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'Reinventing active management':
Why stock picking as we know it might be outdated

Elliot Gulliver-Needham for City AM


20th February 2024


 CLICK HERE to read the article on City AM's page, or read transcript below.

Looking to “reinvent active management,” Mark Ellis, manager of the Nutshell Growth fund, has pushed back on the traditional way that fundpicking has been done.


Following an intricate model that uses over 30 variables, the manager aims to provide a “hedge fund methodology” that retail investors can actually access.


Ellis cited his perspective as a former trader as influencing the style of his model, which adjusts the portfolio twice a month.


This leads to extremely high turnover, setting it apart from other growth funds in the same sector, which may not significantly shift their portfolios for years on end.


Nutshell received its seed funding from billionaire Michael Spencer, who is known to have a rivalry with Terry Smith, manager of the largest equity fund in the UK.


Spencer has made a £10,000 bet with Smith that Nutshell will outperform his fund throughout 2024.


Another massive fund on the scene is Lindsell Train, which Ellis noted had made only its third new purchase since 2020 in November.


Nowadays, “the process is so active and so timely,” that relying on swathes of analysts who spend weeks researching a company before ultimately recommending them to a manager is outdated, Ellis argued.


“Those long-term buy and hold forever guys, I think it’s the wrong approach,” said Ellis.


“In our current environment, the way things are changing so rapidly, companies and their profile can adjust so quickly, they miss out on this. And by us formally calibrating every company on the planet twice a month, we keep up with it.”


The fund added 26.3 per cent in 2023, compared to a global large-cap growth equity average of 10.3 per cent. Since its launch in 2020, it has returned an average of 12.9 per cent.


The factors used to calibrate Nutshell’s model include free cash flow yield, the price-to-earnings ratio and return on invested capital, as well as slightly more niche components.


A key facet of the model involved looking at insider dealing, meaning that “if one of our top 100 stocks sees an insider buy or sell, we get an alert”, Ellis explained.


“We then see over the history, what the next 12-month return would have been if you followed that director,” he said, and the model can factor that in accordingly.


To evidence the power of the model, Ellis pointed to the recent dip and subsequent rise in luxury goods.


The fund came into the new year with a two per cent position in both LVMH and Hermes, but as January progressed, both firms dropped by about 10 per cent.


“The model re-calibration picked up on that and the valuation factors were more compelling,” said Ellis, “and we more or less doubled our position.”


“Then, they rallied back on really good earnings, and since then we’ve trimmed them and taken profit,” he added, with both now being fully divested from the portfolio as valuations have risen further.


The fast-paced turnover enabled Nutshell to “trade that ‘U'”, Ellis said.


Another surprise development in the portfolio has been the return to tech, despite its high valuations.


While the portfolio had been slightly underweight tech coming into 2024, as earnings announcements have come out, that has radically flipped.


“These tech companies seem to be delivering on what they promised, or at least what some commentators in the investment community were expecting,” Ellis said.


However, the manager stressed that Nutshell was not aiming to just ride the wave of the Magnificent Seven, as many other growth funds have.


He noted that the fund only held three of them, and while it had previously reaped the rewards of Nvidia’s meteoric stock growth, it was no longer invested in the software company.


Instead, Nutshell’s model recommended more niche stocks, such as cloud networking firm Arista Networks, and tech security firm Fortinet.


“Arista smashed its earnings but the management kept guidance the same, so the stock sold off aggressively,” said Ellis.


“We picked up on that in that the model really liked its earnings, what was going on with the fundamentals, and the market disappointment just increased its valuation factor as well.”


The fund has also added its first-ever holdings in China this year, as it has always preferred developed markets, because of higher “information and transparency,” said Ellis.


Therefore, the model negatively adjusts scores out of China, but even so, you can still see “quality companies at really cheap valuations” coming out of the country that overcome that bias.


These were biomedical company Imeik, along with two distillers, including producers of the famous Moutai liquor. However, these companies still make up a small proportion of the portfolio.


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