‘Being a fund manager is just damage limitation’

Many fund managers take a view on how the economy will evolve and make big bets on what they hope will be winning stocks. Jeremy Lang, manager of the Ardevora UK Income fund, shuns all this in favour of spreading his risk across a large number of holdings and using investment psychology to make his calls.

In the five years to the end of 2017 his fund delivered £25.40 of income for every £100 invested. However, it underperformed its rivals in 2016 and 2017. Mr Lang, who has run the fund since launch in 2011, tells us how his past errors help him today and why he likes tech stocks.

We’re interested in the flow of fear, anxiety and hope, as we think that is what moves stock prices. At the moment the main point of interest is the debate about whether inflation is coming back. The UK market is skewed to commodities and generally does quite well when people worry about inflation. Mainly we look for unusual businesses that can plough through most of the random stuff the economy throws at them. This gives us an eclectic portfolio. First we started to think about how investors behave, seeing how you respond to different situations and the type of mistakes you make.

If you’ve been doing fund management for 20-odd years you’ve built up a track record of errors and it is quite interesting to study those errors to make yourself better.

We then look at the people who write research reports and think about how they make errors. When they make a mistake, that is what causes a surprise in the market. The last piece is looking at the people who run companies, as each is a peculiar

CV: Jeremy Lang

Jeremy Lang co-founded d Ardevora in n 2010 with William Pattison.

He started ed in investment ent in 1986 before fore taking a foururyear break type of person who has a particular tendency to certain types of bias. We use all of this to help work out where there are opportunities in the markets.

Top income fund manager Jeremy Lang tells Laura Suter how he balances yield today with future growth

When we build an income fund, we like to have a blend of yield and growth. We do this by owning some stocks with higher yields and low growth and others with low or no yield but lots of growth potential. The result is a fund with a reasonable yield but also plenty of potential to grow its dividend. In the past year or two we have bought Dechra Pharmaceuticals, which is a bit of an oddball. It makes drugs for pets, and there are only three companies in the world that do that and can be invested in.

We like businesses like that, where there are not many others like them. Investors and analysts tend to struggle as people like benchmarks to balance their view of a company against. We also bought specialist chemicals company Abcam (see box, right).

We sold software firm Micro Focus, a long-term holding. It kept making bigger and bigger acquisitions, but the mo most recent one looked overstretched and like it would get into trouble. That’s gen generally why we sell, if the risks look too high. I’ve done this long enough to rea realise that being a fund manager is an exe exercise in damage limitation. look at whether it’s a tech company but at how easy it is for the business to make money and grow, and how robust it is.

We like software companies in particular, as once software has been adopted and people have been trained in it, it is a real pain to get rid of. After their set-up costs, these companies also have quite big profit margins.

‘ IT HAS SEEN RAPID GROWTH’

The worst is definitely Bradford & Bingley, and that was a lesson never to trust management. I think we sold before it got to zero, but it was as good as. As for the best, I don’t focus on those; I take my money, bless my luck and move on.

Fund management is essentially a war of attrition – I make lots of small bets and let the good ones run, and hopefully recognise the bad ones as quickly as possible. I’m not making big, hopeful bets, I’m making lots of boring decisions and building up a portfolio. If I get more right than wrong I’ll be doing OK. Abcam is an unusual company. It was founded in 1998 by three Cambridge academics who had the idea of making it easier for research scientists to buy antibodies across the internet.

The business has diversified since then and more recently moved into the direct production of biotechnological products.

The rapid growth of the company, in addition to the changing and highly specialised nature of the business, has made it difficult for analysts and investors to value.

The requirement to invest in the business has held profits back for extended periods of Abcam’s life. As a result the shares have generally looked expensive, analysts have been twitchy, and this has induced anxiety in the hearts of investors. To us, Abcam still looks interesting. There is no obvious peer group to compare it with. Yes, the headline numbers suggest the shares are expensive, but management has been consistent and clear in the plans for the business. Current investment is being made to ensure the company has the best possible chance of taking advantage of the significant growth opportunities that lie ahead. Management behaviour looks sensible to us. The company is lucky to have these opportunities in a world where growth is hard to come by. For investors who are prepared to look forwards rather than back, we think patience will be well rewarded. Abcam is an example of the type of stock we like to blend in to help drive long-term growth for the fund.