Liontrust review could turn ‘ugly’

Jeremy Lang, manager of the £1.2billion Liontrust First Income fund, is expected to make several changes to the portfolio during his next annual review.

Lang changes the portfolio, which is managed according to his Value Dynamic investment process, only once a year. The changes will be in response to this summer’s credit crunch.

Lang’s process aims to identify three types of stocks: the unfashionable, the boring and the ugly.

The unfashionable stocks are those that are relatively safe, on low yields but have good growth prospects. The boring are those companies with a dividend yield comfortably ahead of index-linked gilts and with prospects at least as good as inflation.

The ugly stocks are those that yield 2% more than long-dated gilts but have limited growth prospects, and it is these whose weighting will be increased at the next review.

Jonathan Harbottle, marketing director at Liontrust, says that at the start of the year Lang could identify only 10 such companies. Today he says there are about 50. Harbottle says: “It is likely that this year’s review and the one held in 2008 will see an increase in the number of ugly stocks in the portfolio.

“The sectors in the market where we are seeing these are the mortgage banks, large-cap financials and some of the retailers.”

As the number of distressed stocks increases, Harbottle says the risk profile of the fund will begin to rise.

“Between 2005 and 2007 the fund has had a low risk profile as there haven’t been many of these companies to choose from,” he says. “But owing to the recent credit crunch there are now more opportunities to fish in the unloved sector of the market.”

Examples of such companies include Alliance & Leicester, which is yielding 8%, Barclays, which now yields 11%, and Bradford & Bingley, which is on a 7.6% yield.

“Jeremy holds these stocks at present but at these yields he will likely add to his positions,” says Harbottle.

“There is more than an acceptable risk premium for holding them at these yields.”