Important information: 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.
‘UK’ and ‘growth’ are two words that haven’t sat comfortably together for quite some time now. Yet even in this most unloved of markets, there are plenty of quality companies with strong growth prospects out there.
Julian Fosh, manager of the Liontrust UK Growth Fund, one of our Select 50 favourite investments, believes his unique “economic advantage” stock selection process enables him to uncover such companies. In his eyes, “our big idea is that intangible assets are a fundamental giver of competitive advantage to companies.”
If that all sounds a bit, well, intangible, my colleague Ed Monk recently caught up with Fosh to discuss the thinking behind his strategy.
Intangible assets with tangible upside
Fosh explains how he looks to identify companies that can maintain a higher than average level of profitability over the long term: “We look at every company with the same thought: does it have one of the particular types of intangible assets which we believe will give it a competitive advantage and allow it to earn superior returns and therefore be a great investment?”
He has three intangible assets in mind: intellectual property; a strong distribution network; and high levels of recurring revenue. In the manager’s eyes, each of these provides a company with ‘pricing power’ - i.e. the freedom to charge a little bit more, which in turn brings about and sustains high profits.
But identifying those companies is only the first stage of the process. He’ll next assess whether those companies have strong cash flow returns on investor capital.
That’s a bit of a mouthful, so Fosh breaks it down: “What we’re looking for are companies which can, because of the intangible assets they have, earn returns on the activities they engage in which is higher than their cost of capital and therefore create wealth for their shareholders and investors.” Only those stocks which generate healthy margins and strong cash flow pass this stage of the process.
Finally, he looks at cost. Fosh wants to have the best companies in his portfolio, but he won’t buy them at any price - he explains that “if you overpay for anything, even the most fantastic business, you will not make an acceptable return from it.”
Following that logic, the manager adopts a “very strict valuation discipline”, whereby he will only buy a company if its valuation appears reasonable according to one of several metrics his team uses.
Micro first, macro second
This is unashamedly a “growth” fund - meaning it tends to invest in stocks which are likely to deliver rising earnings (regardless of what’s going on with the wider market), rather than unloved “value” stocks which appear to be trading below their true value.
The growth investing style has been in the ascendancy for several years now, and many feel that value’s return to favour is overdue. The big question for Fosh and other growth managers is how that shift will affect their funds.
Fosh is pretty calm at the prospect. He explains that “any investor who invests in a particular style has to accept that the style will work better in some market conditions than others.”
But at the same time, he feels that his investment process puts the fund in a good position regardless of prevailing conditions.
As he explains: “We try to be bottom up investors, we don’t take views about the likely outcome of the economy.” In other words, he’s more interested in individual stocks and the quality of their business models than trying to play the wider market.
That’s also why he’s not too worried about the current state of the UK market. Though he sees in it good recovery potential and likes its price compared to international markets, his focus still lies with individual stocks rather than the macro backdrop: “Our focus is very much on our stocks and a bottom up process.”
More on the Liontrust UK Growth Fund
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. Select 50 is not a personal recommendation to buy or sell a fund. This fund may use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. 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.
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