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Cartesian philosophy

Cartesian’s Jeremy Hall claims a major advantage over many long-short peers, with years of experience in this space rather than just bolting shorts onto a long-only process.

His Cartesian enhanced alpha fund just passed its three-year anniversary with top-decile numbers and the team has consistently proved able to generate returns from long and short books.

Enhanced alpha is a 130/30 product – which means it can gear on the long side and take up to 30 per cent short positions – and was originally called UK equity 130/30.

It rebranded late last year after poor-quality products launched in this area and threw doubt over the concept.

Hall says: “130/30 flexibility is powerful in the right hands but ended up in the wrong ones too often, with managers running funds without any real shorting experience.”

Since launch in 2007, his portfolio has generated a 13 per cent return against 2 per cent from the FTSE All Share but with much less volatility than most long-only competitors.

Hall says Cartesian’s process is grounded in fundamental stockpicking, which the team honed at SVM before setting up its boutique in partnership with Ignis in 2005. He sees this detailed company analysis as particularly important right now, with correlations between companies and assets running so high.

“It has been a difficult year in terms of calling the market and that has led many so-called active managers into benchmarking,” he says.

“In contrast, our process is about genuine stockpicking, focusing on fundamental analysis of accounts – how they have made money and how they report it – and we are simply looking to find good and bad companies.”

Hall highlights SuperGroup in the former category, floating earlier this year at £5 and already past £14 as the market has rewarded its strong growth and lack of debt.

“The company is looking for working capital and has clear areas of future growth, including online and into womenswear,” he adds.

“This is an example of why stockpicking is key as the outlook for consumer stocks in general remains poor but this company is driving its own growth and increasing revenues by 60 per cent quarter on quarter.”

Hall feels there are plenty of good and bad companies out there, with lack of correlation via some sort of idiosyncratic aspects key on the long side.

As for the short book, there are certain signals the team seeks out, where they are uncomfortable with how the business is being run or the model is flawed in some way.

These fall into the categories of aggressive accounting – for example, where firms are recognising revenues too early – low earnings quality, financial weakness and opaque accounts.

Hall says: “Shorting adds what we call asymmetric risk, which is why experience is so important. If a company is performing as expected, its shares tend to rise gently but if something goes wrong, the price can fall very quickly.”

Key short positions this year have included Connaught, which Hall says has a history of poor cash conversion and high debt, so it took very little to push the company over the edge.

Other shorts have focused on areas such as falling government spending.

“One shorted stock is a staffing company in the healthcare industry, which is already subject to pressure from cuts but also has several obvious accounting irregularities,” he says.

“Last year, there was a sense of the rising tide lifting everyone up but we now see significant shorting opportunities as companies report and people realise they are less robust than was first thought. The market has gone from 4,800 to 5,800 quickly this year and we see several companies susceptible to corrections.”
In terms of major long positions, Hall says 2010 has been a good year for genuine stockpickers, highlighting oil exploration stocks such as Rockhopper and Nautical Petroleum.

On the macro front, he feels the second round of quantitative easing has already been largely priced in by markets and expects a low-growth environment to prevail.

“We are slightly cautious in the short term with the market at 5,800 but believe equities can make progress next year,” says Hall.

“We are focusing on companies not reliant on GDP growth and capable of delivering in a slow environment. Against such a background, managers will have to focus on company fundamentals, which, after all, is what stockpickers are paid to do.”


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