Investment process - Themes, risk & brokers

The team’s research effort is also influenced by significant investment themes that have an impact across the whole market. While the fund managers recognise the relevance of important macroeconomic factors, such as interest rate changes or currency moves, these are generally well understood by the market. Share prices can, however, be slow to react to new secular themes, such as pension funding issues or the growth of outsourcing.

Brokers

Cartesian maintains a wide range of contacts. This reflects both the diversity of companies researched and also the valuable contribution of many of the smaller, boutique brokerages. Rather than taking brokers at face value, however, the Cartesian managers prefer to focus on areas of the market they have identified as particularly interesting and challenge consensus views. The process is very much two-way with brokers challenged to provide arguments to counter the fund managers’ initially sceptical view of a company’s investment case. This fits with the over-arching emphasis on care and diligence applied throughout the Cartesian process.

"In order to improve the mind, we ought less to learn than to contemplate"
Rene Descartes

Risk management

Risk management in the portfolios takes various forms. The primary source of risk control comes from the fund managers’ detailed understanding of the concentrated pool of companies invested in. Running a focused fund makes it easier to maintain full coverage of all positions, and to recognise the stock specific risk inherent within the portfolio.

As a consequence of the heavy benchmark weight of the leading four sectors in the UK (banks, telecoms, pharmaceuticals and oil), many managers carry a high absolute exposure to a limited number of stocks and sectors, which are not necessarily representative of the wider economy. Outside these heavyweight sectors, however, the stock market offers a good level of diversity and the Cartesian fund managers maintain a broad spread of ideas within their portfolios.

Stock liquidity is another aspect of risk control that must be constantly monitored to maintain weightings as the portfolio sizes increase and also to achieve ultimate liquidation. The Cartesian team is not, however, afraid to take a significant stake in a good company.

Formal controls involve communication with the Ignis risk analysis team, who provide Cartesian with regular reporting on portfolio parameters such as tracking errors, volatility and value-at-risk. This risk decomposition is built upon EM Applications risk control software which Cartesian supplements with in-house attribution tools based on Bloomberg real time pricing. These spreadsheets measure daily stock contributions within each portfolio, allowing the managers to monitor longer-term correlations with the UK stock market.