There are a number of reasons why we continue to find attractive investment opportunities among UK equities despite the slow growth environment.
First is the fact that certain companies are benefiting from long-term growth drivers. The emerging market demand for infrastructure, engineering expertise and consumer goods, the global need to find new energy resources, the growing demand for healthcare, further advances in technology and increasing flows of capital will still be the dominant features of the global economy over the next 10 years. It is vital to keep these long-term growth drivers at the forefront of our thinking and not let them be swamped by shorter term market tremors.
Many companies have strong balance sheets and are therefore well positioned to withstand the current economic environment. We have a bias to international product and service companies. Growth rates for many of these will be positive this year because of demand levels from emerging markets. In our Liontrust Special Situations Fund, for example, around 63% of sales by stocks within the portfolio come from overseas.
Companies within our three funds (Liontrust UK Growth, Liontrust Special Situations and Liontrust UK Smaller Companies) that derive 80% or more of total sales from foreign sales include Dialight, Aggreko, Next Fifteen Communications, Aegis, Compass, Diageo, AstraZeneca, GlaxoSmithKline, Craneware, Concurrent, Bango and Petrofac.
Within the non-foreign sales portion of our portfolios, we have very little exposure to ‘typical’ UK consumers, such as retailers. The significant domestic earners within the portfolios include Hargreaves Lansdown, Brooks Macdonald and Rightmove.
We are confident companies with high barriers to entry, through having significant recurring income, intellectual property and strong distribution networks, will continue to trade relatively well. Where businesses remain underappreciated, particularly in smaller companies, we expect further takeover activity this year.
We like companies exposed to one or more of the above categories of intangible assets. Recurring income is particularly attractive to investors at times of uncertain economic outlook or very slow growth. We manage the three UK equity funds using the Liontrust Economic Advantage investment process. The funds only invest in UK companies with distinctive, intangible strengths that competitors struggle to reproduce. In a world of relentless global competition, it is these strengths that enable some companies to grow their market share, protect prices and margins, and thus drive sustained profitability.
Our investment style is very long term with a low turnover of stocks; we believe it is important to construct portfolios with a broad spread of different types of businesses from a range of sectors with varying market cap sizes. Last year, for example, the best performers in our portfolios included Rightmove, NCC, Dialight, Aggreko, Next 15 and GlaxoSmithKline.
The right blend
The great thing about having a blend of different companies is that at any one time some companies will be driving forward the performance of the funds while others will be more dormant. We are relaxed about the dormant companies because if we are right about their intellectual capital and financial returns, they will drive performance in the future. We believe it is better to have a portfolio built like this rather than being like a momentum trader and only backing those horses running hard at the moment. In 2011 for example, GlaxoSmithKline came to the fore to push on our performance having been quiet for the previous couple of years.
We also use this approach to seek to manage the risks of volatility by diversifying across different types of companies and sectors. If the economy falls off a cliff, then larger defensive companies that are not so cyclical will do well such as GlaxoSmithKline, AstraZeneca and BAT. If there is stronger economic growth then you want greater exposure to cyclical companies.
In many ways, last year was typical for us. Around two-thirds of companies we own in our funds outperformed and one third underperformed. What was especially pleasing was that the outperformers comprised a broad spread of businesses.
Anthony Cross is Partner and Fund Manager at Liontrust
*Source: Financial Express, total return, bid to bid.