FUNDS IN FOCUS
Another theme that has influenced our strategy is falling real interest rates, something we have been seeing for the last 20 years. That trend has put fixed income securities under pressure – they cannot protect investors the way they used to because their income has evaporated and so has any opportunity for meaningful capital growth. As such, we prefer to get our bonds exposure via the likes of treasury inflation-protected securities (TIPs) and index-linked bonds. Savers may note that I do not foresee positive real (inflation-adjusted) interest rates emerging for some time yet. Elsewhere, we have held some gold for around 15 years as a diversifier. In a world of currency debasement and zero interest rates, it will always have role to play. Since we first bought it in 20042005, the price has outperformed the broad UK stock market by a reasonable margin in sterling terms. Our remaining holdings tend to be in liquid assets so that we are ready to take advantage of volatile markets and any short, sharp falls in equities. That said, we only go after stocks that meet our strict criteria. Since we like firms that pay us to own them, rather than those that need to raise capital at the first sign of trouble, we look for strong cash flow and solid balance sheets. Victoria Stephens, Fund manager and member of the Economic Advantage team at Liontrust Asset Management
What is your view of the UK stock market post-pandemic? We are enthusiastic about it but nonetheless operate a very strict investment process. We only select businesses that demonstrate at least one of our three key intangible asset strengths; substantial intellectual property (IP), an edge in distribution, and high levels of recurring income. The technology and healthcare sectors meet our criteria, as do some industrial, engineering and FMCG firms plus a few in the media space. We also like fee-based financial companies, such as wealth managers and those investment platforms 18 — Summer 2021
that can demonstrate a recurring income. Conversely, we tend to avoid areas of the market where we cannot see much intangible strength, such as retail banking and the materials sector. As a specific example, the UK is home to some wonderful engineering companies with world-beating IP, such as Renishaw which is a leader in the field of metrology (the science of measuring things). The firm manufactures specialist probes and software for precision measurement so that machines and parts can be calibrated to very high tolerances. Its applications range from neuroscience to manufacturing and the automotive industry. They are also leaders in ‘additive manufacturing’ or ‘3D metal printing’. This high-tech process uses machines to create three-dimensional, complex metal parts, building them up layer by layer from powder. This is an exciting, cutting edge, production technique. More broadly, I am a big fan of UK technology in general because it is underappreciated by other investors. Whilst I concede that exciting, large tech firms may be few and far between in the London market, within the smallcap and AIM arena I could pick out 56 software specialists, a number of which have the potential to become tomorrow’s industry leaders. IMImobile is a case in point. It provides enterprise software solutions which help large firms, such as banks or telecoms companies, to communicate with their own customers. It was recently acquired by the US software giant Cisco, at a considerable premium, as they could clearly also see the potential. At the other end of the size spectrum, we also hold some FMCG giants whose competitive advantage is built on huge international distribution networks that support household brands. Unilever is one, with its vast array of personal care, food, and homecare products. Reckitt Benckiser is another that spans personal health and hygiene. Diageo is a third, with its premium spirits such as Smirnoff and Johnnie Walker. These Londonlisted firms all offer investors access
from the UK to increasing global wealth and the world’s developing markets.
Are equity market valuations too high? I do not think so. For starters, the principal source of uncertainty that has been hanging over shares for four-plus years has gone now that a Brexit deal has been signed. Whilst we expect to see a significant period of adjustment to the new normal, the firms we are speaking to have not tumbled over a cliff edge in the way that some commentators predicted. Most of them are looking beyond Brexit, and COVID-19, with a degree of confidence and an intention to invest capital. Sterling adds to an improving picture. We have seen a decent recent rally, yet in historic terms the pound is still far below its longer-term average level versus other currencies. In that context, the UK market should remain attractive to overseas investors. A focus on growth does mean that some of our stocks can look expensive when screened using traditional valuation metrics. Nonetheless, our fund remains at the cheaper end of its spectrum overall, relative to its benchmark. Besides, I am satisfied that the businesses in question can grow faster than the average UK company thanks to some of the competitive strengths I flagged earlier. Our preference for smaller firms, with impressive growth potential, makes the search for this type of holding a lot easier. Importantly, many of the businesses we like are exposed to multi-year, structural growth themes which should outlast even the biggest cyclical swings. An obvious example, given our focus on intellectual capital, is digitalisation. We gain our exposure to it via specific technology investments, or by holding firms in sectors where it is enabling them to become more efficient, or to grow their suite of products and services. Whatever investment choices we make, they will always reflect a focus on buying into permanent thematic transitions, rather than short-term fads. ●
