The perils of having too much information

Jeremy Lang, 40, is joint investment director at Liontrust Asset Management. Between 1986 and 1991 he worked at James Capel Fund Managers, specialising in North American and Latin American equities. He took a four-year sabbatical to circumnavigate the Pacific Ocean before joining Liontrust Asset Management in 1996. He was appointed joint investment director in 1999. He graduated in 1985 with a degree in economics and econometrics from York University, and has a Masters from Exeter University.

Q: How would you describe your investment approach?

A: I look for companies that can persistently surprise the market with their earnings. This itself leads market analysts to have to upgrade their forecasts, which ultimately leads to a rising share price.

Q: How do you go about identifying companies for portfolio inclusion?

A: My approach is based on finding stocks where analysts are most likely to make predictable human errors of judgment. We have conducted research to show that since 1987 if a share has positively surprised once, it is highly likely to positively surprise again, so there is a lot of room to exploit. What I try to do is to build portfolio of shares with unrealistically low expectations and avoid those with unrealistically high expectations.

Q: Do you meet the management of companies?

A: No. I am solely interested in the views of the analysts to find out where the consensus of forecasts lies. More information does not lead to better decisions; in fact, it frequently leads to inconsistent and worse decisions. It’s my view that analysts tend to put too much faith in quantity rather than quality of information. I think it is important to identify the few crucial factors affecting a situation and ignore the remainder.

Q: What other mistakes do analysts make?

A: Many fall into the trap of becoming emotional about things. However, emotions affect how people assign probabilities: when optimistic, they are inclined to think positive things are more likely to happen; when pessimistic, negative things seem more likely. This affects analysts’ attitudes to previous mistakes, and to rising and falling share prices.

Q: How has being a growth investor affected performance in the current economic environment?

A: The fund itself has performed well, but compared with the rest of the market it has suffered. The principal reason is that the link between a company producing profits that are higher than expected and being rewarded for it with a rising share price has broken down.

Q: What, then, is your current outlook for the UK economy?

A: As a house, we don’t tend to make macroeconomic calls; however, I anticipate the stockmarket will keep going sideways for at least the next five years. At present, rising interest rates, the high price of oil and the US election in November are all factors leading to market uncertainty – meaning that, although companies are reporting earnings surprises, they are not being rewarded for it. Additionally, at current levels, the UK market does not look attractive from a yield perspective, because at 3.1% you can get a better yield from cash than you can from equities. As soon as the market begins to focus again on fundamentals – that is, the potential of stocks – rather than just looking at the bigger macroeconomic picture, our performance will pick up.

Q: How high is your turnover of stocks?

A: The portfolio is reviewed every quarter and on average I turn over some 70-90% of it per year. The main driver, though, is whether or not the stocks have surprised on their earnings, so it can be as much or as small as it needs to be.

Q: Do you actively manage cash?

A: It is not my job to manage cash. While cash comes in and out of the fund as a result of the profits I take, my job is to try to remain fully invested, so I do not use cash as an active portfolio tool.

Q: In which sectors are you currently over and underweight?

A: At present I am more bullish on and am seeing consistent earnings surprises coming through from the technology, telecoms and media sectors. All of these have been through massive pain and restructuring in the last few years, but some companies in these sectors are now producing profits that are higher than consensus forecasts, mainly because they have cut costs rather than growing revenues. Conversely, some of the more traditional defensive sectors, such as tobacco and utilities, currently look expensive relative to the market, so we are underweight in these. Overall, the fund is more growth-orientated in sector terms than it has been in the recent past.

Q: What are some of your current favoured stocks?

A: On the tech theme, at the start of this year I bought a holding in LogicaCMG. This company has had a tough time but, such is the market, I was able to take a rare opportunity to pick up what is fundamentally a good stock on a pretty average dividend of 3.1%, which is the same as is available on the market. Away from the tech story, I also picked up some William Hill earlier this year. The stock has benefited from the growth in internet and telephone-based gambling. In addition, the uncertainty created due to the threat of regulation surrounding fixed-odds betting terminals has been removed, which has helped the company. I mention both these stocks to demonstrate that the mix of holdings in the portfolio is fairly eclectic.

Q: Do you invest in the fund?

A: While Liontrust as a group does not dictate me to invest, I do own a holding.

Q: Is now the time to be invested in a growth fund?

A: I am more optimistic on the fund’s prospects now than I have been for a long time in the past. This is due solely to the fact that the number of stocks surprising on their earnings has expanded and continues to do so. In March/April last year the number of stocks producing profits surprises had shrunk, meaning the number of stocks I could invest in had shrunk. However, we are now in the situation in which the market is recovering, leading to more companies reporting earning surprises and meaning I have a bigger pot of stocks to invest in.

Q: How do you control risk?

A: When I construct the portfolio, I employ a discipline whereby I can go 50% over or underweight in any sector. So while each sector in the market will always be represented in the fund, if I am very bearish on any one I can severely reduce my exposure to it. For example, if the oil sector represented some 10% of the market, the least I could hold would be 5% and the most I could have would be 15%. Another risk control I use is that the portfolio will always contain an index spine of the big nine FTSE 100 stocks – BP, Shell, Vodafone, GlaxoSmithKline, Astra Zeneca, HSBC, Barclays, RBS and HBOS. These nine account for nearly 50% of the overall FTSE 100, meaning the risk of not holding them is too big. While I will always have a weighting in each of these stocks, again if I am very bearish I can go 50% underweight.