Jeremy Lang, co-founder of Ardevora Asset Management, portfolio managers for the Nedgroup Investments Global Diversified Equity Fund, provides an update of the Fund’s recent performance and shares their ‘unusual’ investment approach.
The Fund is a long-only global equity fund with a bottom-up fundamental process that is a combination of growth and value. It aims to produce a return profile that can participate in most up markets and offer some protection in difficult markets. It is the only behaviour finance style fund on offer in South Africa.
We focus on cognitive psychology and the conditions under which people make biased decisions. We usually end up with two types of generic investment opportunities. The first is an unusual growth business. We believe that most CEOs view their businesses as growth businesses but, for us what makes it unusual is that it will have some kind of business model and will operate in an unusual environment where it’s unusually easy for them to grow. The second type is a safe value business. Most CEOs in our view like taking risk 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 something that they don’t normally like to do, which is to de-risk their businesses. This can happen at a time when investors are being traumatized during that period of bad behaviour and they don’t then 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 and no macro calls.
This strategy was launched in 2013 and has coped pretty well with some wild market moves, providing decent downside protection year to date, where we’ve been able to participate in some of these violent market rallies as well. The Fund, being fairly conservatively positioned, returned 23.1% in Q2 and 4.8% year to date for UK investors, and 15.2% and 19.7% for South African investors respectively.
It’s fair to say it’s been a pretty unusual environment this year. In terms of the key behavioural blocks that we are interested in, CEOs have faced one of the first and most serious macro shocks they’ve ever experienced, or since 2008 for some. As a result, CEO behaviours have 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. Investors and analysts have suffered a lot of trauma too in the last six months with anxiety levels remaining high.
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 particularly exciting story. We equally weight each name and rebalance quarterly. This means that individual stock contribution, even from our ‘top picks’, can be quite modest. However, we maintain a strong strike rate (we estimate 60/40), which means we end up with lots of modestly performing good ideas spread across the portfolio.
Thor Industries was the biggest contributor in Q2. It’s the largest maker of recreational vehicles in the world having hoovered up most of its competition. They sell RVs, which is quite an unpredictable market. The industry was previously fragmented and prone to a lot of price competition. Thor has done a lot to improve the behaviour of the industry and is run with an eye more on efficiency and risk than growth. There was a lot of anxiety about what Thor did a few months ago with it selling big-ticket RVs when COVID started to rip through the system and investors worried that everybody would stop buying them. This anxiety has already started to unwind considerably as people have concluded that demand won’t disappear forever. Thor has continued to do what’s it’s done for a number of years, which is to operate in a sensible, low-risk way and we’ve reaped the benefits of the anxiety unwind already. Our worst relative contributor was Microsoft, which reveals the downside of our approach. Because we equally weight all of our positions we will be underweight the mega cap stocks, even though we hold most of the larger tech companies such as Microsoft, this makes for a less risky overall portfolio.