Taking a dispassionate approach to stockpicking

5 October 2009

Barry Norris co-founded Argonaut, a joint venture with Ignis Asset Management, in 2005 with Oliver Russ. He is responsible for managing the Argonaut European Alpha and European Absolute Return funds.

Q: What is it about your stockpicking approach that makes you different from your peers?

A: The process has no bias towards any sectors or industries, or towards high beta or low beta. It doesn’t aim to outperform in a bull market or a bear market. Many investors are one-trick ponies. If I underperform it’s not because of market conditions; it’s because I’ve got my analysis wrong.

Of course there’s relative and absolute performance, and there are times when the outlook for your asset class is not particularly good. But if you’re a long only manager in an asset class which investors don’t have to own, you’ve got to give them a good reason.

Q: What is it that makes a particular stock attractive to you?

A: The characteristics of stocks in terms of how they will perform on the stockmarket will change over time. Some types will do well over some points of the business cycle.

In 2008 anything that was low beta with no debt and high, stable profit margins, performed very well. This year the reverse is true. When you get back-to-back years like 2008 and 2009, any investor only focused on bottom up is not really understanding what’s driving performance. We’re not wedded to any style or any information source.

Q: Can you give me a specific stock example?

A: TomTom, the navigation device and electronic mapping software company. We bought it in 2005 at €18, it hit €50 at the end of 2007 and we sold at €36 at the beginning of 2008. We bought it back at €5 this year. We originally bought it because it was very much a growth stock in a stable environment. In 2008 it spent €2 billion on buying map supplier Tele Atlas and leveraged up its balance sheet.

At the same time there was the economic downturn which affected demand for products. We sold it because of concerns over leverage, but bought it back when financial markets were reopening and it was able to raise some equity. It’s a good example of a company where we’re pretty dispassionate about investing – we recognised when the facts have changed and things have been on the turn.

Q: Is it all about stockpicking or do you consider sector and macro views?

A: Macro views are very important, particularly when there’s a lot of macro volatility. 2008 and 2009 have been driven by macro views. The other thing to bear in mind is that when to change your mind is important. If you think there will always be an economic cycle then changing your mind at least twice in that cycle becomes an important skill. When one approach is successful a manager can become entrenched in that view. We have no bias towards sectors we want to be in over the long-term. Our sector positioning is partly a result of bottom up and partly our sector view.

Long-term supply and demand within sectors play quite a part and new bull markets are not led by the same sectors. The sectors which lead the next leg of the market will be different from those in 2003 to 2005. I also think developed markets will outperform developing markets.

Q: How are you currently positioning the Alpha fund?

A: I’m still very much positioning for recovery – companies which are operationally and financially geared. We haven’t yet had a quarter where western economies have grown. We haven’t had analysts forecasting anything other than very low margins. We’re at a fairly early stage in the recovery.

Q: What’s your view on the investment case for Europe?

A: Markets have gone nowhere in 11 years despite aggregate profits up 50% over that period. It’s a lost decade in terms of returns, which is bad for sentiment but good for future returns. Interest rates are low and likely to stay low for quite a period.

The equity risk premium is still at very elevated levels – yields on equities versus anything else are very attractive. Coming out of the economic crisis the market is underestimating operational leverage and earnings growth.

It might more than double in this economic cycle. Europe is the highest beta developed market. Emerging markets over the last decade have returned 400% versus developed markets, which have been flat. It’s a bit intellectually lazy to think that outperformance will always be there.

Q: What do you make of people who refuse to believe we will see a V-shaped recovery?

A: There are a lot of people with that view and lots of them are potential investors in European equities. I disagree with them. I find it amusing that even other vocal bulls, like Crispin Odey, are saying that markets going up is more a liquidity event than an economic recovery. When you’re investing I think that popular asset classes, where the argument is already won, won’t give you the most attractive returns.

Q: How has the boutique set up with Ignis suited you and Oliver Russ?

A: In 2005 both Oliver and I had just turned 30. While we wanted to set up our own boutique, with stability in terms of freedom of the investment process and longevity of funds we run, it was easier to do it with a partner organisation.

If you look at Ignis now, in terms of sales and marketing and the abilities and resources they bring to the joint venture structure, we’ve got to be pleased with the progress made. In 2005 it was a radical idea; in 2009 it’s about building on that success. Boutiques work because they enthuse managers about running funds. The manager should be there for a considerable period of time – there’s no reason to go anywhere else. The rewards are very transparent. If you don’t make any money, you don’t get paid anything. I would much rather have that visibility.

Q: Was the European Absolute Return fund - launched in February this year - a response to the challenging market conditions or was it planned for a while?

A: We’d been planning to put a vehicle together for some time. We weren’t sure whether to launch onshore in the Absolute Return sector or an offshore hedge fund. We always wanted three strategies: alpha, income and absolute return.

It was just a case of which particular target market to launch the fund in. To me, absolute return means the ability to make real absolute returns in all market conditions. In the onshore Absolute Return sector people have confused it with low volatility funds. As a manager, I don’t think you can give any excuse to investors for not performing.

Q: Did you have previous experience of hedge techniques, for example shorting, pair trading and using derivatives?

A: Not with real money. We’ve been doing dummies for a long time. Running an absolute return fund has made me a better long only manager. If you’re losing money on shorts in an absolute return fund, it’s a lot more painful. In long only funds if you’re not suffering absolute losses there’s a temptation to think such losses are not of such pressing concern, but they should be.

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