Kernow Asset Management founder Alyx Wood repeatedly uses one word to describe himself: contrarian.
It was the strategy he employed at 21 years old in a stock trading game during recruitment. While everyone was given 10 minutes to trade as much as they liked, he made just one trade to short BT.
“If the market goes up, I lose. If the market goes down, I have a 50% chance of winning despite competing against 30 people,” Wood explained.
He won. Now, it’s a strategy he’s continued to use in the five years since his creation of Kernow Asset Management.
“We apply it in a very specific way… but contrarian will work anywhere. You can’t have too many people doing it, if they all start doing it, it ruins it,” Wood said.
“Fortunately, because it’s so emotionally hard for the individual doing it, because you seem to be literally wrong most of the time, and look like an idiot most of the time, it’s very hard to do that.”
As Kernow celebrates its five-year anniversary, the strategy has paid off well. The YFS Kernow Equity Navigator fund has returned 28% over the last year, according to Morningstar, and 18.8% so far in 2024.
Wood holds a combination of long and short positions, but focuses his investments on UK equities, a notoriously troubled market for the past decade. Naturally, Wood sees it the other way round.
“The UK equity winter has ended. Small caps in particular have an extremely rosy future. The amount of upgrades we’re getting relative to downgrades is higher, the profit growth margin is all about how much you’re going to make, not whether it’s going to be negative or not. There are still some shenanigans going on, but it’s the best I’ve seen it, and we’re very excited. The core thing here is the prices are just wrong. They’re ridiculous. Half the FTSE 250 are doing buybacks because they’re fed up.”
Wood isn’t alone in his faith for the market. Private equity firms have chomped at the bit for the chance to buy up companies, often at high premiums. And companies continue to see themselves as a promising investment, buying up shares.
But fund flows have told a different story: In September, Calastone recorded £666m in outflows from UK equity funds. So when will the tables turn? According to Wood, they already have.
“A lot of the old businesses are index huggers now, and they’re consolidating, and their story and value proposition isn’t very compelling. ‘I’m going to charge you loads of money and probably not beat the index.’ Brilliant. What a great proposition. All those investors are struggling, and they’re a shrinking part of the market, and they should be,” Wood said.
“All you have to adjust for is the rise of the quant funds, multi strats, the passive, and the rise of the retail consumer as well. Ultimately, the stockmarket has gone up, so more money has gone into it.”
While UK pensions have had little confidence in their home market, international retail investors have seen the appeal of the UK. These investors, Wood said, will be the winners.
Current developments in the UK market also come as Rachel Reeves and the Labour Party prepare to present the Autumn Budget on 30 October. The date has been marked with apprehension across the investment industry, especially as areas such as Capital Gains Tax appear to be on the chopping block. But while many investors board up in preparation of a storm, Wood has stuck by his contrarian ideals, and taken the view of sunshine on the horizon.
“I’m ready for the rally, and I’ve positioned a couple of things to take advantage of that. To balance this, we’ve taken of some aggressive ‘Oh my god, we didn’t realize how bad they’d be and they’ve actually made a mistake’ trades that can grow very quickly that will protect us from that,” Wood said.
However, Wood believes small and mid-cap stocks will be helped in their rally with boost from certainty value as the budget is settled.
“These things repeat themselves. You’ve seen 100 different budgets and 100 different things. The reality is, it doesn’t matter that much, but because everyone thinks it matters so much, it’s important.”
