The Pride - Issue 5 - Autumn 2021 - Magazine - Page 14
INVE S T MEN T U P DATE S
UK EQUITIES
Fund managers: Anthony Cross, Julian Fosh, Victoria Stevens, Matt Tonge
Whether it was Homebase being sold to Hilco, Asda merging with Sainsbury’s, or AT&T’s
acquisition of Time Warner, M&A has barely been out of the headlines this year, say Liontrust’s
Economic Advantage team.
Seeing a portfolio holding succumb to
a takeover approach can be bittersweet
for a fund manager, sparking a range
of emotions ranging from vindication to
frustration. It is, however, an experience
that we are increasingly familiar with in
our team. Since we began managing
the Liontrust Special Situations Fund in
2005, we have seen 66 companies
exit the Fund; a third of these have been
the result of takeovers. NEX Group and
Fidessa were the latest to join this list
over the summer.
Our investment process is all about
finding companies with three core types
of intangible asset: intellectual property,
recurring revenues and distribution
networks. We seek out these assets
because they are difficult to replicate;
the theory being that they can confer
an enduring competitive advantage,
as high profitability cannot be eroded
away by copy-cat market entrants. It is
precisely because these assets are so
hard to replicate organically that they
often appeal to corporate acquirers. The
only way to get hold of these assets is
to acquire the company that owns them.
Upon receipt of a bid, the first thing we
need to do is evaluate how the implied
business valuation matches against our
assessment of the company’s long-term
potential worth. If it is in the same ballpark, then taking the short-term takeover
premium boost could prove attractive. If
an offer level is significantly below our
assessment of a company’s value, then
the bid is clearly less welcome. This is
particularly the case when the bidder is
acting in an opportunistic manner, taking
advantage of market turmoil or companyspecific short-term setbacks which have
knocked a share price disproportionately.
From a practical perspective, we always
have a pipeline of potential investments
we are monitoring in order to verify their
possession of Economic Advantage.
When one of our stock picks prematurely
matures in the form of a takeover, we can
view it as an opportunity to promote one
of our pipeline stocks at the other end
of the investment lifecycle. Companies
being taken out by acquirers is therefore
less a necessary evil, and more of a
pleasant by-product of our investment
style and welcome vindication of some
of our stock picks.
EUROPEAN EQUITY INCOME
Fund managers: Olly Russ, Oisín O’Leary
Liontrust’s European Income team take a look at two key trends affecting the outlook for the region.
2018 has seen the emergence of
two trends which we think will have a
big part to play in European markets
for some time to come: a recovery
in ‘value’ stocks and a resurgence of
market volatility.
Value stocks – those which trade on
low share price metrics such as price/
earnings – have been unloved for almost
a decade, with investors favouring
‘growth’ stocks, which trade on higher
share price valuations to reflect the
expectation of greater growth in
earnings. We are, however, starting to
see an inflection in the performance of
value stocks. This is because inflation,
interest rates and bond yields are all
14 - T HE P R I DE - Issue 2 Winter 2018
nudging up, which reduces the ‘net
present value’ of future earnings from
growth stocks, and makes value now
more attractive.
The rise in market volatility is linked to
the rotation towards value stocks: both
trends have arguably been triggered
by rising bond yields. This in itself can
probably be attributed to the gradual
removal of the remarkable moneyprinting programmes which were
introduced globally following the 2008
financial crisis. These quantitative easing
(QE) measures flooded financial markets
with money, having a smothering effect
on volatility and encouraging smooth
asset price inflation.
Europe is now set to end QE at the end of
this year while the US has already ended
its programme and is in fact starting to
reverse it by withdrawing its prior money
injections from the financial system. This
leaves Japan as the only major economy
with an active QE programme.
It may seem strange to celebrate the
return of volatility to markets, but it is
important to remember that volatility was
so low previously due only to the artificial
effect of QE. A reversion to company
fundamentals as the primary determinant
of share prices should be good news for
stock pickers such as ourselves.