Liontrust regroups to bolster pride

19 October 2009 | By James Smith, Fund Strategy contributor

Liontrust Asset Management is a publicly quoted independent investment management company with £1.28 billion in assets under management at September 30, 2009. It was founded in 1994.

Liontrust suffered its first-ever manager departures in January after 15 years of stability, sparking outflows of more than £2 billion in the following months.

But with assets holding firm and two high-profile new teams in place, the group sees itself as well positioned to win fresh investors after recent industry traumas.

Nigel Legge, the firm’s chief executive officer (CEO), says after the various market problems of 2008 - from hedge funds blowing up to performance disappointment - there are opportunities for a group with integrity and openness of process. Legge and team established the firm in 1995, breaking even in their 20th trading month and listing on the fourth anniversary in 1999.

Until this year, Liontrust had never had to deal with an enforced manager change on its portfolios and this stability was part of its allure. As expected, the group therefore faced plenty of negative publicity when Jeremy Lang and William Pattisson, prominent fund managers, announced their resignations at the start of the year.

Both were part of the launch team that came over from James Capel and Lang was responsible for a large part of the group’s assets including the flagship First Income portfolio.

These two departures also meant the group lost three of its five much-vaunted processes, with the eponymous Lang Approach and Value Dynamic, plus Pattisson’s Large Cap system dropped.

After a period of re-adjustment, Legge is keen to set the record straight. “We were largely immune to the credit crunch and were net sellers in 2008, with assets reaching around £3.6 billion and the business profitable,” he says.

“The departure of the two individuals in 2009 meant we lost various pension mandates, with trustees and consultants pulling the money based on a change of process. But those mandates produced wafer-thin margins and UK equity overall is a declining part of the institutional space.”

Legge says the group has been in net redemption this year but is confident outflows have slowed and the assets have stabilised in the £1.2-£1.3 billion area. Amid all this, the CEO says he has had more enquiries from fund managers about joining the firm than ever before, with many attracted by the basic freedom to execute their skills.

Over the years, the group has prided itself on a culture of fair remuneration, negligible micromanagement and accountability for performance. He stresses not every manager would fit in to this structure, with a key Liontrust requirement to set out exactly how your investment process works.

Other tests for potential recruits include being saleable into the retail and institutional markets, small teams and scalability at similar margins to the existing business.

Focusing on British equities for its first decade, the group made an initial move outside this area in 2006, bringing in Gary West and James Inglis-Jones to head up European products.

Like the rest of the group’s managers, the pair spent several months refining and documenting their Cashflow Solution investment process. When Lang left, they were seen as the best choice to replace him on the First Income fund and also took on Pattisson’s First Large Cap portfolio.

Lang’s First Growth moved under managers Anthony Cross and Julian Fosh, who also run the Intellectual Capital and First Opportunities vehicles. They recently revised and rebranded the Cross Report process to Economic Advantage, focusing on companies’ intangible assets, such as intellectual property and distribution.

Of their three portfolios, First Growth is mainly large-cap focused, Intellectual Capital is a smaller company product and First Opportunities goes across the spectrum.

Looking at the group’s seven-strong range, Cross and Fosh’s initial two funds are the only top-quartile performers over three years to October 5. First Opportunities is also top-quartile over 12 months, ranking 64th out of 305 rivals in the UK All Companies peer group.

First Income’s recent struggles under Lang are evident from fourth-quartile figures over one and three years, although First Growth is second quartile over the longer period.

Legge highlights a strong start from West and Inglis-Jones on First Income, with top-quartile six-month numbers after the long spell of underperformance.

In a change of policy, the fund will reduce its dividend payment next year for the first time since its launch, in an effort to boost the total return. Under Lang, the fund was well-known for raising the dividend year in year out, but the new managers feel this has sometimes been at the expense of total return.

With West and Inglis-Jones at the helm, First Income has three aims: returning more than the stockmarket, growing income faster than inflation over a five-year period, and yielding more than index-linked gilts.

“The hope is that this pain in changing direction and widening the product range bears fruit in the long-term”

Their philosophy is based on mistakes made in profit forecasts by company managers, which are magnified in markets as investors adopt these unreliable figures to value future profits. Such mistakes are predictable and identifiable and create investment opportunities - particularly at key stages of a company’s development.

