What do James Bond, Donald Trump and Liontrust have in common? November 2016

Ten years ago this month, Daniel Craig was named the new James Bond, Donald Trump performed 'Green Acres' at the 2006 Emmys, and Liontrust European Growth was launched.

This fund has a somewhat different process to its peers. Managers James Inglis-Jones and Samantha Gleave believe that cash flow is the most important determinant of investors' returns and, consequently, this is the first part of their stock screening process.

They look at the report and accounts of the 1,200 companies in the European universe to assess the cash flow of each, scoring them and then ranking them over one and five years. They then look in more detail at the top 20% of these companies, which they believe have the strongest cash flow and are run by management committed to making intelligent use of that money.

Their entire focus is on the financial data found in the company report and accounts. They do not consult brokers and they do not meet company management, as they believe this strips the emotion out of the investment decision and avoids them being swayed or distracted in any way.

The stocks James and Samantha pick for the fund are then given an equal weight. Trading is minimal, as they prefer to hold stocks and let the cash flow figures do the talking. Instead, they have an annual review of their holdings.

“In a way, our process is childishly simple,” said James Inglis-Jones at a catch-up today. “But it has proven to be very effective over the past decade and we have outperformed the market (MSCI Europe ex UK) by 73%* over that time, providing investors with returns in excess of 136%*. We believe that investors tend to overlook the importance of what has been and is happening and focus too much on what may happen in the future.”

James and Samantha have refined their process in recent years. They looked back over what they could have bought, compared with what they did buy, and looked to see how they could improve. They now break the top 20% of companies into four areas: growth, cash return, recovery value and contrarian value. Within these areas, they look to identify the best of each theme as well as tilting the bias of the fund towards different themes as the economic climate changes.

“The changes we have made have eliminated our own personal biases,” continued James. “We naturally gravitated towards the more stable, less volatile businesses in the past, which was fine, but this new element has helped us to be more bold. It has introduced a framework for us to take advantage of more opportunities.”

When it comes to selling a fund, the fund managers also have strict criteria. If, intra-year, the company management does something that undermines the cash flow, they sell. If, at the annual review, the company is no longer in the top 20%, they sell. And if the company has done well, they trim their holding at the annual review to bring the stock weightings back into line and equal across the portfolio.

Commenting on the US election, James said: “The markets have had a much more muted response than anticipated, probably due to the fact that, from his first speech as president-elect, Trump had a more conciliatory and positive tone. History suggests that elections, even close ones and controversial ones, have very little impact on investments. There is reaction on the day, but they don't do much to upset the current stock market trend.

“There has been heightened political risk since Brexit, and the markets seem to have taken the Trump win more in their stride.”


*Source: Liontrust, since inception to 9th November 2016.


Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. James's views are his own and do not constitute financial advice.

 

Published on 09/11/2016

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