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“Euphoric” market will destroy investors’ wealth, warn Fosh and Cross

21 January 2014

The Liontrust managers say that while “a rising tide lifted all boats” last year, a focus on quality and fundamentals will win out in the long-term.

By Jenna Voigt,

Features Editor, FE Trustnet

Investors must not follow a euphoric market into the cyclical “trash” that has led the strong market of the past year, according to FE Alpha Managers Anthony Cross and Julian Fosh.

ALT_TAG Last year equity markets delivered their best returns since the financial crisis, with the FTSE All Share up 20.81 per cent.

However, Fosh (pictured) says the market treated all companies equally in 2013 and warns it was a situation where a rising tide lifted all boats, a set of circumstances that has ended badly before.

“We won’t be joining the dash for trash, which appears to have been a successful strategy last year,” Fosh said.

The manager warns ignoring fundamentals such as high levels of recurring income and intellectual property that set companies apart from their peers is a dangerous strategy.

The pair highlight what they describe as the poor quality of the best-performing stock in the FTSE 100 last year – International Consolidated Airlines, the parent group of British Airways.

While the stock made more than 117 per cent in 2013, its longer-term performance has been less rosy.

Performance of stock vs index in 2013

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Source: FE Analytics

Performance before the British airline merged with Spain's Iberia was fraught with ups and downs, and the airline sector as a whole tends to be bumpy.

The managers warn stocks such as the airline conglomerate are “serial value destroyers” and investors should not get caught up in the hype.

“People have suddenly decided that BA is a very exciting business for some reason, but it is still value-destroying,” Cross said.

Instead, the managers favour steady blue chip names such as GlaxoSmithKline, which has delivered solid returns year in and year out.

Over the last three years, Glaxo is up 68.76 per cent, more than doubling the returns of the FTSE 100. It has an attractive yield of 5 per cent.


Performance of stock vs index over 3yrs

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Source: FE Analytics

More important, in the eyes of the managers, is how the company handles the rough years, which are not yet a distant memory. In 2008 when the market was down a painful 28.33 per cent, Glaxo made 5.47 per cent.

“It has a long-term track record of adding value,” Cross said.

This type of quality performance makes investors better off in the long-term, the managers claim.

While Cross and Fosh had a tough year in 2013 relative to their peers, their Liontrust Special Situations and Liontrust UK Smaller Companies portfolios have outperformed over the longer run.

“Last year was a tougher year for us,” Cross said.

While the five crown-rated Liontrust Special Situations fund performed in line with the FTSE All Share in 2013 – picking up 19.97 per cent while the market was up 20.81 per cent – the managers said it was a difficult year versus the sector.

However, they point to their consistency and ability to perform well in falling markets as the selling point of their fund.

“We all get hideous years, we’re bound to at some point,” Cross said. “But don’t just think about the good times. Remember how our funds behaved in bad times also.”

Fosh added that although quality stocks lagged behind the rally last year, the fund did well not to fall further behind its peers.

Liontrust Special Situations has picked up 60.58 per cent over three years, nearly doubling the returns of the FTSE All Share and outperforming the IMA UK All Companies sector by more than 20 percentage points.

The fund’s performance has been even more impressive over five years, gaining 206.94 per cent while the sector and index made 121.94 per cent and 113.3 per cent, respectively.

Performance of fund vs sector and index over 5yrs

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Source: FE Analytics


Much of the fund's outperformance can be attributed to its bias to companies with dependable earnings, which means it tends to protect better on the downside.

While the fund lost 25.9 per cent in 2008, the index lost 29.93 per cent and the sector lost 31.96 per cent. The fund rallied more strongly in 2009 and continued to outperform in 2010.

In the falling markets of 2011, Liontrust Special Situations managed a positive return of 7.54 per cent while the sector shed nearly as much.

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Source: FE Analytics

The managers say they won’t be changing their style to suit the current market climate, but that quality stocks are poised to outperform again.

“We don’t believe all companies are equal,” Fosh said. “We take massive comfort from the fact that [the companies we own] weren’t direct beneficiaries from QE (quantitative easing). They really are the masters of their own destiny,” Cross added.

“We do feel things are moving back in our favour. A focus on quality, a focus on strong businesses is starting to come back in. We have more of a spring in our step than we did in October.”

Liontrust Special Situations requires a minimum investment of £1,000 and has ongoing charges of 1.88 per cent.

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