The Cartesian philosophy is influenced by the ‘safety-first’ traditions on which Scottish investment management was built. Managing money entrusted by wealthy and aristocratic families required a careful, diligent approach to risk and a detailed understanding of the companies invested in. This was not an attempt to chase short-term gains or asset bubbles but a considered, long-term approach to investing in companies with genuine potential and no hidden risks.
This forms the basis of the Cartesian approach. The team is naturally sceptical of investment opportunities and this caution remains until the fund managers have been comprehensively persuaded otherwise. A healthy scepticism is very much the default option. Consensus stock market views on a company are registered by the team but always challenged. The Cartesian fund managers prefer to analyse company reports and accounts themselves to form their own opinion before checking the verdict of the wider market. This approach, with its focus on the true health of a company rather than consensus views, is perfectly suited to shorting strategies.
The tools for the job
The fund managers’ actuarial and accountancy backgrounds mean they are well equipped to examine whether a company’s balance sheet and accounts support the ‘investment story’. Opportunities are approached with a business ownership mindset, rather than as short-term investments. The closely aligned interests of the Cartesian team and their investors mean potential portfolio constituents have to satisfy stringent requirements. If the managers would not be entirely happy investing their own money, the company will be quickly discarded from the ideas pool of the portfolios.
It is this diligence and attention to detail that has helped Cartesian avoid many of the bursting asset bubbles and subsequent downgrades in the last ten years. These included sharp falls in the financial, commodity and technology sectors. By the same token, Cartesian’s short strategies have benefited from investments in these sectors.
"It is only prudent never to place complete confidence in that by which we have even once been deceived."
Rene Descartes, Meditations on First Philosophy 1639
Keeping it simple
In the same way as managers of Scottish investment trusts in the past were careful how they chose investments, so Cartesian goes to great lengths to understand a company’s business model. Many of the key measures the team uses to judge a company’s likelihood of success are similar to those analysed in years gone by. Cashflow, for example, is a prime consideration, providing a ‘hard and fast’ barometer of the health of a company and not subject to potentially ‘creative accounting’.
The Cartesian fund managers believe they should be able to explain in straightforward terms the investment case for all the holdings in their portfolios. This means they need a detailed understanding that encompasses all aspects of the business. They actively avoid companies overly reliant on complex financial gearing or high levels of engineered debt. Notably it was these companies that were hit the hardest during the credit crunch. By avoiding such companies, or shorting them, and establishing a detailed knowledge of the workings of all their portfolio holdings, the Cartesian team has been able to produce strong performance and build trust with their investors.
"Each problem that I solved became a rule which served afterwards to solve other problems."
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