Cartesian’s approach is to understand in detail how business models work, rather than spending too much time watching share price charts. Good and bad business models do not change overnight and tend to outlive stock market sentiment or share price trends. The Cartesian aim is to exploit anomalies between the managers’ valuations of a business, which tend to remain stable, and the more volatile share price. Investment is made on a medium to long-term view and Cartesian’s funds remain invested throughout the stock market cycle.
Truly active stockpicking
Cartesian employs an unconstrained approach to stockpicking. The team’s investment universe spans the full spectrum of the UK market and the team deliberately maintains a high degree of flexibility rather than fitting neatly into ‘pigeon-hole’ fund management categories. The team is agnostic in terms of company size and sector, preferring to explore the best opportunities wherever they sit in the marketplace.
The heavy coverage of the UK universe by brokers and analysts means the prospects for most companies are fairly valued by the stock market. Subsequently share prices generally offer only modest returns. A small subset of the universe is, however, not properly analysed. It is here that more material investment potential can be found, providing a fund manager has the proper analytical tools and capabilities to do so. This is Cartesian’s area of expertise.
Typical long positions taken in the subset by Cartesian may include:
- companies offering premium growth that have been overlooked by the stock market,
- companies offering long-term, sustainable growth that are undervalued by the stock market,
- companies going through a process of change or value release that the stock market has been slow to understand.
The same principles are applied to Cartesian’s search for short positions. A subset of the market includes poor quality companies that have been over-valued by the stock market. In the same way as detailed analysis can reveal uncovered potential, so it can reveal fundamental faults in a business that the wider investment community has yet to understand.
Understanding a business
The Cartesian approach is based upon the belief that value can be added as much by avoiding bad investments as finding good ones. While it is sufficient to own only a sample of the best performing stocks to outperform, it is crucial to avoid the bad ones. Cartesian’s emphasis on caution and scepticism, combined with the team’s analytical rigour, means they are well equipped to unearth potential pitfalls when assessing company prospects. The fund managers’ experience in corporate finance and private equity means they are quick to spot potential balance sheet risks. This technical ability has led to Cartesian uncovering both some of the best and worst performing stocks. It means the same investment process works equally well in long/short strategies as well as long-only funds.
"If you would be a real seeker after truth, it is necessary at least once in your life you doubt, as far as possible, all things."
Rene Descartes