Liontrust reacts to pessimism with early fund review

Jeremy Lang, manager of the £1.1 billion Liontrust First Income fund, brought forward his annual review of the portfolio by a month in response to market conditions. Lang changes the portfolio once a year and the changes he has made were first mooted last year and reported by Fund Strategy on October 22.

Lang, who also runs the Liontrust First Growth fund, typically conducts his review between mid-December and mid-January. However, his latest review was completed in November and the changes are now being implemented.

Jonathan Harbottle, marketing director at Liontrust, says the review was brought forward because of increased pessimism in the market. This, he says, means many stocks have become cheaper than expected since last summer’s credit crunch.

As a result of this the number of stocks in the fund has risen from 67 to about 80 and Lang has significantly increased the portfolio’s weighting to what he calls the “ugly” stocks. Harbottle says these are companies that yield 2% more than long-dated gilts but have limited growth prospects.

Throughout 2007 the income fund had only a 7% weighting to these companies, but in his review Lang has raised this to 30%. Harbottle says that at the start of last year Lang could identify about 10 such companies whereas now there are at least 30.

To allow for this shift Lang has cut the fund’s weighting to what he calls the “boring” companies from 80% to 63%. These are companies with a dividend yield comfortably ahead of index-linked gilts and with prospects at least as good as inflation.

Lang has also slightly decreased the fund’s weighting in what he calls “unfashionable” stocks from 10% to 7%. These are companies that are perceived as relatively safe, on low yields but with good growth prospects.

In terms of performance, 2007 proved a difficult year for the income fund. According to Lipper, over the calendar year, bid-to-bid the fund fell 8.9% in value while the FTSE All-Share index rose 5.3%. The average fund in the IMA UK Equity Income sector was down 1.7%.

Harbottle says that despite the poor return the fund still raised its dividend by 6% in 2007 and that, as a result of the changes Lang has made to the portfolio, the fund can expect its dividend to rise in the region of 5-10% this year.

“The last time the fund yielded more than long-term gilts was at the start of 2003, at which time the fund was performing strongly,” Harbottle says.

“We expect the crossover to happen again within the next few weeks and the resulting payback for investors will be enormous over the next 36 months.”

He adds: “The last time we had this number of ugly stocks in the portfolio was between 2000 and 2005 and history shows that the payback from them is enormous.”

However, Harbottle says that investors must be prepared to wait because most of the payback will not be coming until the end of this year and the start of 2009.