Anthony Cross and Julian Fosh, joint managers of the Liontrust Intellectual Capital and First Opportunities funds, have introduced a two-tiered process to selecting stocks.
Intellectual capital describes the intangible assets some companies possess but do not sit on balance sheets or show up on quantitative screens. In the past Cross (pictured) split the types of intellectual capital into eight categories, but since Fosh’s arrival from Saracen in June the process has been refined so that three categories are of particular importance.
Fosh says that to pass the tier one test a stock must demonstrate that it has either more than 75% repeat business, a distribution network that is difficult to replicate, or some form of intellectual property.
At the second tier are the remaining five categories, which include a company’s culture, its procedures and formats, franchise and licenses, customer databases, and finally brand. Cross says while these five categories remain important and are used in the scoring of companies in terms of entry into the funds, they are not a substitute for the tier one test.
“Nearly all of the companies in the two funds have one of the three elements in the tier one test,” says Cross.
“Those businesses that lack any of the qualities will be sold over time.
“It is all about having the most robust intellectual capital model as possible.”
Fosh adds: “These are unparalleled times. What we try to do is look for companies with a competitive advantage so they shine in conditions such as these.”