West and Inglis-Jones say the best way to exploit these opportunities is to focus on company cashflow. “Strong cashflows (after investment spending) are a good indicator of strong growth in profits; conversely, weak cashflows often predict a collapse in reported profits,” they add.

In contrast, Lang’s Value Dynamic approach tended to focus on market overreactions by concentrating on stocks with unusually high yields. The Top 100 tracker is the group’s only other British equity product, after it closed down the sub-£1m Focus 350 offering - another former Pattisson fund - earlier this year.

First Income remains the largest portfolio, although at £367m, it is much depleted from the £1 billion days under Lang. Meanwhile, First Growth is also down to about £160m, dropping from slightly over £500m before Lang announced his departure. First Opportunities remains the smallest fund at under £10m but the group has no merger plans.

On the European side, West and Inglis-Jones have run a long/short fund for professional investors since 2006 and launched a retail version earlier this year. They had run a long/short fund at Polar Capital before joining Liontrust, boasting an established record in short trading.

Their long-only European offering has also racked up decent numbers and will hit its three-year record in November. Over 12 months, it is the group’s only other top-quartile offering, ranking ninth out of 106 portfolios in the IMA Europe ex-UK peer group.

This year, Liontrust has attempted to broaden the product range, recruiting high-profile bond and global equity teams.

First to join was the European fixed income team from Ilex Asset Management, which Legge trumpets as among the best in London. Headed by Simon Thorp, chief investment officer, the team runs the Cayman Islands-domiciled long/short Ilex Credit fund, among the earliest offerings in this market when it was launched in June 2000. This vehicle moved over with the team and further launches are planned.

“This team spoke to several firms before joining Liontrust, attracted by our focus on transparent reporting and process-driven investment,” adds Legge.

“Parts of our client base have never been able to get exposure to this strong team, with their abilities evident by how many competitors sprang up in this space only to fall away.”

From its launch on June 1, 2000, to the end of 2008, the euro share class of the Ilex Credit fund returned 44%. Meanwhile, Liontrust also poached a global equity team from Gam, with three managers joining in October and Ross Hollyman, the head, to arrive in January 2010. When the team is complete, they will develop the Global Value, Global Earnings Surprise and Global Multi-Factor Equity investment processes, with products to follow.

Legge says this latest recruit represents the group’s ­ongoing joined-up thinking, with Hollyman previously working under Gary West at Flemings. West had also taken over from William Pattisson at the same firm, when the latter left his head of UK equities role.

“In essence, we are assembling know-how here in the form of clearly defined investment processes and packaging in investible form for various client groups,” adds Legge.

“After last year, we feel many managers have been shown up as complacent. This echoes the early days of the firm when many people warned me against trying to compete with the biggest firms on UK equities.”

While acknowledging the impact of institutional outflows, Legge highlights the health of the business, recently boosted by Schroders manager Andy Brough doubling his stake.

“We launched in 1995 with no managers, no process and a name associated with a 1940s investment trust, and with four teams of excellence in place, we would rather be here than there,” he adds.

Among fund buyers, First Income has been popular down the years but most are waiting to see how a broader Liontrust in terms of products emerges from a tough 2009.

Darius McDermott, managing director of Chelsea Financial Services, says: “Liontrust recruited Rob Page [who will join Ignis next year] and Simon Hildrey to reinforce its message in the retail market and this was starting to work before Lang and Pattisson left. First Income has been the flagship and has been on the buy list although the fund had dropped into our relegation zone after a tough period.”

McDermott is positive on the European team, with their long-only and absolute return funds on his buy list, and was happy West and Inglis-Jones inherited First Income.

“Liontrust has had a tough year, losing its main manager and a good chunk of assets, but the hope is that this pain in changing direction and widening the product range bears fruit in the long term,” he adds.

Jake Moeller, head of investment research at Alico Wealth Management, says investors in Liontrust’s flagship products are looking at managers with a new investment philosophy and style. He has previously linked to both First Income and First Growth, citing some standout years interspersed with more mediocre performance. “First Income in particular generated stellar returns between 2000 and 2003 but tailed off and never really managed to deliver subsequently,” he adds.

Moeller is also bullish on the Continental Europe fund under West and Inglis-Jones and says their absolute return product is interesting. “I like the fact they have a very clear process and style and the group is giving this philosophy a high profile. However, we would need to see their risk-adjusted returns over three years before they would be eligible under our best of breed criteria.”