Liontrust has received FSA approval to remove reference to small and medium-sized companies from the investment objective and policy “on or around 14 June 2011”.
The fund’s investment objective had focused on investing in a concentrated portfolio of medium-sized and smaller UK companies’ shares in order to achieve long-term capital growth, though it was never restricted by either size or sector in its choice of investments.
The changes will not alter any aspect of the management of the fund; Liontrust says the change is indicative of the fund’s existing stock selection process.
“We believe there are some very cheaply priced stocks in the FTSE 100, and these are all big, liquid stocks – the likes of pharmaceutical companies and Unilever, for example", says Fosh.
Fosh also sees opportunities in the FTSE’s oil majors. “There is a value gap between the cost of capital and return on equity in some big oil stocks”, he says.
“The likes of Shell and BP are better companies than the market gives them credit for. They can cover their cost of capital in good years and in bad,” Fosh added, before acknowledging that BP’s recent corporate issues have cast it in a less favourable light.
Process
The pair’s Economic Advantage investment process has delivered consistently strong returns on the Special Situations fund, which sits in the UK All Companies sector and has produced top quartile returns year-to-date and over one, three and five years.
That process focuses on three categories of intangible assets: intellectual property, strong distribution channels and significant recurring business. Fosh points to GlaxoSmithKline as an example of how the fund is playing the first category and cites the likes of Unilever and Aggreko as companies with strong distribution power. A further screen is the ability of such companies to consistently cover the costs of their capital.
It is ROE that Fosh and co-manager Anthony Cross prefer to look to when assessing companies.
Says Fosh: “price-earnings ratios are often not the best gauge for companies – PE is a very static measure. A lot of companies look expensive on those terms”.
The fund has recently added Smiths Group to its portfolio, Fosh citing its potential as a takeover target and its strong trading performance, but the pair continue to see miners and banks as two sectors that do not fit their investment process.
“Turnover in the fund remains very low”, says Fosh. “We don’t betray the process. The style has produced good returns and good risk-adjusted returns and we are not rushing to change that”.
