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Investing in a bear market
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- 3/9/2010
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Fundamental UK investment
Investing in a bear market
With challenging conditions set to continue for UK equity investors, picking stocks that
are well positioned to weather the storm is now more important than ever. David
Stevenson, the highly experienced, Citywire ‘A’ rated fund manager of the Ignis
Cartesian UK Opportunities Fund*, provides ten tips below for investing in a bear
market. David has 19 years’ investment experience, having successfully managed UK
equity long only and long/short funds through both bull and bear markets. He was a
David Stevenson founding partner of Cartesian and the Ignis Cartesian UK Opportunities Fund is top
Cartesian Capital Partners
quartile since it launched in December 2005.†
1. Stick with a proven process 4. Look for companies with resilient earnings
Cartesian has been using the same stock picking template Earnings are under pressure right across the market, but
for more than a decade, through a variety of market investors can mitigate that risk by looking for companies
environments. The process has delivered outperformance with more defendable earnings. This means companies
in the past, and it is working well now. In fact, the with big franchises, large market shares and companies
attributes that Cartesian looks for in stocks – notably that have leverage over their competitors or their
earnings quality and financial robustness – seem more suppliers allowing them to eke out more market share or
important now than ever before. It would be a mistake to a better margin.
suddenly try to come up with a new approach just
because the market is tough.
5. Think big
Big brands have the kind of footprint that will allow them
2. Balance sheet quality is paramount to survive through a difficult environment. Companies like
Companies that are heavily indebted may not survive the Vodafone, Centrica and National Grid are all likely to
next couple of years. This may seem extreme but that is outperform. These operate in areas where spending
what we are dealing with at the moment. Companies remains necessary. Other attractive areas include food
with low or sustainable gearing, and which therefore have retailers and pharmaceutical companies.
a degree of self-determination over their future and
developing their business, are relatively attractive.
6. Do not trust company directors’ dealing
As the market moved into the downturn, there were
3. Be wary of unsustainable historic dividends plenty of examples of company directors buying up stock
Companies have had free and easy access to very cheap in their own companies. These directors assumed they
debt for a long time. This has led many companies to knew better than the stock market and were bottom
borrow to fund share buybacks, special dividends and fishing, but so far they have been proved wrong. Now
supernormal dividend growth. That borrowing has now directors’ activity has slowed, as company outlook
been cut off, and those companies that over-engineered statements broadly indicate that times are tough and are
their position and have cyclical earnings streams are going unlikely to improve in the near-term.
to be in trouble.
*Source: Citywire as at 27/02/09. †Source: Lipper, bid to bid, net
income reinvested as at 27/02/09, excluding initial charge. Past
performance is not a guide to future performance. The value of
investments and the income of them can go down as well as up and
is not guaranteed. Exchange rate movements may cause the value of
investments to fluctuate.
www.cartesiancapital.co.uk
Fundamental UK investment
7. Avoid the temptation to become a short-term trader 10. Be patient
Cartesian’s skill is as an investment manager, not as a trader. The UK stock market will recover, but not overnight. At
Investment views need to be made on at least a one year the moment market conditions remain challenging and it
basis, and a bear market does not change that. At Cartesian would be foolish to invest expecting the market to
the average holding period is around two years, and that bounce back straightaway. Cartesian expects the market
is unlikely to be affected by the current environment. to recover only once macro statistics show that borrowing
has come down (and saving gone up), unemployment is
peaking and the housing market has bottomed out.
8. Do not be afraid to hold a more concentrated
portfolio
In a bear market the number of attractive stock ideas David Stevenson
tends to fall. Over the past year, the Cartesian UK Investment experience: 19 years
Opportunities Fund has moved to a more concentrated David graduated from Edinburgh
core of around 40 holdings. As and when opportunities University with a degree in Economics
arise, new positions will of course be added. The and Accountancy before training as a
important lesson, however, is not to hold low conviction chartered accountant with KPMG. He
stocks just for the sake of being diversified. was involved latterly in corporate finance
before moving into venture capital with
Dunedin Fund Managers. In 1993 David
9. Think independently
moved to SVM, where he managed the
Do not be fooled by consensus thinking or the latest SVM UK Opportunities Fund from its launch to the end of
fashion. Fundamental analysis of balance sheets and October 2005. He also had co-responsibility at SVM for an
earnings will give a clear picture of companies’ future institutional client base with funds totalling £600m.
prospects. This then allows a portfolio to be built up from In December 2005, David became one of the founding
individual holdings – “bottom up” – without having to partners of Cartesian.
form a view on overarching macroeconomic, consensus or
benchmark themes.
Further information: Cartesian Capital Partners is a 50-50 joint venture
Professional advisers please call: between the four Cartesian partners and Ignis
+44 (0)845 60 50 444 Asset Management.
Email: The partnership enables Cartesian to focus
brokersales@ignisasset.com
entirely on investment management while Ignis,
Web address: which has around £70 billion of assets under
www.cartesiancapital.co.uk management,* delivers the distribution, sales,
Telephone calls may be monitored and/or recorded for the purpose of marketing and back office operations.
security, internal training, accurate account operation, internal
customer monitoring and to improve the quality of service. *Source: Internal as at 31/12/08.
This information is for professional clients and investment professionals only and should not be relied upon by retail clients.
Ignis Asset Management is the trading name of the Ignis Asset Management Limited group of companies which includes Ignis Asset Management Limited,
*Ignis Investment Services Limited and *Ignis Fund Managers Limited. Issued by Ignis Investment Services Limited. Registered in Scotland Number SC101825.
Registered Office: 50 Bothwell Street, Glasgow G2 6HR. *Authorised and regulated by the Financial Services Authority. www.ignisasset.com
B892.03.09
www.cartesiancapital.co.uk
