Liontrust’s culture of giving managers the freedom to pursue their own approach means they must live or die by their convictions, says FE Alpha Manager Julian Fosh.

Fosh, who heads up three UK equity portfolios including the top-performing Liontrust Special Situations portfolio, believes that this approach is also the group’s main strength.

"I’ve only been with Liontrust for three years but it is a group that I have always admired from afar because there is a genuine focus on managers’ investment process," he said. "When they first arrive fund managers are required to set out their process in some detail in a document."

"One of the biggest challenges of being a fund manager is having to fight for time and space to actually focus on managing the fund. There are various meetings that fund managers get involved in that are not necessarily conducive to looking at the stocks. At Liontrust there is a real culture of letting managers get on with it and seeing them sink or swim by their own investment process."

Liontrust has five pairs of managers each running different portfolios according to their own unique style.

For instance Gary West and James Inglis-Jones have an investment philosophy that exploits low-profit expectations from investors through a focus on company cashflow.

FE Alpha Managers Jan Luthman and Stephen Bailey, who recently joined Liontrust after the group acquired Walker Crips, manage their funds according to their analysis of the macroeconomic environment.

Fosh and fellow FE Alpha Manager Anthony Cross’s strategy is focused on finding companies with a distinct competitive advantage.

"Traditionally investors look for companies with tangible qualities such as cash on balance sheets, assets owned and levels of debt when looking for ideas, and these are seen as the biggest drivers of continued outperformance," Fosh explained.

"My process centres on intangible assets in three main areas: intellectual property, which gives a legally protected competitive edge, strong distribution networks and high levels of repeatable returns."

"We find companies that have a decent return on capital year in, year out, with allowances made for one-off investments. For this reason we tend not to invest in miners or banks because outperformance is at the mercy of macro issues which, from a stock-picking perspective, are impossible to forecast. We prefer companies that are very much the masters of their own destiny."

The process has paid off in each of the three funds the pair manages. The standout performer is the Liontrust Special Situations portfolio, which is in the top-decile of its UK All Companies sector over five years, with a return of 56 per cent.

Performance of fund vs sector over 5-yrs



Source: FE Analytics

Fosh says that one of the functions of his process is that volatility tends to remain well below the sector average.

"The companies that the process picks out tend to be of really high quality and this results in us having a very low turnover on the fund as well as some real long-term winners such as Right Move, Aggreko and Domino’s Pizza," he commented.

However, the manager acknowledges that this can lead to periods of underperformance during market rallies.

"The style does particularly well in recessionary times when investors most seek quality companies and is likely to fall short in fast-rising markets," he finished.