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IA 100 Club: Liontrust duo back ‘animal spirits’ metrics

IA 100 Club: Liontrust duo back ‘animal spirits’ metrics

Liontrust duo Samantha Gleave and James Inglis-Jones are maintaining near-record levels of market exposure in their long/short fund, as the pair’s indicators point towards a relatively stable period for equities.

The absolute return GF European Strategic Equity fund began 2016 with a record-low level of net exposure, at 20 per cent, but by the end of the year the situation had reversed with the vehicle’s exposure at more than 60 per cent.

Ms Gleave said both positions had helped bolster the fund’s returns over the past 18 months.

“It’s a combination of stock selection and our exposure to market – and how this has varied – that has helped performance,” Ms Gleave said.

The MSCI Europe index shed 10 per cent in the opening weeks of 2016, though the duo’s fund was only down 0.6 per cent. However, by the end of the year the index was up 18 per cent, while the fund had gained just 5.4 per cent over the same period.

Ms Gleave said the vehicle’s indicator-driven, asset-allocation method had worked well.

The team uses market metrics to help dictate both short and long exposure. Shorts are decided using what Ms Gleave termed an “animal spirits” metric, measuring corporate aggression with a higher level, meaning stocks might be ripe for shorting.

The fund had a gross short exposure of 41 per cent at the end of June 2017. 

Ms Gleave said the metric showed the levels were in “normal territory”, a positive sign for markets in general.

On the long side, the managers study a trend indicator measuring momentum in corporate earnings, as well as investor sentiment. Both were pointing towards sensible rises in the market, Ms Gleave said.

The fund’s recent performance has also been driven by increasing long exposure to the energy, mining and industrial sectors, all of which benefited from a global cyclical upswing in the second half of 2016.

A fundamental review of the product’s universe heralded change. Once a year the team studies financial performance and data across all the fund’s potential investments, with a view to making changes to both the long and short books.

“We were short energy at the end of 2015 but have moved to more positive levels,” Ms Gleave said. 

“Valuations were incredibly low and valuation dispersion was wide – that’s a contrarian indication. But valuations are still attractive, now as much as two years ago. Our market signals not only help decide the size of the long and short books, but also the composition of the long book. 

“We have a slight tilt to momentum stocks, businesses with good revenue growth that exceeds investment plans so they can return value to shareholders.”

Similarly, the short book is now more exposed to smaller biotechnology firms in Europe.

“They’re burning through cash, and expectations for returns are very high,” she added.

The Liontrust fund has also retained a value tilt in the long book, but has changed this from the contrarian play in energy made last year to a strategy that focuses more on “recovering value”.