GlobalApr 4 2017

Lang tilts towards cyclicals as ‘anxiety’ lowers valuations

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Lang tilts towards cyclicals as ‘anxiety’ lowers valuations
Miners surge ahead of global peers in 2016

Jeremy Lang and his Ardevora Global Equity co-managers have been backing cyclical names, including mining stocks, in the belief “high levels of anxiety” are still dragging down valuations despite fundamentals having improved.

Mr Lang, along with co-managers Ben Fitchew, Gianluca Monaco and William Pattisson, has tilted the £770m fund’s long and short positions towards businesses deemed to be misjudged by the market – those where they perceive excessive caution or complacency from investors, analysts or management.

The managers believe some cyclical names are being weighed down by sentiment despite balance sheet improvements.

“We have been picking up businesses that usually have high amounts of anxiety but which management has de-risked,” Mr Fitchew said.

This saw the team – which had more than 15 per cent of the fund allocated to industrials at the end of January – invest in Anglo American last year. 

“We saw extreme anxiety in mining that led to investor scarring,” Mr Fitchew added. 

“We saw a feedback loop from capital markets into management behaviour. Investors became overly anxious about the likelihood of survival of certain businesses, and this anxiety caused management to de-risk.”

Conversely, the managers have also been backing names in the technology space such as data storage business Seagate, where a different threat is spurring firms into action.

“The PC market has started to decline and Seagate is engaged in dramatically restructuring and pivoting to enterprise and the cloud,” Mr Fitchew said.

“In mining, businesses divested. But in technology it’s not about balance sheets but the fear of obsolescence.”

Such moves have partly been funded by a move away from certain “quality” names that looked threatened as a broad market rotation gathered pace last year. The team has lowered exposure to the likes of Japanese consumer staples firm Kao.

“We have reduced our exposure [to quality names] and increased our exposure to value names,” Mr Fitchew explained.

The managers, who held 190 long positions and 65 shorts within the fund at the end of January, have also been exploiting the woes of consumer-facing names in the latter book.

Mr Fitchew revealed they had been shorting retailers, particularly those focusing on luxury and fashion products, in the belief that these companies faced a series of headwinds.

“Thematically our focus is on consumer discretionary. In luxury and fashion retail, we see the problem of ‘over-retail’ and the disruptive effects of the maturity of the internet model [of retailers’ businesses],” he said.

The team has also been focusing on shorting pharmaceutical names, in the belief traditional research and development (R&D) is providing the industry with diminished returns.

“In pharma we are seeing this declining efficacy of traditional R&D,” Mr Fitchew noted.

“We think the effect of that is their super profitability being eroded away. R&D is becoming less effective – they made all of the great gains a long time ago.” 

The managers could now ramp up their focus on both retail and pharma as they review their short book. “They are areas with interesting themes – potentially more will go in,” he said.

The Ardevora Global Equity fund has returned 58.7 per cent over three years, compared with the 42.7 per cent average by its IA Global peer group, data from FE Analytics shows.

 

IN NUMBERS

98% 

Ardevora Global Equity fund’s net invested position at the end of February 2017

65

Number of shorts in the strategy