Money Makers

If Peter Spiller is the doyen of the investment trust sector, then KARTIK KUMAR is the opposite – the youngest manager of an investment trust in the universe. The 28-year-old was appointed a co-manager of the Artemis Alpha Trust in April 2018. JONATHAN DAVIS talked to him to find out what he is about. (Note: this article was first published in the 2019 edition of the Investment Trusts Handbook and has not been updated).

An early taste of fund management

A career in investment management can start in many ways, but for Kartik Kumar it was a relatively conventional route by modern standards. While a student at Bristol University, studying for a degree in economics but uncertain about what career to pursue, he took a summer internship at Lazard Asset Management. While there he was given the task of analysing the fortunes of two companies in the same business. Those companies were the moneybroking firms ICAP and Tullett Prebon, both run at the time by powerful personalities, Michael Spencer and Terry Smith respectively.

Kumar spent six weeks looking at the two companies, an experience that included surviving a fact-finding session with the famously pugnacious Smith, now himself, as founder of Fundsmith, an extraordinarily successful fund manager. “That was quite an experience,” Kumar recalls, “but I was so compelled by the work I had done – this was in the summer of 2011 – that I decided I wanted to buy some shares in ICAP. I didn’t actually have much money, but I still tried to do it. Fortunately I got bogged down in bureaucracy – when I was back in university four months later, ICAP had fallen by around 35%, when I had thought it was a sure winner!”

“I was so intrigued by the fact that I could spend six weeks in what seemed like a very serious environment, working weekends, looking at two companies, and come up with a conclusion in which I had full conviction – and yet be entirely wrong. That’s really what drew me into the investment business. I thought I wanted to try it again and get it right” – proof again of the wisdom of the useful old adage that what doesn’t kill you will make you stronger.

Given such stubborn determination, it is perhaps not that difficult to see why John Dodd, now the chairman of Artemis, took a shine to this confident and intelligent young man and made him the firm’s first graduate trainee in 2013. Born in India, brought up in Nigeria, where his father had moved to start a new business, and educated at boarding school and university in England, Kumar is the personification of two of the 20th century’s most compelling themes, the onward march of globalisation and cross-border diversity. (“I am a bit of a mongrel” is his own low-key description.)

As it happens, though, it took a little time for Kumar to find a job in his newly chosen profession. There was no investment gene in the family, although his father, born in India, helpfully had a strong entrepreneurial streak, as evidenced by his move to Nigeria with his family. “My father did some terrifying things that I would never do. He moved the family to Nigeria and set up a tyre-retreading manufacturing business because he thought industry there would require retreaded tyres, which are more durable and cheaper than new tyres. I had firsthand experience of the difficulties of having a heavy manufacturing business in Nigeria, with not only oil price fluctuations but also – potentially more difficult – the risk of political interventions. So my father was a real entrepreneur. The way I look at it, the very definition of an entrepreneur is being willing to take on risk in pursuit of profit, and in my view that’s what fund management is also about.”

A lucky break

In the event, this unusual background stood Kumar in good stead when it came to applying for a job. His CV might not have looked that different to that of hundreds of other graduates looking to break into a lucrative fund management career, but his application did have one differentiating feature in the shape of a letter to the Financial Times that the editor of the ‘pink paper’ decided merited publication.

“I tried very hard to find a job in fund management, but I found it wasn’t very forthcoming. I had a lucky break when I had the letter published in the FT when I was 20. I put it down on a CV and sent that to as many people as I could.” Eventually it did the trick. Kumar was offered a job at a large firm about the same time that he was introduced to John Dodd, who quickly made him the offer to be the first graduate Artemis had employed.

And what was the letter about, I ask? “It was called ‘Families that can’t afford the luxury of a lightbulb.’ I had read a piece in the FT that was talking about how ludicrous it is to have diesel subsidies in Nigeria when Nigeria is clearly an exporter of crude and is subsidising the import of diesel. I pointed out that if you removed these subsidies on diesel, without providing electricity, most poor families wouldn’t have a way of having electricity in their house. You can’t yank the rug out from under people like that. It was an Oxford professor who had written the article and I just said ‘come on!’ I was still in Nigeria at the time going, ‘I’m not sure you know what you’re advocating here’. It’s great in theory, but I don’t think it’d work that well in practice.”

Challenging an academic theorist is not a bad qualification for a serious professional investor, one has to admit. What then did Kumar think he gained from his economics course at university? “I was always more interested in microeconomics than in macroeconomics. I had a particular interest in game theory. That is probably the most useful thing I learnt, because the premise of game theory is always to think strategically. If you look at the price that Sky has recently been sold for [via a knockout bid by the American cable company Comcast], that’s a great example. An auction always extracts the maximum price from a buyer. So I think the application of thinking strategically in markets, companies or industries is hugely important. Directly or not, it’s an incredibly powerful framework to remind yourself to use.”

