Most fund managers go to a lot of time and trouble to meet the senior directors of the companies that they invest in. They think that this can help them to get a better insight into the business and the people behind it, but Jeremy Lang of Ardevora UK Income believes otherwise.
Lang thinks that picking stocks is about recognising where the market is wrong and pictures it as made up of three sets of people: investors, financial analysts and company managers. He then monitors the behaviour of these groups for signs of bias.
With investors he looks for evidence of excessive anxiety or over-exuberance, which can result in prices being pushed too low or too high, whereas with analysts he watches for signs of overconfidence or too much reliance on a good story.
The behaviour of management is somewhat different, but the warning signs would be arrogance, denial or excessive risk taking. This is why he prefers to keep away and to base his decisions on the raw data like the share prices, analyst reports and company accounts.
The Ardevora UK Income fund aims to generate long-term capital growth and income, but has the scope to liquidate its holdings and keep the money in cash if the prevailing investment climate warrants it. It is one of the best performing funds in the UK Equity Income sector with a three-year return of 62.7% and has a competitive historic yield of 3.64%.
Lang and his co-manager, William Pattison, are both experienced fund managers and left their previous roles to set up Ardevora as an investment boutique where they have free reign to apply their ideas.
They are cautious investors and like businesses that are successful without taking risks and that have balance sheets that are easy to understand. Normally they will hold onto a share for around 18 months and will reappraise a new holding after six months to see whether they should stick with it or sell.
Their portfolio tends to be very different to most UK Equity Income funds and will normally have a bigger exposure to the mid-caps than their peer group. This has contributed to the strong performance to date.
Another unusual aspect is that the managers tend to equal weight their portfolio. At the end of June they had 24 core holdings with most accounting for between 3% and 4% of the fund. There were also smaller positions via contracts-for-difference, which is a simple type of derivative that provides exposure to the underlying share price.
The most recent data on the various holdings was at the end of July when there were 43 stocks with the top ten accounting for 44% of the fund. These included the likes of Next, BAT, Greene King, National Grid and the Ashmore Group.
Ardevora UK Income has made a name for itself amongst professional investors, but is still relatively unknown by private investors with only £226.4m in assets under management. It could make a decent diversifying holding if you already have a more mainstream UK Equity Income fund in your portfolio.