Ardevora's stock unpicking pays off

At a time when many professional investors are growing increasingly jittery over the outcome of the UK's general election, Jeremy Lang remains supremely relaxed.

Many fear the most unpredictable election for at least 40 years will herald an unstable, conflict-ridden, multi-party coalition government. Mr Lang, founding partner of Ardevora Asset Management, welcomes the prospect.

"If we get a dysfunctional government that is not able to change much, I would quite like that because there is less they can do wrong," he says.

He draws a parallel with the business world. Ardevora favours companies whose chief executives have little scope to meddle, in the belief that they are prone to excessive risk taking due to their "egotistical" personality type and skewed remuneration structures.

Such behavioural insights lie at the heart of the "Lang approach", developed by the eponymous manager and William Pattisson, his close colleague at Liontrust, where the duo at one point ran £5.5bn, 90 per cent of Liontrust's assets.

Messrs Lang and Pattisson believe investors are prone to overreaction, drawing black and white conclusions from a narrow range of information, while sellside analysts are prone to under-reaction, being overconfident about their forecasting ability and resistant to information that contradicts their views.

Arguably this makes the duo stock-unpickers. Ardevora's portfolios are constructed by rejecting stocks, rather than by choosing them.

This approach seems to have paid off. Under Mr Lang's watch, from 1996 to 2009, the Liontrust UK Growth fund beat its benchmark by 1.8 percentage points a year on an annualised basis.

Since then, all four of the funds launched under the Ardevora umbrella have, thus far, strongly outperformed their sector averages.

Mr Lang is not short of stocks to reject at the moment. To his mind, beaten-up natural resources companies, struggling with lower commodity prices, and UK supermarkets, with their noses put out of joint by cheap foreign interlopers such as Aldi and Lidl, have much in common.

"We try and infer how the people who are running these businesses are behaving and whether there is evidence of acceptance or denial [of their changed circumstances]. All we see is denial, therefore it looks too early [to buy] in those areas."

He believes the long oil boom led to over-investment in the sector, but not enough of the excess capital is being withdrawn because "in some sense [oil company boards] view their problems as transient. If they can just hold their nerve, the oil price will come back."

"Most people who run businesses have an ego and that ego is tied to how big their business is. That is why private equity can be good; it tries to reset [the business]."

Mr Lang believes it can take "a surprising length of time" for denial to dissipate and excess capital to drain away. Often this only occurs when matters have become so bad that businesses are in a fight for survival.

Perhaps inconveniently, given the talk of ego-fuelled growth, Ardevora is also expanding.

Mr Lang and Mr Pattisson established the London-based partnership in 2010, after jumping ship from Liontrust. Five years on, the boutique has just decamped into larger premises after outgrowing its original home.

The headcount has risen by four to 17 so far this year, with a few more additions likely. In February, Ardevora won its biggest mandate to date, A$200m ($152m) from the Commonwealth Bank of Australia's superannuation fund, and its assets under management have now passed £1bn.

As one of 10 partners in a profitable asset management business built entirely without external capital, one might assume Mr Lang has gained financially from the decision to leave Liontrust. However, while not disputing that that may ultimately be the case, he says it is not so yet.

"If I had just stayed where I was I would have almost certainly made more money and possibly had an easier ride, probably with less stress," he says, adding that those who choose to follow his example "are probably looking at a 10-year investment to get back to ground zero, with a high failure rate".

Mr Lang says it took Ardevora three-and-a-half years to become financially viable, and that last year he only took home £90,000. The additional profit share he technically received was wiped out by earlier losses, although that situation should change this year.

Despite that, he says creating the boutique is "the best thing I have ever done", adding that he and Mr Pattisson "wanted to create somewhere we could work for the rest of our lives".

"Ultimately one wants to get up in the morning and look forward to going to work."

The personal predilections of Mr Lang and Mr Pattisson have shaped Ardevora's fund range. Of the boutique's four funds - two global equities, two UK - two are long-only but the others long-short 150/50 funds, which combine a gross long position of 150 per cent with a short position of 50 per cent.

These funds are intellectual soulmates of the 130/30 vehicles that were launched in a blaze of publicity in 2007, but have since largely melted away. Ardevora is one of the few houses to have made a go of the concept.

Mr Lang says 150/50 has served Ardevora "very well", but is honest enough to admit the strategy was chosen for "entirely selfish seasons".

"One reason for starting the business was for Bill [Pattisson] and I to manage our money. We wanted to be invested in stock markets but the trade-off is you have to bear short-term volatility.

"We view [150/50] as a way to control your risk better. The things we want to short are stocks that typically suffer a lot when the environment is difficult. They have more blow-up potential than most, yet investors view them quite benignly."

As to why more managers have not made a success of the strategy, Mr Lang says shorting stocks is "emotionally hard, because it can feel most of the time that you are wrong. There is an emotional drain."

Once again, it seems, behavioural factors have a lot to answer for.

Born 1964

Total pay £90,000 (fixed salary)

Education1985 BA in economics and econometrics, University of York 1986 MA in economics of finance and investment, University of Exeter

Career1986 Investment manager, James Capel Fund Managers 1991 Sailed around the world 1995 Joint investment director, Liontrust AM2010 Founding partner, Ardevora Asset Management

Founded 2010

Assets under management £1.3bn

Employees 17

Headquarters London

Ownership Limited liability partnership

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