Under the Spotlight - Q&A with Fund Manager Anthony Cross - Liontrust Asset Management
As the UK and the rest of the World begins to emerge to a life now posing the threat of Covid-19, the financial marketplace continues to experience such unprecedented upheaval. Our Investment Committee is working continuously to adapt our portfolios to accommodate and protect against the global fluctuations and challenges presented by Covid-19.
Like our own Investment Committee, the Portfolio Managers of the funds we invest into are having to address, adapt and evolve throughout this period too.
We recently caught up with Anthony Cross of Liontrust Asset Management in a Fund Manager Q&A – a series we’re running, enabling us to provide our readers with insights into the strategies some of the managers within our portfolios deploy.
Who are the Economic Advantage Team?
Anthony Cross, Julian Fosh, Victoria Stevens, Matt Tonge and Alex Wedge
Anthony Cross, Julian Fosh, Victoria Stevens, Matt Tonge and Alex Wedge manage the Liontrust Economic Advantage Process.
Anthony, who was previously at Schroders, has managed the Liontrust Special Situations and UK Smaller Companies Funds since launch and he started working with Julian at Liontrust in 2008.
Julian has previously managed money at Scottish Amicable Investment Managers, Britannic Investment Managers, Scottish Friendly Assurance Society and Saracen Fund Managers.
Victoria Stevens and Matt Tonge joined the team in 2015. In Victoria’s previous role as deputy head of corporate broking at FinnCap, she built up an extensive knowledge of the smaller company investment universe. Matt had previously spent nine years on the Liontrust dealing desk, winning an industry award for his work in mid and small cap stocks.
Alex Wedge joined the existing Economic Advantage team in March 2020 from N+1 Singer, where he was latterly a senior member of the equity sales team.
Liontrust was named Global Group of the Year at Investment Week’s 2021 Fund Manager of the Year Awards. Anthony Cross and Julian Fosh are the 2020 FE fund info Alpha Managers of the Year and UK Equities Managers of the Year.
Both Anthony and Julian are AA rated by Citywire. Awards for the Special Situations Fund include being named Best UK Equity Fund in the 2019 Morningstar Awards and best UK Growth Fund at Investment Week’s 2018 Fund Manager of the Year Awards.
So let’s take a look at Anthony’s answers to our questions…
Fund Manager Q&A:
1. What’s the investment philosophy of the fund?
A fundamental principle of competitive markets is that profits regress to the mean. We believe that the secret to successful investing is to identify those few companies that have a durable Economic Advantage that allows them to defy this principle and sustain a higher-than-average level of profitability for longer than expected. This surprises the market and leads to strong share price appreciation.
Economic Advantage is the collection of distinctive characteristics of a company that competitors struggle to reproduce, even if those competitors have understood the benefits arising from those characteristics. In our experience, the hardest to replicate of these particular characteristics fall into the following categories of intangible assets:
1. Intellectual property
2. Strong distribution channels
3. Significant recurring business
Other less powerful but nonetheless important intangible strengths include: franchises and licenses; good customer databases and relationships; effective procedures and formats; strong brands and company culture. It is our key belief, backed by our years of experience exploiting Economic Advantage, that only distinctive and hard to replicate intangible assets can form the basis of a sustainable competitive advantage. These assets deliver pricing power, protect margins, and thus drive sustained profitability. The market rewards excess profitability, particularly when it is higher than consensus expectations.
2. Did the fund strategy change during the C19 pandemic and if so, how?
We have been applying the process for over 20 years, a period which includes previous sharp sell-offs such as the technology correction at the turn of the century and the financial crash of 2008. So investing through a period of volatility and uncertainty is not a new experience for us the team.
During these bouts of stock market turbulence, our strict adherence to investment process has served our funds well. This has also been the case during the Covid-19 pandemic and the market sell-off it triggered in early 2020. In volatile conditions, having a clear investment process is invaluable as its decision-making framework ensures we continue to take a rational approach to managing the portfolios.
