insurer that is selling off non-core divisions to make itself leaner and fitter.


A typical long position misunderstood by the stock- market is a care home provider with a differentiated business model. “The industry perception of care homes is of overcapacity and over-leveraged businesses that have often gone bust or fallen prey to scandals, so the firm is priced as a value stock when it should be seen as a growth stock. It is a growing company, with an annuity style business, aligned management and market leading key performance indicators. Its average customer age is 34 years old, it has low debt, high customer service scores, and is growing organically. Some 40% of its properties are freeholds, and a takeover of a slightly larger business should generate synergies that will lead to margin expansion and dividend payouts. We expect that stock could triple or quadruple and could become an attractive target for a private equity bid,” says Wood.


Another long holding is a relatively new corporate entity: a construction business that was spun out of a housebuilder. “It traded below cash value and had a negative enterprise value at one stage. New management is now well incentivized, and our channel checks suggest that their plans are credible. When they pay a dividend, they could get re-rated and even at conservative estimates of profit margins they could triple in value – or more likely may be taken over by private equity. Key institutional shareholders are also building stakes,” says Wood.


Ferreting out aggressive accounting “Company accounts nowadays are excessively bureaucratic and have lots of adjustments, leading to “dirty EBITDA” which needs to be corrected. This is a war game that gets harder and harder to crack. The smart finance directors know how to window dress, so Bloomberg takes the wrong numbers, but we never rely on third party data for historical financials,” points out Wood, who trained as a chartered accountant with KPMG before moving onto Deutsche Bank and then a boutique asset manager, and who also has a natural grasp of accountancy. “My dad teaches accountancy and has taught a fair few of the PLC finance directors out there. He sold his business to Kaplan which is where my brother now works”. Kernow has a simple approach, linking cash to reported profits and finding the gap on the balance sheet. Reading accounts for me is the same skill as some people have for reading music and hearing the song immediately. I was inspired by Jim Chanos’ Enron short. My best short was Globo PLC, where the accounts did not add up. The gap between profits and cash was the same as the amount it raised each year in equity markets, for several years in a


row. Our channel checks came back with red flags, and we also noticed some celebrated short sellers involved,” says Wood. Though this historical short is mentioned, and Wood respects some short sellers who go public, he does not want Kernow to become short activists. Appraising governance is however an important part of their investment and ESG process.


ESG, governance and voting Kernow has observed that the scarcity of some of the “E” stocks in the ESG sector has helped to inflate their valuations but has not shorted such names partly because overvaluation alone is not sufficient to warrant a short. “We need to see a catalyst for valuation coming down. If we traded US stocks for example, we would not short Tesla, because it is so fundamentally divorced from reality that it can always become more divorced from it,” says Wood. Captive demand from pension fund investors could also lead high valuations to persist: “The pace at which pension assets are transitioning to ethical investing poses a danger of increased greenwashing,” says Makris, who has a BCVA ESG Certificate.


Kernow integrates ESG into its investment process but does not label the flagship strategy as ESG. “At the simplest level, Kernow is a responsible investor but is not marketed as ESG per se, though we could offer segregated mandates with exclusions that can be clearly defined,” says Wood. “Equally, we are sceptical about the performance track records of some ESG and impact funds,” says Makris.


For now, the most important ESG approach is governance of investee companies. Kernow does not approve of outsourcing voting and owns physical rather than CFDs to enable voting. “Most resolutions are pretty standard, but we never abstain and might vote against companies’ remuneration policy, or shareholder incentive schemes. They should be linked to share price and margin performance. Many firms are outsourcing pay structures and copying other companies, but a good board should set the policies independently,” says Wood. “If we vote against a resolution, we will raise the issue privately with management,” he adds. Kernow does not plan to table their own resolutions. More broadly, Kernow engages with management around issues such as capital allocation, and dividend policies, where many companies have inefficient practices.


Kernow is monitoring companies’ ESG metrics with both in house research and external agencies.


Ready for a runway of growth Many start-ups obtain regulatory approval under the umbrella of an appointed representative or regulatory hosting structure, whereas Kernow


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“The UK currently trades at the largest valuation discount to Europe in my lifetime. It is on an emerging market valuation, at a huge discount to


developed markets.” — EDWARD HUGO


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