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Jeremy Lang: How to make money like me

24 September 2014

Jeremy Lang, the former Liontrust manager, tells FE Trustnet about the unique strategy that he uses on his popular Ardevora UK Income fund.

By Alex Paget,

Senior Reporter, FE Trustnet

Jeremy Lang takes a very different approach to the equity market than the majority of his peers in the IMA UK Equity Income sector.

ALT_TAG Instead of using a value or growth strategy, Lang builds his Ardevora UK Income fund around cognitive psychology and the belief that people in financial markets – be it company management teams, analysts or investors – are prone to making predictable mistakes, errors of judgement or biases.

He then tries to exploit those mistakes to create opportunities.

This relatively unique strategy, and Lang’s track record at Liontrust and at his new venture, has attracted a number of fund of fund managers, with the F&C’s Rob Burdett and Gary Potter describing his Ardevora portfolio as a “new breed” of equity income fund.

According to FE Analytics, Ardevora UK Income has been a top decile performer in the IMA UK Equity Income sector since its launch in January 2011 with returns of 54.89 per cent.

As a point of comparison, the FTSE All Share has returned 30.36 per cent over that time.

Performance of fund vs sector and index since Jan 2011

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Source: FE Analytics


In this article, Lang explains how he tries to implement his strategy by highlighting three recent acquisitions for the fund.


Sainsbury’s: Because the management has been forced to take less risk

“From my experience of being an investor for a long time, the belated conclusion I came to after watching some of my apparently smart stock decisions blow-up on me, was that I hadn’t been paying enough attention to how the management were running the business and their tendency to create risk for me,” the manager (pictured) said.

ALT_TAG Lang says company management teams are different to most people as they are “peculiarly egotistical”.

While most investors are adverse to risk, management tend to be massively over-confident in their ability to grow their businesses and are therefore risk-loving.

To find opportunities, investors therefore need to identify management teams who are forced into a position where they are encouraged to take less risk, according to Lang.

Once they have done that, the manager says he looks to see whether anxiety levels towards the company are high and whether they are justified.


He says Sainsbury’s, which he bought last month, is a prime example.

“There is lots and lots of anxiety around supermarkets generally and some of that anxiety is well-placed. But the way in which the two sets of company management teams, Sainsbury’s versus Tesco, have reacted to this anxiety inducing environment is quite different.”

“Sainsbury’s management are not in denial anymore because they have been battered into a position where they no longer have a choice. It’s not about growing the business anymore; it’s all about protecting what they have already got.”

“There is a chance that they are now acting in a sensible way, but when I look at Tesco, they look completely different. They are still in denial, they are still trying to grow and they are still trying to fiddle the accounts; it’s all a pack of riskiness.”

Performance of stocks vs index over 1yr

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Source: FE Analytics


He says that all the supermarkets are all viewed with similar levels of anxiety because share prices look horrible and valuations are low, but he thinks Sainsbury’s is the one where that anxiety maybe misplaced because management has de-risked, which isn’t the case with Tesco.

He therefore says investors are wrong to buy shares in Tesco following news of accounting errors earlier this week.

“In my view and from experience, it’s not good enough to just go and buy things that people hate.”


Next: Because analysts are biased against it

“The other direction we go for reward is relatively safe businesses, but those that are in a much more benign environment. These are not normally cheap or have anxiety around them, but often you find the analysts don’t quite understand them,” the manager said.

“Next is a good example of that.”

The manager says analysts and forecasters tend to group all retailers together and are therefore usually confused why Next keeps surprising on the upside.

“What’s special about Next is that it nearly went bust 20 years ago and is now run in a highly unusual conservative way,” Lang explained.

“They’ve got a very specific business model. They target a very specific type of person and they just don’t try and overcomplicate things. What you find, when you look at the pattern of mistakes analysts make when they forecast how well Next will do, you see this pronounced positive skew. They are much more likely to be caught out on the upside, rather than the downside.”

“They do disappoint, but that only really tends to happen when all other retailers disappoint.”


Our data shows that the stock has returned close to 200 per cent over three years.

Performance of stock vs index over 3yrs

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Source: FE Analytics


Lang added: “If there is a bias there, then that can be an opportunity because generally stock prices react quite positively to surprises and quite badly to disappointments. If you can find businesses that have that skew and are more likely to surprise rather than disappoint, then you can do quite well.”


TSB: Because investors still don’t like banks

Lang says that, although certain individuals have started dipping their toe back into the sector on the back of attractive valuations, most investors still have their hang-ups about the UK’s retail banks.

He says most of this anxiety is justified as the large majority of them are still very risky businesses. However, he says that all the aspects that caused riskiness in the banks does not apply to TSB.

He bought the stock at its IPO, meaning it is the first bank he has bought since the crash.

“There is only one piece of information you need to know about TSB. Yes it’s a bank, but that doesn’t matter. What you need to know about why it is a good investment is that Lloyds was a forced seller,” he said.

The manager says the government, which is still a major shareholder in Lloyds, made it create new competition in the sector by spinning out a new retail bank using “all the nice bits” from their existing client network.

He says TSB were given a big and incredibly low-risk mortgage book, access to Lloyds TSB’s IT systems – meaning it didn’t have to spend a huge amount setting up its own – and gave it distribution channels to attract depositors.

Lang also says the regulators will take it easier on TSB as they want competition in the sector.

On top of that, Lloyds was made to give TSB a huge amount of cash to fund growth, instead of tapping up TSB’s new shareholders.

“Lloyds have given TBS all the advantages available and then they are told to sell it at a time that they don’t want to, at a price that is really low and at a time when no-one really wants to buy it,” he said.

“That’s the story, it’s this fantastically low-risk bank with this fantastically benign environment to grow, its being sold to you by a forced seller and at a time when no-one else seems to be interested.”

TSB floated in June and the initial share price was 260p and, at the time of writing, those shares are now worth 280p.

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