Liontrust Responsible Capitalism Report 2024 - Flipbook - Page 92
Global Fundamental team’s investment process
GFT applies a number of investment approaches to manage funds.
At the core of the team’s investment approach is deep, fundamental
research (including the explicit incorporation of material ESG
factors) driven by original thinking to find share price inflection
points that can drive long-term performance. The managers look for
distinct inflection points and drivers of returns for the different funds.
GLOBAL EQUITY
• The fund managers’ process is based on the philosophy that
change creates investment opportunities.
• The approach accepts the uncertainty associated with change
and seeks to identify, through deep analysis of a company’s
fundamentals, when change has created an asymmetry of
potential returns to the upside. The changes that the companies
within the fund seek to exploit sit along a range.
• At one end is External Change. These changes originate outside
of a company and can result in significant beneficial tailwinds.
The catalysts for External Change are wide ranging and may
include the arrival of a new technology that is transforming an
industry, environmental change or demographic change that may
take years to work through.
• At the other end of the range is Internal Change. These changes
originate from within a company and enable it to re-engineer
itself so that its future is very different from its past. The catalysts
for Internal Change may include new management teams,
restructuring or pivoting to new business models and products.
• The team seeks to identify companies that can exploit multiple
change catalysts because this is often when change is most
pronounced and the potential opportunity most advantageous.
EQUITY INCOME
• The strategy seeks to provide a growing dividend yield alongside
long-term capital growth.
• The fund managers focus on high-quality dividend paying
companies. The managers apply a screen to identify quality, with
each holding demonstrating five characteristics: i) Strong and/or
improving returns; ii) Clean, cash generative financial model; iii)
Prudent balance sheets; iv) Skilled, motivated management; and
v) Attractive underlying markets.
• Following the screen, the research process involves operational
due diligence to understand the company, its Competitive
Powers, industry position and key risks and opportunities and
financial diligence to understand a company’s key value drivers,
sources and uses of cash and the potential scenarios ‘priced-in’
at a moment in time.
• Competitive Powers are strategic characteristics that the
managers believe underpin persistent profitability and enable
quality to endure. There are seven Competitive Powers (scale
economies, network effects, counter positioning, switching costs,
branding, cornered resource and process power) and stocks
within the Fund must have at least one of them.
• The Fund is actively managed and constructed with 30 to 50
stocks. Typical target stock weightings are of between 2% to 4%
of NAV. The Fund will typically have a high tracking error and
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active share against their respective benchmarks, which means it
takes active positions against the index.
• The portfolio is broadly equally weighted across two distinct,
but complementary, investment silos – Repeatable Cashflow
and Dividend Growth at a Reasonable Price (GARP). This helps
mitigate style bias and produces balanced portfolios, with the
potential to perform across different market and economic cycles.
• Repeatable Cashflow: With this silo, the managers focus on more
mature companies, which are directing more of their cashflows
to dividends.
• Dividend GARP: With this silo, the managers focus on businesses
in the growth/scale phase of the corporate lifecycle, generally
reinvesting a higher proportion of their cash flows to drive growth.
• The Fund invests across the market-cap spectrum and the manager
can invest a maximum of 20% of the portfolio in overseas stocks
UK EQUITY
• The fund manager applies a flexible investment process, which
avoids inbuilt style biases and enables the team to pursue
investment alpha regardless of economic and market conditions.
• The fund manager focuses on shares that, in their view, offer
the best risk/reward profiles, while ensuring the portfolio is well
balanced and risk is carefully targeted.
• The fund manager is first and foremost a stock picker although
macro-economic research is also woven into the team’s bottomup research.
UK FOCUS
• The fund manager focuses on building a concentrated portfolio
of high conviction investment ideas.
• The fund manager focuses on what they believe to be companies
with a durable moat which protects their franchise and hence
returns, which are typically capital light, high ROIC, cash
generative businesses with structural growth.
• The fund manager is first and foremost a stock picker although
macro-economic research is also woven into the team’s bottomup research.
EMERGING MARKETS
For these funds, the team focuses on emerging leaders, which are
companies that are well positioned to prosper in a world of rapid
change. Given many disruptive products and business models have
arisen in developed markets, their introduction and adoption rates
across emerging markets are driving considerable growth at a
consumer and commercial level. Therefore, emerging leaders alone
have the resources and capabilities to survive and prosper given
the huge levels of disruption seen across the whole economy. A
common feature is their ability to create value for customers (either
via a lower price and/or higher quality product and management
that are focused on driving continuous improvement) and capture
value for itself and its shareholders via a sustaining moat (such
as unique assets, efficient scale, technology leadership, R&D
investment and customer switching costs).