(At this point I could not resist asking what Kumar thinks game theory has to say about the likely outcome of the Brexit negotiations, which to the casual observer has always seemed to be a classic example of the so-called Prisoner’s Dilemma, where two parties can still fail to arrive at the optimal cooperative solution in negotiations. His quick-as-a-flash answer: “I am not sure game theory has a framework for incorporating how an immense bureaucracy will behave.”)

Having eventually found a foothold at Artemis, he was given a fluid training programme, as you would expect from an entrepreneurial firm that is still run by one of the four founders (who, I remember once being told, spent the first few weeks of setting up on their own playing table tennis in the absence of any money to run). “I got my first marching orders to go and work in the bond fund. I remember Adrian Frost [the long-serving manager of the Artemis Income fund and a City veteran of many years] turning to me when he heard that I was the first Artemis graduate and was starting on the bond team. ‘Before you make any career decisions, look at what the yield is on the first-year Treasury!’ It had fallen for the last 30 years. He said that didn’t bode too well for future prospects…”

Armed with that useful advice, Kumar spent time working with the bond team, the global equity team and the smaller companies team before settling into a permanent role as assistant to William Littlewood, manager of the firm’s global multi-asset fund, Artemis Strategic Assets. Littlewood, who made his name managing an income fund at Jupiter, is known for taking and holding on to high-conviction positions, often in defiance of conventional opinion.

“Will is very unusual in the way he thinks,” Kumar says now. “I remember one of the first things he had me do was to try and work out what the value of Gazprom was, at which point John [Dodd] was standing in the corner of the room thinking, ‘How on earth is he going to do that?’ But Will and I got on extremely well. One thing is that Will read economics at Bristol, and he is also a big fan of game theory and that sort of thing, so we naturally got on very well. I liked the strategy and the way he thought.”

Kumar thinks that he has learnt most from Littlewood in terms of understanding the role of psychology in timing an investment. “He has always said, ‘Buy a good share on a bad day, buy a bad share on a good day.’ He loves investing and he’s always had a very strong understanding of when to make a purchase. Watching him in, say, August 2015, or February 2016, or the day after Brexit [all days when the market fell sharply] – seeing how he behaves on a day when the market is, in his view, throwing up bargains compared to a normal day is a sight to behold. Our dealers will often look at the deal sheet on the day after one of those days and think, ‘Wow. For example, you didn’t hold Diageo the day before, but bang – in August 2015 – you’re in there at, was it, £16?’”

Managing Artemis Alpha

Having worked on the Strategic Assets fund for five years, how did Kumar come to be entrusted with a co-manager’s role with ARTEMIS ALPHA? “When I was doing my rotation, I was given the odd project by John Dodd to look at, an opportunity he was looking at, and also particularly to help with monitoring some of our unlisted equity investments. My role just expanded organically. Artemis Alpha has always been run by John and Adrian Paterson – Adrian Paterson has worked with Will since the 1990s, they were at Jupiter together so they’ve got a strong relationship – and I’d occasionally find an idea. They would know what I was looking at for Will, and occasionally we’d say ‘That looks like a really interesting opportunity for Alpha too. Why don’t you buy it as well?’ So we were sharing the knowledge and the work, and effectively my role expanded because the number of ideas that we thought were compelling for Alpha started to grow. I’d say I did this for about two years, maybe a little bit longer, before I was appointed co-manager of the trust itself.”

Two factors combined to make the move a timely one. One is the impending retirement of Paterson, who has co-managed the Alpha Trust since it was taken on by Artemis 15 years ago. The second is that the trust, once one of the highest of high fliers in the trust universe, has in recent years suffered a striking loss of form, prompting the board, after consultation with shareholders and its managers, to announce a new strategy which it will be down to Dodd and Kumar to implement.

The discount at which the shares in Artemis Alpha trade tells the story of the need for a turnaround as graphically as anything. During its first decade, when the trust made a sparkling return of some 400% – well ahead of its peer group and double the return of the FTSE All-Share index – the shares consistently traded at or around net asset value. However, around 2014 results started to disappoint, the result of a combination of different factors. These included an above average number of holdings of energy stocks in a period when oil prices were on course to plummet from $100 to below $30 a barrel, the high proportion of difficult-to-value unlisted equities in the portfolio and a suspicion – so some observers clearly thought – that the managers, all busy with other responsibilities, might perhaps have taken their eye off the ball.

