Portfolio Adviser • PA November • Double take

The Ardevora Global Equity Fund uses cognitive psychology to help identify ‘unusual’ companies with growth potential...

Our approach to investing is fundamental. We are stockpickers. We look at many of the same things as other fundamental investors but we think we do it in a slightly different way.

We aim to invest in well-managed, low-risk businesses. However, unlike most investors, we think the best way to do this is to take the results of academic research from cognitive psychology, on errors and biases, and apply them to financial markets.

We believe successful stockpicking requires an understanding of how three groups of people interact: company managers; financial analysts; and investors. Each group is potentially subject to bias, and the biases affecting each group are different.

Cognitive psychology tells us that company managers, despite being intelligent and well informed, are especially susceptible to over-confidence bias. If the environment they face allows them to, they can take on too much risk. We take the view that, all things being equal, management are likely to push a business harder than is sensible. This is driven by their self-belief, their shareholders’ desire for growth and their companies’ remuneration policies.

We look at how fast the company is growing, how much cash is being generated by the business and what management are saying about their business and the industry conditions they face. All this helps us make a judgement on management’s attitude to risk.

If we think a company is straining too hard for growth or in denial about how difficult conditions are becoming, we will not buy the stock or we will short it.

Once we have identified companies we think are being well managed, we apply the same lessons from cognitive psychology to financial analysts and investors. In our view, financial analysts can often under-appreciate how fast, and for how long, unusual businesses can grow.

By exploiting this tendency, we hope to identify interesting ‘growth stocks’. Separately, investors can often become sceptical and nervous about companies after a traumatic event. By exploiting this, we hope to identify interesting ‘value stocks’.

For our Ardevora Global Equity Fund, we have exposure to a broad spread of stocks in most major equity markets around the world. Stock positions are equally weighted by region. The long and short book are man-aged separately. The objective of our fund is to achieve long-term steady capital growth without too much volatility. The structure of the fund is 150/50, which allows a maximum gross exposure of 200%.

As for current market conditions, one of the most prevalent themes is the trade war between the US and China. We still believe most people are too relaxed about the degree of negative impact a prolonged trade war will have, but at least they have come around to the idea that a trade war is here to stay. This is good for markets since, as the cliche goes, more is now in the price.

In addition, central bankers seem to have changed their view on the trade war. There has been a remarkable flip, especially in the US, on the likely path of interest rates. The Fed has moved from signalling an intention to raise rates, to a position of clearly signalling multiple rate cuts. This reflects an acceptance the trade war is here to stay.

WEALTH MANAGER COMMENT

Given the progressive attitude of Scandinavian asset managers, it is no surprise the Nordea Global Stars Equity has a strong ESG focus. Johan Swahn looks for forward-thinking companies with strong sustainable business models. With two-thirds of the portfolio invested in US stocks, and technology the prominent sector, the fund has been well positioned and has built up a solid three-year track record of outperformance.

As for Ardevora Global Equity, ex-Liontrust stalwart Ben Fitchew, supported by Jeremy Lang and William Pattison, has produced strong returns since launch in 2011, with a fund looking to add value and manage risk through both long and short positions. The fund has a neutral approach to geographical allocation, and runs a well-diversified portfolio (300 stocks) with a bias for large-cap growth businesses.

Both funds follow high-conviction strategies and have shown a good level of outperformance. If I had to choose, it would be the Nordea fund, as I believe its ESG-driven process will continue to gain traction.

...while Nordea Global Stars Equity has an ESG-driven process that monitors companies for the best possible ethical business models

Nordea’s Stars range, which includes the Nordea Global Stars Equity strategy, embodies true ESG integration, with thorough research undertaken to identify companies displaying sustainable and responsible business models. We firmly believe businesses on the right side of change are more likely to be tomorrow’s winners.

The first stage in our process is to seek out companies displaying compelling ‘expectation gaps’. These are fundamental value drivers where we have a materially different view from the market. The next step is to make assessments of a company’s strategic positioning, focusing on businesses with sustainable competitive advantages or moats.

Finally, we perform extensive work based on proprietary discounted cashflow models to determine the upside potential of a stock.

We think the key differentiator for the Stars investment process is the ESG integration and analysis. ESG analysts from Nordea’s responsible investments team work alongside us, providing invaluable insights into possible risks and opportunities to our current and potential investments.

Each company we invest in, as well as every potential new holding, is assessed on whether it conducts business responsibly in relation to its stakeholders, across employees, suppliers, customers, investors, the environment and society at large.

Our team then assigns a forward-looking rating to the company, which determines whether there is a positive or negative trend. Each company is given an A, B or C rating. Our fund, as well as all other Stars funds, are unable to invest in any C-rated business.

We believe engagement is incredibly powerful and seek to identify the most relevant ESG topics for each company we engage with through a roadmap. A good example of this can be seen through the investment in global food leader Kerry Group. On our first engagement in 2015, we noted some weakness in labour practices within Kerry’s agricultural supply chain. At this point, the company was given its first rating, of B+.

We continued to engage with Kerry over the next 18 months and witnessed big improvements by April 2017. Kerry was then given an the highest rating available, A+.

As for recent additions to our portfolio, during the third quarter we took a stake in research-driven biopharmaceutical company Abbvie. Attention towards the healthcare sector has spiked over the past two years on the back of the opioid epidemic in the US. Although Abbvie is not involved in the crisis, the issue has shown the importance of understanding a firm’s culture.

When discussing business ethics – one of our ESG pillars – we found Abbvie aligned with global best practices. We gave it an A-rating as it has strong policies and procedures regarding product quality and safety.

During the past few months we increased our engagement in relation to climate change. As the urgency of this issue mounts, we engaged with 24 companies across the entire Stars range in an effort to enhance climate reporting and risk management.

For our Nordea Global Stars Equity strategy, our portfolio’s carbon footprint is 63% lower than the benchmark, while contribution to the eight environmental objectives within the United Nation’s Sustainable Development Goals is twice as high.