Admittedly less abstract than the other two, Fosh channels his energy into identifying companies with strong intangible assets that other investors glued to balance sheets might overlook.
Fosh explains: “We start by saying there are three types of intangible assets and if you have one of them you can make it into the fund: intellectual property, strong distribution and high levels of recurring revenue. We believe that if you have at least one of these, it gives you the ability to earn higher returns than the average company, and the ability to do it for longer.”
Once the manager has spotted one or more of these traits, he turns to measuring how they translate into concrete value for a company. Then it’s a case of figuring out what price the Liontrust team is prepared to pay for the company’s shares. As Fosh says, “It’s all very well to identify a group of terrific companies but if you pay too high a price for them you’ll never succeed in achieving acceptable returns for your investors.”
Stocks, not sectors
Along with co-manager Anthony Cross, Fosh sets his sights on firms across the FTSE 350, with the ability to invest up to 10% of the fund in smaller companies as well. While Fosh uses his ‘economic advantage’ process across a number of Liontrust funds, he says the main point of the fund is to provide the selection method to people who prefer focusing on opportunities within larger UK companies.
And while a quick look at the fund’s holdings might suggest the managers have a penchant for a few favoured sectors, Fosh explains it is the process itself which often brings the pair naturally towards a certain type of company: “We start with the stocks and don’t care at all about sectors. However, what’s evident when you look at sectors is that some of them have what we look for in abundance and some don’t have it at all.”
With around 40 company names in the fund, it is one of the more concentrated portfolios in its peer group. But rather than seeing space for further diversification, Fosh sees a big advantage in fewer holdings.
He explains: “Studies have shown that as few as 12-18 holdings will diversify away 90% of your stock-specific risk so by that standard we aren’t overly concentrated. What you really need is enough stocks to keep an eye on and monitor closely so that you’re really not overstretching yourself. I think between 40 and 60 is great for us and has been reflected in the fund’s good risk-adjusted long-term returns.”
And despite the uncertainty of Brexit hanging over the UK, Fosh is eager to remind us of the enduring qualities a London listing brings for companies and investors alike: “The UK has a very stable and reliable political system, a stable legal system and a very well-regulated stock market. These are very big advantages for investors because you want to know your risk of capital loss is being minimised and your interests are being protected. We’re happy that the UK is our hunting ground; it’s a great place to invest.”
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. This fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This fund invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.