The occasional premium then started to disappear, to be replaced by a discount that got as wide as 25% at its worst, prompting some influential shareholders to agitate for change. Had it not been for the fact that Dodd, Paterson and other managers at Artemis together own nearly 20% of the equity, it is doubtful whether the trust would have survived. In the event, the board decided to take remedial action and after consultation the new strategy – which includes a commitment to reduce the unlisted holdings from around 25% to less than 10% – was formally adopted in April 2018 and Kumar was given his chance to show whether his youthful promise would translate into a more senior and responsible role.

So what exactly, we ask, is his role now as co-manager, given that John Dodd continues to run both the firm and his other funds? “John and I work very closely. As you can imagine, we’ve got quite a strong relationship given that he brought me through the door on day one. What do I do? I meet a lot of companies, I think over 200 a year. For example, I’m going to Germany next week for two days to see companies that our largest investment, Rocket Internet, has invested in. I really like being on the ground, trying to pick up as much as I can about a company’s culture, how it’s being run and its competitive position.”

“John clearly has tremendous experience, having been in the industry for over 30 years. So we work closely together in the sense that we bring the data back, have a look at it, analyse it and then make the decisions together with a view to constructing a portfolio with a number of interesting equities that we think are more valuable than the market is currently giving them credit for.” The division of labour appears to be that Kumar is doing most of the stock research while his mentor, apart from the resource stocks which have always been his specialism at the firm, is there to ratify the decisions and oversee the overall composition of the portfolio.

Will it work? It is not as unusual as you might think for fund managers to start having a say in running money at such a relatively young age – Littlewood, for example, was 25 when he started running the Jupiter Income fund back in the 1990s. The saying, if you are good enough, you are old enough, is truer of fund management than many other professions, where experience is often an overarching requirement for success. One benefit of the investment trust structure is that, when the discount has sunk as low as it had done with Artemis Alpha two years ago, there is not so much to lose from taking a new and bold initiative. An essential element of the new strategy is the board’s commitment to offer shareholders an opportunity to exit at close to net asset value every three years.

Implementing the new policy

Kumar speaks confidently about the chances of the new strategy paying off, as indeed you would expect him to do. As well as the commitment to reduce the holdings of unlisted equities, the managers intend to pivot the trust away from its historic focus on energy stocks and smaller companies. Instead the priority will be to unearth interesting opportunities across the market capitalisation scale, including up to 30% in non-UK stocks, using all the stockpicking resources of the Artemis team. A good example of this new approach was the decision to take a big holding in Tesco, following the accounting scandal which tarnished its name four years ago. It is unlikely that such a household name would have featured so prominently in the portfolio in the past.

As Kumar noted earlier, despite their very different objectives, there is already a significant overlap with the portfolio of Artemis Strategic Assets, Littlewood’s fund, which has no investment trust equivalent. As the table shows, nearly half of the Artemis Alpha portfolio consists of names that also feature in the open-ended fund, though not always in the same proportion. The unquoted element of the portfolio has meanwhile already been cut to just under 12% (as at the end of September 2018), so that leg of the new strategy is already on the way to being fulfilled. The gearing has also been slashed and the number of holdings cut from more than 120 to 70, with more reductions to come.

The new management team is essentially looking for contrarian opportunities where a significant gap has emerged between the market’s perception of a company and the reality of its circumstances as Artemis sees it after taking a closer look. “In our view,” says Kumar “there are certain reasons why you might have this opportunity. It might be that a company is emerging from a rough patch and the market is behind the curve on the progress that’s been made. It might be that the company is doing something more disruptive or creative than people are giving it credit for. (US technology companies are a good example of that.) It might be that the company is run by someone who we think has a strong focus on operational excellence and capital allocation. There’s a really strong wealth of literature that demonstrates how that factor alone can lead to outsize returns over the long run. Our simple idea is that you look hard, you do the work and you wait patiently and act very opportunistically when you think you’ve got the right opportunity.”

Okay, but are there not many other fund managers trying to do the same? “Yes. I realise that most fund manager strategies sound the same, and they should do because you’re all trying to make money. But what I would suggest is that we are putting emphasis on factors that I don’t believe other people are to the same degree. To give you one example, I believe we will be putting a larger emphasis on how management is allocating capital than many other people do, or that an index fund could ever do, given that it can’t make a subjective opinion on the capabilities of the manager.”

Bear in mind, he says, that capital allocation decisions can only really be judged in hindsight. “The substantial part is a judgement on what the likely outcome is going to be. For example, a return on capital metric wouldn’t help you judge whether an acquisition is going to be good or not. The Comcast/Sky deal is a good example. Comcast lost 7% of its value the day after it announced its winning bid. Brian Roberts’s track record as manager of Comcast is excellent. He tried to buy Disney a long time ago, and did buy NBC at the right time. The markets are suggesting that he’s overbid; he might well have. But it’s very difficult to tell at this stage. It’s certainly unlikely that he has got a bargain.” It is a good example of that game theory point that auctions tend to ensure that people have to pay up for what they want.

