The first is cyclical businesses, which can, in the managers’ view, be priced as if they will never recover. “But economies do tend to recover eventually,” they said, and named ITV, Marks & Spencer and WPP as examples.
The second group involves another type of cycle, this time the ebbs and flows of capital. When too much money chases initially high returns in a certain sector, “oversupply results and this drives down returns”. Capital then exits and returns improve. Potential beneficiaries are miners such as Anglo American, Barrick Gold and Newmont.
Then we have the credit cycle in the banking sector. A decline in lending standards leads to increased defaults. Bad loans are written down, capital ratios improve and there are better lending standards, the managers said, mentioning Barclays, NatWest and Standard Chartered in this category.
Nothing to do with cycles is the opportunity they seek to exploit when companies indulge in “strategic error”: a firm expands too aggressively, for example, which leads to “a change of management, disposals and cost reductions that improve profitability”. Examples are Serco and Capita.
There is an appealingly contrarian streak in the final one, “misdiagnosed structural decliners”. The market currently believes that the “disrupters” win and everyone else loses. But the reality is “more nuanced” as incumbents adapt to competition. ITV, WPP, M&S, BP and Shell are examples.