continued... “But if we start to see rising interest rates, the attractions of a less dynamic business – with free cash that could be bought with cheap interest rates – changes. If it is a less dynamic business, the free cash might not be so certain, and the cost of borrowing is rising. The whole mood of buyout excitement can suddenly change,” Cross explains.
 So how will Cross’s investment technique ride out the
inevitable downturn in the market? “I worry that inflation is
starting to creep back into the system,” he says. “If the
banks are forced to put up rates because of cost inflation
due to rising commodity prices, that will make corporate
activity less attractive, life more difficult for the consumer, make people less certain of how economies might cope with rising interest rates, and will lead to a decrease in speculation. I think we could see quite a correction.”
But Cross is confident that even in a downturn his funds will outperform. “I am light on resources stocks, I am light in the consumer area, I am very light on property and, typically on less exuberant days, the funds outperform.
“Things are overheated, but I will stick to a sensible logical investment process, not be sucked into businesses that I have no idea how to value, and not follow the herd in chasing up overvalued companies. People are now buying Datamonitor at £4.40 a share, but they didn’t want to own it when it was 20p,” he says.
“Some 25 per cent of the companies in my Intellectual Capital Trust are trading on price-
earnings ratios of less than 14. In my First Opportunities Fund I have 35 per cent of the
portfolio in companies where I think they are undervalued by at least 20 per cent.”
Cross cites Clarkson, Datamonitor (now sold), Renishaw and RWS, a patent translation
business, as classic examples of the intellectual property approach to investment, where the value of the people involved was undervalued or ignored altogether.
Describing the appeal of Renishaw, which makes
specialist industrial probes and is a world leader
in its field, Cross says, “I like owning companies
that spend a lot on research and development,
that have intellectual property, that have their
products patented, that have a global distribution
network. That’s Renishaw. They are now selling
into China too.”
He adds: “I would much rather hold that type of business, where there is a strong chance that they will be able to maintain their profit margins. It is a business that has consistently delivered strong results for the past three or four years, and has been around since the 1970s, serving the machine tool industry.
“Renishaw has strong margins and spends a lot on research and development, and the competition has found it difficult to eat away at their market. It is a high-quality business. It is vulnerable to global industrial activity, but it is diversifying, for example, into the dental market. But there are very few companies in the small companies sector that are not potentially vulnerable if there is an economic downturn.”
Clarkson’s attraction is that it is a large shipbroker in a world of small broking businesses – a world that is not generally well understood. Cross says: “There is only one other quoted company, Braemar Seascope, that trades on twice the multiple despite being smaller and less diverse.
“It is a competitive market, but mostly smaller broking businesses. But Clarkson has that global reach. They have put a lot of research into trying to provide a better level of service for customers. They have also tried to shift the business away from being vulnerable to changes in shipping rates.”
Cross points out that the company has a reasonable forward order book and is expanding into shipping services and financial services advisory work and specialist hedge fund management.
“It is one of those businesses about which analysts rarely write. It is a very cash generative business. You have an attractive yield of about three or four per cent and a P/E of only eight. For me, the risks of competition or a big decline in shipping rates is more than compensated for by only having to pay a P/E of eight.”
Discrete years
performance |
|
1 year to
31.3.02 |
|
1 year to
31.3.03 |
|
1 year to
31.3.04 |
|
1 year to
31.3.05 |
|
1 year to
31.3.06 |
|
The Liontrust
Intellectual Capital
Trust |
|
-10.2% |
|
-24.8% |
|
+68.7% |
|
+18.9% |
|
+19.5% |
Source: Lipper, bid to bid basis, net income reinvested at ex-dividend date.
Past performance is not a guide to future performance. The value of investments and the
income from them can fall as well as rise and are not guaranteed. Investors may not get back
the amount originally subscribed. The issue of units in the Funds may be subject to an initial
charge, which is likely to have an impact on the realisable value of the investment, particularly
in the short term. Equity investment should always be considered as long-term. Some smaller
companies may be less liquid than larger companies and the price swings in smaller company
funds may therefore be greater than in large company funds. Up-to-date performance
information on the Funds (to the last quarter end) is available direct from Liontrust or
from our website, www.liontrust.co.uk.
|
Roar Jaw