Liontrust Responsible Capitalism Report 2024 - Flipbook - Page 101
STAGE
3
FUNDAMENTAL RESEARCH AND
SECONDARY SCORING
The team’s entire focus for the long-only investments is on
this Cashflow Champions list. The team then conducts
fundamental research on these stocks, scrutinising their
annual report and accounts.
Cash flow data and balance sheet changes are often
subject to large exceptional items or reflect a particular
business cycle or accounting change. The aim at this
qualitative stage is to make sure that the cash flow ratios
accurately reflect the investment opportunity the managers
are looking for.
They work carefully through all the accounts, notes and
annual commentary. They look closely for any changes
in accounting policies, unusual revisions to prior year
accounts, the focus of remuneration policy and the stated
forecasts for growth. The team wants to understand the
management culture of the company. They do not attempt
to understand a company’s operations in enormous detail
but do want a clear understanding of the importance
they attach to cash flow generation and forecast risk.
Companies are assessed according to four ‘secondary
scores’, refining their cash flow attributes and style factors
within the team’s screen:
STAGE
4
STAGE
5
• Cash Return: Stable businesses with robust balance sheets,
returning cash to shareholders through share buybacks,
debt paydown and dividends (shareholder yield)
• Recovering Value: Recovering
businesses
with
management focused on reining in capital expenditure
and imposing working capital control, eager to return
cash to shareholders. Investors are generally sceptical,
hence the low conventional valuation
• Contrarian Value: Companies that have experienced
prolonged tough trading conditions, with management
responding by restructuring and selling off assets. Investors
are very sceptical.
Once a shorter list has been generated through the application
of secondary scores, the fund managers undertake qualitative
analysis on these companies. The team:
• undertakes fundamental research, scrutinising
companies’ annual report and accounts
the
• updates the data with any changes stemming from
balance sheet changes impacted by large exceptional
items or reflecting a particular business cycle or
accounting change
• assesses the Group’s management culture
• Momentum: Businesses with strong momentum, high margins
(indicative of an economic moat) and self-funded growth.
• checks the MSCI ESG score for the stock to understand
if there are concerns about the company from an ESG
perspective
MARKET REGIME INDICATORS
The managers apply a set of key proprietary indicators which
allow them to designate the prevailing market regime. This, in
turn, allows the team to optimise portfolio construction, targeting
growth or value exposure as appropriate by emphasising
different secondary scores within stock selection. For long/
short portfolios, net market exposure is also dynamically
adjusted according to the market regime indicators. The key
indicators the managers analyse include valuations, investor
anxiety, corporate aggression and market momentum.
PORTFOLIO CONSTRUCTION
The final stage of the process is to select stocks for portfolios.
For long-only strategies, the managers believe the best
returns are achieved through concentrated portfolios of 30
to 50 stocks that are equally weighted at inception. The
managers focus on selecting stocks for portfolios from a
diverse list of different industries with the uniting common
thread of strong cash flows and the best secondary score
attributes as identified by their regime indicators.
Responsible Capitalism Report 2023 - 101