This £242m global income offering from Liontrust is co-managed by Samantha Gleave and James Inglis-Jones.
Their objective is to deliver a high level of income for investors, with capital values “keeping pace” with inflation across a medium- to long-term investment horizon, and to grow the dividend “modestly”, Ms Gleave notes. The fund’s mandate changed in 2014 from investing in UK stocks to global equities, which she says explains its high yield.
The managers employ the Liontrust cashflow solution investment process in running the fund. Ms Gleave elaborates: “This process is based on the belief that the most important determinant of shareholder returns is company cashflows, which determine the ability of a business to grow in a self-sustaining way and the ability of a firm to return money to shareholders through dividend yields and share buybacks.”
She explains: “[We set out] to find companies that generate significant free cashflows from their asset base, and are lowly valued on these cashflows while being run by company managers who allocate cash in an intelligent way. Before embarking on in-depth qualitative analysis, we apply a simple quantitative screen using two measures of cashflow. We combine these measures to create a composite ranking of our universe of companies, with only the top 20 per cent – the top quintile – of this list qualifying for further qualitative analysis.”
The managers have begun employing new “secondary” scores in the screens in the belief that these will help to filter the universe of high-yielding stocks to help pick the “very best opportunities”. Ms Gleave continues: “The secondary scores rank companies on four types of cashflow characteristics: growth, cash return, recovering value and contrarian. We have found that ‘intersection stocks’ have shown particularly strong returns historically.”
The fund’s managers are in the midst of the investment process’s annual review, which requires analysis of historic cashflows and balance sheet developments found in companies’ annual reports and accounts. “The majority of portfolio changes are typically implemented in the second calendar quarter of the year following completion of the review,” she points out.
The fund is considered a level five on the risk-reward spectrum, with ongoing charges of 0.91 per cent applying to the I-clean share class.
The fund’s performance has only slightly lagged the Investment Association Global Equity Income sector across three and five years, delivering 47.12 per cent against the sector average of 48.99 per cent in the three years to April 14. But data from FE Analytics shows that across 10 years, the fund has only managed a return of 69.94 per cent compared with an impressive average of 125.03 per cent by the sector.
Ms Gleave identifies two factors as having held back the fund’s relative performance as “the fund’s equally weighted structure in an environment of strong relative returns for large caps and its lower weighting to the US market compared with many peers and global indices”. She says: “Strong performance from large-cap stocks tends to create a more difficult environment for the fund due to our equally weighted strategy, which typically causes us to have a bias to smaller- and mid-sized companies when compared with a capitalisation-weighted index. The US market has rallied and the dollar has strengthened relative to sterling, while the US comprises 60 per cent of the MSCI World index but only about 3 per cent of the fund. The portfolio is exposed overwhelmingly to Europe, which offers some of the most attractive valuations in the world.”
Ms Gleave believes the fund has benefited in recent years from growing dividends and special dividends in the retail and technology sectors, in particular from companies such as Next, Hugo Boss and Micro Focus International, and she expects this to continue. “Dividends from companies in consumer-related sectors should benefit from the positive impact of the low oil price on disposable incomes,” she says. “In 2014, we increased the fund’s weighting to the telecoms and utilities sectors. We felt there was an attractive valuation opportunity as the benefits of corporate restructuring and cost savings came through.”
EXPERT VIEW
Juliet Schooling Latter, research director, Chelsea Financial Services
This portfolio changed its mandate a couple of years ago from a UK equity income fund to a global vehicle. It is predominantly invested in the UK and Europe, though, with a huge underweight of 3 per cent in the US. It has a very different make up to the Invesco Perpetual fund, with more in telecoms and much less in industrials. The yield is more attractive at 4.8 per cent, but the style of the fund and the investment process require investors to be patient. It can underperform for periods of time, although I believe it will reward investors in the longer term.
