The co-founder of equities boutique Ardevora Asset Management, whose investment strategy is based on exploiting irrational behaviour of company managers, investors or analysts, is “intrigued” by the possibility that most investors haven’t yet properly adjusted to the new reality of prolonged low growth – an environment in which a small number of high-quality companies might carry on doing very well indefinitely.
He said: “Nowadays, people look at safer stocks, and say ‘this is overvalued’. My question is: who remembers the Nifty Fifty [and] what if we’re in an environment which is quite similar?”
The Nifty Fifty was the term given to an unofficial group of 50 popular large cap stocks on the New York Stock Exchange in the 1960s and 1970s. They included the likes of Coca-Cola, IBM and Procter & Gamble and were famed as solid performers that would deliver earnings growth year in, year out and so only required investors to make a decision to buy them, not sell. Their appeal led to sky-high price/earnings multiples on such stocks.
However, Lang said: “What created this appetite for people to pay 100 times earnings for growth? It was a lack of growth. These had been the stocks that would grow forever. Then, when inflation came back into the system in the 1970s, their share prices went nowhere for a couple of decades.”
Lang, who started out at James Capel in 1986 before going on – after a brief stint as a sailor – to hone his skills at Liontrust Asset Management and then start Ardevora six years ago, recalls the accepted folklore by the time he started his career was that growth investing did not work.
Fast-forward to today, and some modern-era Nifty Fifty-type companies are an active component of Ardevora’s investment bucket. Lang explained: “You can easily find these businesses: Unilever, BAT, Reckitt Benckiser, package franchise businesses. On a risk-adjusted basis these have done extremely well. But part of our portfolio is in these because I think they still have very unusual properties.”
Making unusual calls is typical of Lang, who with his partner Bill Pattisson – also a colleague at James Capel and Liontrust – has been second-guessing collective market psychology for more than 25 years, and using those insights to deliver returns that have trounced most peers.
Ardevora’s flagship global equity fund has made 17.7% a year annualised during the three years to September 30, compared with 13.2% for the MSCI World index and the 10.3% average among sector peers, according to FE Analytics. It ranks eighth out of 267 global equity funds. The UK equity fund, meanwhile, has made 14% a year over the same period, against 6.6% a year for the FTSE All Share and 6.5% for the average UK equity fund.
Breakneck recent growth has seen operating profits virtually double to £8.3 million for the year ended March 31. Assets under management have roughly quadrupled over the past two years from £1.1 billion at the end of 2014 to £4.3 billion as of last month, helped by a clutch of institutional mandates, not least from Australian pension funds including the Commonwealth Bank of Australia’s superannuation fund, according to institutional sales head Hugh Rittner.
Ardevora’s complex investment process put off some investors in the firm’s early days, but Lang said of the Australian investors: “They have an ‘oddball box’ and we are in it.”
It is somewhere Lang is clearly happy to be. There is a touch of tell-it-like-it-is irreverence to Ardevora: its factsheets list company sectors including “booze” and “corporate pic’n’mix” rather than the staid “consumer goods”.
The label ‘contrarian investor’, claimed by many an active fund manager, is particularly apt for Lang and his team, who devote their time to trying to work out why other market participants are wrong about things.
Citing John Maynard Keynes’ likening of playing the stock market to trying to predict the outcome of a beauty contest, Lang stresses the importance of “working out what everyone else will think” rather than personal opinion, an approach that has shaped his investment strategy since the James Capel and Liontrust days.
One of the holdings in the global fund, for example, is Hermès, the French luxury goods maker whose stock sellside analysts tend to be biased against because they view it as too expensive compared with sector peers, Lang believes. He and Pattisson reason that Hermès’ strategy of producing less in bulk and rarely discounting its wares instead sets it apart.
Another stock fitting this bill is Swiss chocolatier Lindt & Sprüngli, whose steady performance is overlooked by analysts whose role is to build arguments to drive buy and sell decisions.
Lang said: “Lindt & Sprüngli is interesting because it hardly ever disappoints [delivers earnings below analysts’ forecasts]. But analysts find it difficult to argue what’s new and different about it. It’s a narrative bias. But also there is valuation anxiety.”
Mining a new seam
It is the addition, since the creation of Ardevora, of management bias to the team’s analysis that is the most eye-catching, and has helped drive performance this year. The UK fund is up 20.6% over the past 12 months compared with a 12.4% rise in the FTSE All Share index.
The biggest holding in the UK fund is miner Anglo American, the FTSE 100’s top performer this year and the poster child for a turnaround in sentiment on commodity and resources stocks, whose share price has more than quadrupled since January.
Ardevora made a call on the psychology of the company’s management.
Lang explains: “What I want to see is a pattern of past management behaviour which was risky and poor. This lays down the environment for trauma. But I also want to see evidence that management has moved out of denial.
“These businesses require capital and so they require the trust of capital markets. This can coerce management out of denial. I would say all the symptoms of this were there at Anglo at the start of this year. The share price was collapsing, the cost of debt was exploding, and management said: ‘We have to do something’.”
At Anglo American, that has meant targeting [$ 3 billion to $ 4 billion of asset sales this year].
Lang added: “In the conventional framework people don’t like this because they are distressed sellers. But they are selling risk. Most people don’t like changing their mind. Under what circumstances would you? When your back is against the wall.”