Cartesian's top 10 tips for investing in a bear market

With challenging conditions set to continue for UK equity investors, picking stocks that are well positioned to weather the storm is now more important than ever.

David Stevenson, the highly experienced, Citywire ‘A' rated fund manager of the Ignis Cartesian UK Opportunities Fund, provides ten tips below for investing in a bear market. David has 19 years' investment experience, having successfully managed UK equity long only and long/short funds through both bull and bear markets. He was a founding partner of Cartesian and the Ignis Cartesian UK Opportunities Fund is top quartile since it launched in December 2005.†

Here Stevenson gives his top 10 tips for investing in a bear market:

1. Stick with a proven process
"Cartesian has been using the same stock picking template for more than a decade, through a variety of market environments. The process has delivered outperformance in the past and it continues to working well now. The attributes Cartesian looks for in stocks - earnings quality and financial robustness - seem even more important now than perhaps ever before. It would be a mistake to suddenly try to develop a new approach just because the market is tough."

2. Balance sheet quality is paramount
"Companies which are heavily indebted may not survive the next couple of years. This may seem extreme but that is what we are dealing with at the moment. Companies with low or sustainable gearing, and which therefore have a degree of self-determination over their future and developing their business, are relatively very attractive."

3. Be wary of unsustainable historic dividends
"Companies have had free and easy access to very cheap debt for a long time. This has led many companies to borrow to fund share buybacks, special dividends and supernormal dividend growth. That borrowing has now been completely cut off, and those companies that over-engineered their position and have cyclical earnings streams are going to be in trouble."

4. Look for companies with resilient earnings
"Earnings are under pressure right across the market, but investors can mitigate that risk by looking for companies with more defendable earnings. That means companies with big franchises, big market shares and companies that have leverage over their competitors or their suppliers. These companies can eke out a bit more market share or a better margin."

5. Think big
"Big brands have the kind of footprint that will allow them to survive through what is clearly a difficult environment. Companies like Vodafone, Centrica and National Grid are all likely to outperform. These all operate in areas where spending remains necessary; other attractive areas include food retailers and pharmaceutical companies."

6. Don't trust company directors' dealing
"As the market moved into the downturn, there were plenty of examples of company directors buying up stock in their own companies. These directors assumed they knew better than the stock market and were bottom fishing, but so far they have been proved wrong. Now directors' activity has slowed, as company outlook statements broadly indicate that times are tough and are unlikely to improve in the near-term."

7. Avoid the temptation to become a short-term trader
"Cartesian's skill is as an investment manager, not as a trader. Investment views need to be made on at least a one year basis, and a bear market does not change that. At Cartesian the average holding period is around two years, and that is unlikely to be affected by the current environment."

8. Don't be afraid to hold a more concentrated portfolio
"In a bear market the number of attractive stock ideas tends to fall. Over the past year, the Cartesian UK Opportunities Fund has moved to a more concentrated core of around 40 holdings. As and when opportunities arise, new positions will of course be added. However, the important lesson is not to hold low conviction stocks just for the sake of being diversified."

9. Think independently
"Don't be fooled by consensus thinking or the latest fashion. Fundamental analysis of balance sheets and earnings will give a clear picture of companies' future prospects. This then allows a portfolio to be built up from individual holdings - "bottom up" - without having to worry about forming a view on overarching macroeconomic or benchmark themes."

10. Be patient
"The UK stock market will recover, but not overnight. At the moment the market is still very difficult and it would be foolish to invest expecting the market to bounce back straightaway. Cartesian expects the market to recover only when the macro statistics show that borrowing has come down (and saving going up), unemployment is peaking and the housing market has bottomed out."