Another telling example he cites is what has happened to KAZ Minerals, whose shares can be measured against the price of copper and the much bigger commodity business run by Glencore. “KAZ Minerals has some great copper reserves and yet it halved in value quite recently because management thought it was a good idea to spend $900 million buying an asset from Roman Abramovich that he paid less than $100m for – and that is before they have to sink more money into developing the company’s greenfield opportunity in Russia. There is no bit of analysis that you could’ve done on KAZ Minerals to suggest that its share price should halve, but if you had said that you were uncomfortable with the way management allocated capital, you might well have avoided it.”

Asked for examples of a share other than the 5% holding in Tesco that the trust owns and which illustrate the new strategy at work, Kumar cites the aforementioned Rocket Internet, a German company which invests in other promising digital businesses, and in the UK, Dignity, the country’s largest undertaking business. Artemis was one of the largest investors when Dignity was first listed on the stock market in 2014 and made some decent money from it. It later sold out, a wise precaution as the shares crashed from a peak of £28 in 2016 to a low of around £7.50 this year, at which point the trust bought back into the company (see box). Two other themes that run through the portfolio are holdings in several fund management companies (Liontrust, Polar Capital and Miton) and some large retailers (Sports Direct, Dixons Carphone Warehouse), on the view that the sell off in UK retail businesses with market-leading positions has been overdone.

It is too early to be certain that the new strategy is working. The best indicator of the progress that has been made with the new strategy is that the discount has been starting to narrow, reflecting an increasing confidence that the fortunes of the trust may be turning. It was down to 17% in September 2018 – and eliminating the discount, while not a formal objective, remains a key ambition. “This investment trust used to trade on a premium,” says Kumar “and that’s what we’re determined to return it to. We think the new strategy has got the ingredients to achieve that.” The board is helping the process, having obtained approval from shareholders to buy back shares in the trust and also undertaking to give shareholders the opportunity to tender their shares back to the company at a price close to net asset value every three years, starting in 2021.

Is Kumar daunted by taking on the responsibility of seeing this through at such a young age, we ask finally – and get, as you may have guessed from what has already been said, a straightforward and confident answer. “No. I’m absolutely up for the challenge. I’m very ambitious. I’m relishing the opportunity and enjoying the experience thoroughly. Our emphasis is on running this trust in a way to generate better and more consistent returns. My personal objective is to generate better performance, have that reflected in the rating and then take it on from there.” If that turns out to be true, remember that you read it here first…

Case Study: The Case For Investing In Dignity

Dignity ticks a number of boxes for us. One is that the funeral industry has a very desirable characteristic of being completely unrelated to the economic cycle and also very predictable. You can chart out what demand for that industry is going to do for the next 20 years, because those factors were set in stone over 60 years ago [in other words, a function of mortality rates]. Dignity itself has some very attractive businesses. The crematorium business is effectively an infrastructure-type asset and it also has a very strong position in funeral care.

There’s a third business, too, which is very interesting. That is the pre-paid funeral business which, because it’s not on the balance sheet, I would argue that the market is putting a very low value to. It is effectively what Warren Buffett would call a ‘float’ business because people have pre-paid for a funeral, the company has the benefit of the economic surplus that that will generate and also has the certainty of the future business that that will provide.

When the company went towards £7 a share earlier this year, we believed there was a false perception that the company had effectively increased prices to a level at which it was so egregious that it would almost be bust if it tried to keep them at that level. When we looked at it in considerable detail we found a couple of things. One, it’s quite hard to compare two funeral products. It’s like trying to compare an expensive hairdresser with a cheap hairdresser. It’s a service industry – not a homogenous product. Even though our observation would be that the company had increased prices too much, it has subsequently cut them. Our second observation was that the market seemed to be overlooking the value of the crematorium business. And our third observation was that management were clearly doing something about it.

When you put these factors together, our view was that this was an incredible opportunity to buy a very attractive business with fundamentally good long-term characteristics and we moved quickly to establish a position. This is really what this trust – and, more broadly, profit hunting – involves. It’s saying we’ll move opportunistically to buy if we think it is the right time, they’re attractive long-term holdings and we have an in-the-moment reason for getting a bargain.

KARTIK KUMAR co-manages the Artemis Strategic Assets fund with William Littlewood and Artemis Alpha Trust plc with John Dodd. He joined Artemis in 2012 after graduating from Bristol with a BSc in economics.