One of the few small changes we made early on in the pandemic was to run a higher cash position. This gave us the opportunity to support our companies if fund raising was required. Our experience of past downturns, particularly the 2008 credit crisis, was that companies need to act quickly to secure funding if required. For our smaller companies, regardless of how well-funded they appeared, we wrote to their corporate brokers to impress upon them the importance of acting quickly if equity funding was needed.
3. How has the C19 pandemic impacted the way in which you operate?
Prior to Covid-19, we were all completely used to home working and therefore no significant changes needed to be made in the way we communicated thoughts and make decisions. Julian and I predominately worked remotely prior to the pandemic and will continue to do so.
We have found that the communication tools that we have all had to adopt during the lockdowns have been beneficial. Whilst we have always had good access to company management, it proved very simple via Zoom to have one to one or group meetings with companies we hold as well as possible new ideas. Whilst we missed the physical ‘eye to eye’ contact and some of the body language, these digital meetings were efficient for both management and us.
As lockdown rules have been relaxed, we have been able to spend more time in the office when necessary and have also had offsite team meet-ups.
4. With inflation rising, how do you see the potential of future rises in inflation impacting the fund?
The Economic Advantage investment process that we apply to our funds is very much ‘bottom up’, involving a detailed assessment of the attributes which are key to companies’ success over the long term and across the economic cycle. It does not make an attempt to predict short-term fluctuations in macroeconomic or political variables. However, we believe that companies with high and sustainable barriers to competition should be better able to weather exogenous shocks such as increasing inflationary pressures.
Another way of thinking about barriers to competition is in the form of pricing power; the ability to maintain prices and profit margins in a crowded and competitive market place. Pricing power not only insulates a company from competition, it also allows it to cope better with inflation. In simple terms, a company can pass on some or all cost inflation rather than having to absorb it through a reduction in profit margins. In more jargonistic terms, we would say that the company’s demand is relatively price inelastic.
5. What do you see as the outlook for investing in UK smaller companies?
The pandemic, as with other crises, has shown the importance of focusing on a company’s ability to trade through a downturn and its potential to emerge on the other side in a healthy position to take advantage of any subsequent upturn. In our view, the portfolio of companies held by the Special Situations Fund has strong barriers to competition, attractive market positions and a history of high returns, which should stand them in good stead. Moreover, once the dust settles from the Covid-19 pandemic or a ‘new normal’ is reached, these companies could be able to take share from weaker competitors who have suffered more or ceased trading altogether.
There has been some early evidence that many of the companies the Fund owns are likely to emerge from the Covid-19 crisis in a position of strength. While the pandemic triggered a large increase in the amount of capital-raisings undertaken by listed companies, much of this was to boost balance sheets and liquidity for businesses that were vulnerable to lockdown. By contrast, many of the Fund’s companies accessing new capital were doing so for proactive growth reasons such as for acquisitions and additional investment capital. By raising money from a position of strength (and at a more favourable price), these companies can accelerate market share gains or take advantage of lower valuation multiples when buying out weakened competitors
Another tailwind to the Fund’s holdings is likely to be the increasing digitalisation of the economy, a process accelerated by the pandemic. The Fund has a strong technology constituency, and we expect it to benefit from this theme.
The businesses in which the Fund is invested have largely proven resilient during the pandemic and continued to generate growth. Nevertheless, we would still expect them to benefit from a more benign backdrop if efforts to fight Covid-19 are successful in achieving something closer to economic normality.
We’d like to thank Anthony for his time and excellent insights provided.
At Fiducia we are continuously looking to deliver outstanding value and expertise to our clients, if you have any questions regarding your investment portfolio please do not hesitate to speak to a member of our team. We are a multi award-winning Chartered Financial Adviser based in Colchester, Essex. Our advisers will ensure you have the right investments to help you meet your financial goals, in a tax efficient way that works for you.
Information and opinions presented are correct to the best of our knowledge and belief, and have been obtained or derived from sources believed by Liontrust to be reliable. Liontrust Asset Management PLC (2 Savoy Court, London WC2R 0EZ). Liontrust’s standard terms of business apply.