was launched in 2013 and has delivered pretty good performance given the wild market moves this year. We were able to provide decent downside protection year to date where we were able to participate well in the market as it rallied. In Pound Sterling, the Fund returned 4.13% in Q3, with the longer-term GBP performance over 3 and 5 years at 11.28% and 16.45% respectively. We don’t sacrifice upside capture in our pursuit of offering some downside protection.
Key performance contributors
Until April, investor behaviour was dominated by fear with the arrival of COVID-19. Stock prices were strongly influenced by the data with investment fundamentals of secondary interest. Since April, investors’ reaction to worsening virus stats has been much more muted, which indicates that market sensitivity to the virus has dropped a lot since the first wave and this fits our general set of assertions about how we are trying to understand and explain the pandemic. As the virus goes on, people and investors will become accustomed to it and bundle it along with all other risks and uncertainties that we all have to deal with. The true test of this will be when the stats of the ongoing second wave start to peak. From the way the market is behaving, it is starting to become immune to the virus.
CEOs have faced one of the first and most serious macro shocks they’ve experienced since 2008. But the shape of this shock has been very different. As a result, CEO behaviour has changed a lot since the start of the year and they are focussing on how to reduce risk and improve the robustness of their businesses.
The portfolio has two types of investment opportunities – unusual growth and safe value. In Q3, the safe value names have been particularly interesting. We’ve categorised our stocks into two groups. This first are those we frame as the ‘Covid changes everything’ group, such as eating out, tourism, air travel, etc. The second group are those where CEOs were pretty quick to respond to the general economic shock. The first group hasn’t done as well, which isn’t surprising given that we’re in the midst of the second wave. But investors are much less sensitive in general to Covid. We’re confident that as this second wave peaks and as we emerge from Covid these types of stocks will start to represent a really interesting opportunity. The second group have continued to recover well since April.
In terms of contributors to performance, we don’t rely on a couple of big winners to deliver outperformance and think this makes us more robust and more consistent, but it doesn’t make for a very exciting story.
Navistar, a producer of trucks and diesel engines, has done well for us. It had a big restructure following a bail-out from VW with a focus on de-risking the business. In April, VW finally decided to move to full ownership and take advantage of the progress that Navistar had made and offered us a nice amount of money to take those shares off our hands. A stock that has not done so well for us is International Consolidated Airlines, which is a holding company for a lot of airlines, including British Airway and Aer Lingus. This stock sits in our traumatic value type stocks and typifies the ‘Covid changes everything’ stock. It’s been hard hit with people not being able to fly, particularly in the long haul market, and there’s a lot of anxiety and scepticism around this business due to the financial repercussions of not being able to operate. This has triggered a significant restructuring process where they’ve radically reduced their cost base and their capacity in order to survive. In our view, demand will come back and I think they’ll have a lot of upside leverage as things normalise.