View more on these topics

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.”

Recommended

Firms must review processes

The FSA has ordered all firms selling pure protection to review their sales processes after finding “significant failures” by firms to comply with oral disclosure rules. Firms have six months to confirm a review has been completed and protection sales processes comply with Icobs. If they cannot comply they will have to write with a […]

Gay leads strategic review at Aifa

Aifa is launching a strategic review of the trade body following the arrival of new director general Stephen Gay. Former Aviva director of distribution development Gay was announced as Chris Cummings’ successor in September and joined Aifa on December 1. His first move has been to call for a wide-ranging review of the organisation, looking […]

Frontiers fund to cover next generation of up-and-comers

BlackRock is launching a frontier markets investment trust that will target markets including Kuwait, Oman, Saudi Arabia and Tunisia. The trust will target the 140 countries currently classified as frontier markets, which BlackRock says have some of the fastest rates of economic growth in the world. In October, Money Marketing revealed BlackRock was looking to […]

1

FSA appoints two senior advisors

The FSA has appointed two senior advisors to advise the regulator on the investment banking sector and on risk management respectively. Simon Prior-Palmer will advise on the investment banking sector, drawing on over 30 years experience in investment banking at Credit Suisse and JP Morgan. He led investment banking in the UK at Credit Suisse […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com