Jeremy Lang does not tick many of the boxes when it comes to modern fund management. Runs a concentrated portfolio of best ideas? Nope. Kicks the tyres on company visits? Nope. Has great stories about stocks to tell? Nope. Indeed, Lang and his colleagues at Ardevora have become almost anti-managers.
Detachment is at the core of Lang’s approach. Company chief executives take excessive risks, says Lang, often living in a world of hubris and denial. Investors are either over-exuberant or excessively anxious. And analysts? Overconfident and blinkered people who too easily believe a good story.
“Keep away from these people,” he says. Instead just look at observable facts – such as stock prices, valuations and company accounts. His portfolios don’t have favourites – running a portfolio is like running a family; it’s bad to show favouritism to any one child.
Each stock position is under 1 per cent of the portfolio. Stock counts in his funds can be as high as 200, in sharp contrast to the 50 to 60-strong portfolios now common at most fund management groups. Some stocks he has held since the launch of the funds, others he has bought and sold in a week.
“In very concentrated portfolios, a fund manager really, really wants the stock to work. It makes it difficult for the fund manager to recognise when things are going wrong,” says Lang. He simply can’t see what you gain from making company visits and meeting chief executives whose charm and eloquence can blind you.
Six years after his dramatic exit from Liontrust, and four years after launching Ardevora’s funds, the observable facts seem to be that Lang has indeed been right to keep away from those people.
The group has four funds, three with a track record of three years or more. Each of them has first quartile performance over one and three years. The fourth fund, the Global Long-Only Equity, was only launched in November 2013 and is also first quartile over one year.
Lang could come across as insufferably smug. After all, his investment process could be summed up as “we’re really brainy and everyone else is a bit thick”. Could he become victim to the same hubris he accuses others of?
“Most people’s instinctive reaction is that we are saying everyone is stupid and we are really clever. We are not saying that.”
It’s a charge he is accustomed to hearing. “Most people’s instinctive reaction is that we are saying everyone is stupid and we are really clever. We are not saying that. If you look at all the academic research, it suggests that people don’t make mistakes because they are stupid. Chief executives are usually highly intelligent, well-informed people,” says Lang. But it’s the type of mistakes that highly intelligent people make that interests him.
He cites academic insights learned from studies of medical students at Massachusetts Institute of Technology – who we can assume are a fairly brainy bunch to have managed to get in to one of the world’s top educational institutions. The studies show that these medical students are likely to be, at times, over-confident and myopic, with an emotional side that leads them to make mistakes.
“Of course we have to admit that we are error-prone ourselves. But we hope we make different mistakes to everyone else. And if I’m wrong, what I want to know is how much it can hurt me. At core, our approach is quite conservative,” says Lang.
When does the process go wrong? Lang admits that during momentum-driven bull runs he is not likely to outperform. “We are most vulnerable when everyone else is in love with risk,” he says.
The biggest fund he runs, co-managed with Bill Pattison, Ben Fitchew and Gianluca Monaco, is the Global Equity fund, with around £350m under management. In yet another swipe at conventional fund management, the portfolio is not carved up so that each individual is responsible for some bit of the globe. Each of the four Ardevora managers is a generalist, and each carries responsibility across the portfolio, says Lang.
Global Equity is a 150/50 long-short fund, with a high minimum investment – £50,000 – and a choice of fee structures, which can include performance fees. Over the last three years, it is up 58.5 per cent compared to the Equity International sector average of 31.7 per cent and up 18.3 per cent over the year compared to 10.2 per cent for the sector.
Does shorting work? What’s interesting at Ardevora is that there is a very clear comparison to be made, between the Global Equity fund on the one hand, and the Global Long-Only fund on the other, as they both have identical long-only portfolios.
In the past six months, the pure long-only portfolio has lost 6.6 per cent of its value, compared to a loss of 3.7 per cent on the 150/50 fund, while over one year it is up 15.4 per cent compared to the 18.3 per cent rise in the 150/50. Shorting evidently works.
“I think shorting makes you a better long-only manager, it makes you look at stocks in a very different way,” says Lang. But he’s shy about saying where his shorts are. “I generally don’t talk about them because people have an irrational dislike of shorting. They think it is somehow greedier. It is a debate that is fraught with emotion.”
He recently closed out of many of his shorts in natural resources. Where he finds opportunities for shorting at the moment are among healthcare and drug makers. The pharmaceutical companies have been crafty at keeping prices high, but that’s beginning to attract attention from governments and regulators, he feels.
But getting Lang to talk excitedly about any of his long positions is near impossible. Currently the largest stock in the fund is Gruma of Mexico, a tortilla maker. But ‘largest stock’ only adds up to 0.8 per cent of the portfolio. Few themes are apparent in the fund, apart from a distinct underweighting in financials. “We like to be evidence based when picking stocks. The thing with financials is that you can’t rely on the numbers from the report and accounts or the balance sheet. You simply can’t see all the risks you are taking.”
Ardevora’s own figures are somewhat surprising. Six years ago when he left Liontust, Lang was managing nearly £3bn, but today the total is only around £1.5bn. Given the fantastic performance figures Ardevora is now enjoying, it surely can’t be long before much more money flows in. While Lang took some years out in his late 20s and early 30s to go sailing around the world, he’s now going to say at the helm, he says. “I have no intention of retiring. Ever.”
CV: Jeremy Lang is founder at Ardevora
Jeremy Lang founded Ardevora in January 2010 and runs the asset manager’s four funds. He previously worked at Liontrust, joining the asset manager in 1995. At Liontrust he co-ran the UK equity portfolios and investment management operations alongside his Adrevora partner William Pattisson. Lang left Liontrust in April 2009. He started his career at James Capel Fund Managers in 1986, but left in 1991 to take two years sailing around the world.
Key takeaway: Lang is known for his unorthodox style, which some may find offputting. But his funds at Ardevora have delivered and showed his strategy has worked. His ability to short effectively, and add value by doing so, means he stands out from the crowd of equity managers. Assets at the fund group are still half of what Lang ran at Liontrust, but with three funds having hit their three-year track record, asset flows could pick up.