There are three key elements to the investment process:
1. Collaborative Idea Generation: each member of the Liontrust Global Equity team has a research responsibility covering an industry sector of the global economy, a particular economic trend or a theme such as industries adopting new technology and changing consumer tastes. This clear division of responsibility ensures that the fund managers do not overlook “unfavoured” companies and allow structured peer challenge for the generation of validated, independent and sometimes atypical investment ideas that underpin the collaborative original research required.
2. Culture of Conviction: to enable ideas to drive investment returns rather than providing market returns, each one must be given sufficient weight in the portfolio and time to work. This results in concentrated portfolios with long holding periods.
3. “Three Silo” Portfolio Construction: portfolios are constructed to be “style-free” with the aim of providing more consistent returns over the economic cycle by ensuring that ideas drive returns rather than style bias.
The philosophy and process are implemented through four stages: idea generation, stock selection, portfolio construction, and monitoring and exiting.
Idea Generation
The Global Equity team seeks to identify excellent companies that are positively exposed to powerful trends that will result in consistently above market returns over the long term. The team’s collaborative research focuses on industry and economic trends that they believe will drive long-term value creation. The fund managers then identify those companies that will benefit from these trends and which have the basic characteristics of an excellent company using quantitative screening of fundamental financial data including revenue growth, profitability and cash flows.
This combined top-down and bottom-up approach allows the team to generate potential investment ideas across the whole market on a structured and consistent basis.
Stock Selection
An excellent idea does not automatically translate into long-term value creation. Companies identified during the idea generation stage may fail to execute its strategy, the shareholders may fail to benefit or the identified opportunity may already be priced in.
The Global Equity team subjects identified stock ideas to an in-depth evaluation of the opportunity and risk. This may involve building financial models to estimate the potential opportunity size and engaging with company management to understand execution risk – and therefore to understand whether the corporate strategy and management quality will mean the opportunity is achieved. Finally, the governance arrangements and other factors are considered to ensure that the returns will accrue to the shareholders.
Companies identified during this stage should possess a significant opportunity to create value, typically over a three-year time horizon, along with the management capability to execute.
Portfolio Construction
A portfolio of typically 20 to 40 stocks is constructed that is likely to differ substantially from the benchmark. The size of each holding in the portfolio is determined by the consideration of three factors: the size of each company’s value creation opportunity, its riskiness and the degree of diversification it offers to the existing portfolio.
Investments are assigned to one of three silos within the portfolio to help ensure that the fund managers minimise the risk of style bias. These silos represent structural growth investments, economic recovery investments and more tactical or special situation investments. The balance of the three silos is designed to help manage the risks posed by overreliance on any particular investment style and to ensure that the portfolio’s returns are driven by the investment ideas.
Monitoring and Exiting
Once an investment has been made, it is monitored on an ongoing basis against the investment thesis identified at the stock selection stage as well as against the three factors used to determine portfolio sizing listed above. This involves engagement with company management, evaluation of new information and updating of financial models.
Holdings are sold when they reach a valuation where further upside is not anticipated and the case for selling and investing in another company with greater return prospects is compelling. Another reason for selling a holding is when the stock does not perform as envisaged and events reveal a side to the investment rationale that was not anticipated. Where this negates the original investment thesis, the company is sold.