He adds: “On the long
side, why own more of a
business just because it is
bigger? It is not about
focusing on the benchmark
and looking at relative bets
against that, it is about
making money.”
On the short side, the
requirements are flipped
with the focus on management
that has a “really rosy
view of the future, backed
by a significant cash investment”.
That, says Inglis-
Jones, is a signal of great
optimism, while historically
these situations tend to
go badly wrong at extremes
of the market.
He explains: “It is fine
to invest modestly in a
business to grow, but it is
not fine to double the size
of your business or double
your capacity in a year, or
massively grow your working
capital – that tends to
end in tears. Where investors
share the rosy outlook
company managers have
we describe this as a high
forecast risk situation.”
l No second-guessing
While the European Absolute
Return and Growth
funds are presumably at the
mercy of negative events
from the eurozone, Inglis-
Jones is not going to
enlighten us with any predictions
about its future or
insights into what went
wrong; that is contrary to
what he does. Still, with
reference to Robert Shiller’s
renowned work on PE
ratios, the belief is that
equities are not looking
particularly cheap – the US,
he says, is expensive, while
Europe looks “fair value”.
Any research Inglis-
Jones and West do comes
from their insight into company
reports and accounts,
something the pair has
honed to a fine art having
worked closely together
since 1998. They met at
JPMorgan Fleming, before
joining Polar Capital in
2003. It was in 2001,
inspired by the work of an
obscure and unnamed
accounting professor,
when they first begun to
look seriously at the predictive
qualities of cash
Liontrust fund performance since Aug 09*
60
40
% 200
0
European Growth
Income
-20
European Absolute RReturn
eturn
Aug ’09 Dec Apr ’10 Aug Dec Apr ’11 Aug Dec
*Launch of European Absolute Return Fund. Source: FE Analytics
Why own more
of a business just
because it is bigger?
It is not about focusing
on the benchmark and
looking at relative bets
against that, it is about
making money
“
”
FUND MANAGER PROFILE JAMES INGLIS-JONES
flows in terms of earnings
surprises and share price
performance.
Inglis-Jones says the pair
are close friends as well as
colleagues, although individually
the way in which
they approach reading
reports and accounts,
which can often stretch up
to 300 pages, differs.
Whereas West is happy to
read the comments of a
chief executive, chairman
and finance director before
ploughing through the
financials, Inglis-Jones prefers
to read back-to-front,
starting with the cash-flow
statement and balance
sheet. Generally, they come
to the same conclusions.
l Expert opinion
The duo makes a point of
seeking out only prudent
management, but this is
something they say comes
more from analytical
expertise and judging the
way in which companies
relate to shareholders more
than being criteria on a set
checklist.
“Some chief executives
might write ‘Dear fellow
shareholders’ letters which
is a good sign because
they have a massive stake
in the company. There are
other firms where the chief
executive chooses to put
his photograph on the
front of the report and
accounts, which tells you a
lot about the company too
– he is arrogant and thinks
the business is just him,
and we look for that hubris
on the short side.”
While Europe is a focus,
Inglis-Jones is quick to
stress that the process is
applicable to other markets
– they have a global screen
– and further funds could
be launched if investor
demand is there.
“The beauty of the funds
we run is if you look at
our long-only returns, and
if an investor wants that
exposure to what they
see as a significant recovery
in Europe, our process
does tend to deliver,” he
remarks. “While the long/
short fund delivers when
markets go down, when
the long-only fund delivers
is actually when the
markets recover strongly.
That is when the hedge
fund flatlines because it is
non-directional.”
In an environment
where investors are hypersensitive
about paying for
active management, Inglis-
Jones believes he and West
are doing something genuinely
different. Whether or
not there is a place for
their funds within a diversified
portfolio depends
on how much trust a fund
picker places on the
strict forensic accounting
approach – although Inglis-
Jones asks that investors
stick with them for a minimum
of three to five years.
He concludes: “It cuts
both ways and you are
going to have times when,
for one reason or another,
the process does not work
so well, but because we
understand it and because
we believe in a philosophy
that is based on a view
that the future is just not
knowable, the process follows
logically.”
BIOGRAPHY
James Inglis-Jones joined
Fleming Investment
Management in 1997,
assuming responsibility for
the management of UK equity
portfolios in 1999. Between
1999 and 2002,
he worked closely with Gary
West on JPMorgan Fleming’s
institutional investment
process and managed a wide
range of retail and institutional
funds as a senior portfolio
manager within its European
equity group. The pair ran
a hedge fund for Polar Capital
from 2003, before joining
Liontrust in 2006.
JANUARY 2012 [www.portfolio-adviser.com] PORTFOLIO ADVISER
23
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