Buy, hold or sell: Jeremy Lang
Within Ardevora Global Equity Jeremy Lang employs one of the most innovative investment strategies outside of the hedge fund space.
It is known as a 150/50 strategy: 150% of the portfolio is invested in conventional equity positions while 50% is in derivative positions 'shorting' other equities or betting that their share prices will fall. The proceeds from the short portfolio are then recycled back into the manager's long positions, mitigating losses there.
Within both his long and his short portfolios, Lang uses behavioural psychology to decide what to invest in and what to bet against.
The central tenet of this is a focus on companies where management – which Lang identifies as the key risk to any business – are unable to take any risks that will derail the company, or those where the business is so strong that management can't do much harm.
Online retailer Amazon, which Lang bought into for the first time in June, falls into the latter category. "We go looking for unusual circumstances, either where the company has got itself into trouble so management doesn't have much room to take risk, or where a company faces an unusual environment where it's very easy for it to grow. That's where Amazon fits in," says Lang.
The manager says the company first caught his eye after the release of its first-quarter results in April, when it surprised the market with much higher profits than anticipated after a controversial decision to separate its cloud-hosting service from the main business.
This set off a second requirement for Lang: a disconnection between market expectations and trading realities.
"Analysts are struggling to understand what is going on with Amazon. If you've got a business where a previous source of anxiety flips and becomes a source of surprise, that often unleashes an unusual opportunity that can last for quite some time as most investors struggle with the change. So we now see what a great business Amazon is," says Lang.
Lang has owned Spanish wind turbine manufacturer Gamesa since March 2014, periodically adding to it ever since. The firm meets the manager's first investment criterion neatly, with management currently forced to curb its risk-taking after the global financial crisis saw the bottom fall out of the company.
"Gamesa was a go-go growth stock before the financial crisis, with management that took lots of risks to capture what they saw as easy growth. After 2008 it was forced into survival mode where it had to really pull the business back and just concentrate on not going bust.
"We get interested if we can see that in an individual company, but if we can see that in an entire industry, that can create an unusually low-risk environment and a very long period of stability for investors," says Lang, who also owns Dutch wind turbine manufacturer Vestas.
Perhaps vindicating the manager's view, Gamesa has performed well over recent years, with shares up 115% since August 2010 and over 50% in the past year to 1 August alone. However, Lang believes there is still plenty of room for growth.
"Gamesa's share price has bounced a lot, but we still think it's a very safe business with a long period where past analyst and investor anxiety can still slowly unwind," he says.
SELL: ABERCROMBIE AND FITCH
A constituent of Lang's 'short' portfolio, the manager believes that US fashion retailer Abercrombie and Fitch, whose shares have sunk close to 50% in the year to 1 August, has some arguably terminal problems to deal with.
"We think Abercrombie and Fitch has fundamental problems with its brand. They've tried to make it an elitist, sort of anti-fat brand, and because of that it now has a negative rather than a positive value.
"Also they've tended to set up their shops in very chi-chi, expensive places, which makes them geared to failure because they've got very high rents to pay," says Lang.
In response to the company's problems, Lang says management is employing a high-risk strategy in attempting to copy the "fast fashion" models of budget teen retailers H&M and Zara – a move that involves vast sums of money and will likely end in disaster.
"Instead of radically retrenching and going into survival mode, management is playing double or quits with a brand that's already broken, and that creates massive blow-up potential," he says.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A financial instrument where the price is “derived” from a security (share or bond), currency, commodity or index. The price of the derivative will move in direct relationship to the price of the underlying security. They often referred to as futures, options, warrants, interest rate swaps and contracts for difference (CFDs). They are mainly used for financial certainty – to protect against spikes in the prices of commodities – as a hedge, whereby investors can buy a derivative that bets the market will move against them so they protect themselves against potential losses. Derivatives are also a tool of speculation as they enable banks, traders or investors to bet on price movements without having buy the actual physical assets. As derivatives cost only a fraction of the underlying asset price, they are “geared” (leveraged in the USA) so if the price of the asset moves £1, the value of derivative could change by £10.