Liontrust – London

Liontrust was launched in 1995 and listed on the London Stock Exchange in 1999. Today, there are seven teams that invest in global equities, sustainable investment, global fixed income, and multi- asset. A third of Liontrust’s AuMA is in sustainable investment. There is no single house view. AUM are $27.8 billion as at 31 December 2023. The firm is a signatory to the United Nations Principles for Responsible Investment (UN PRI).

The Liontrust GF Sustainable Future US Growth Fund was launched in July 2023 and is managed by Chris Foster, Simon Clements, and Peter Michaelis. It is an Article 9 fund and focuses on 35 – 55 stocks.

Chris Foster joined Liontrust in April 2017 as part of the acquisition of Alliance Trust Investments (ATI). Chris had initially joined ATI through the management training programme after graduating with a First Class Honours degree in Economics and Mathematics from the University of Edinburgh. Chris is a CFA Charterholder. Chris has ten years’ industry experience and has been part of the Liontrust Sustainable Investment team for eight years.

Co-fund managers Simon Clements and Peter Michaelis also joined Liontrust in April 2017. Prior to managing funds at ATI for five years, Simon spent 12 years at Aviva Investors where latterly he was Head of Global Equities. Peter has managed Sustainable and Responsible Investment portfolios for over 20 years and was previously Head of Sustainable and Responsible Investment at Aviva Investments.

In recent years, Liontrust has made a number of acquisitions such as Majedie and Neptune, how are acquisitions integrated?
Each team is very much independent from the rest of the organisation. Our team joined in April
2017 and has been kept as a separate team to those other acquisitions. We don’t have a CIO and we don’t have a house view. It’s been very seamless for us – the support services we get from Liontrust, the sales, the marketing, the compliance, the risk, the performance stuff and all the distribution is unchanged.

Does your fund have a target for AUM?
We don’t have a firm target, but you want the fund to be at a scale where it is self-supporting. The fund launched in July 2023 and had a pretty good start. (The best time to raise money also tends to be the hardest time to raise money, you want to raise assets following a period of difficult performance and when sentiment is negative).

Describe your investment style.
Quality growth and imbedded sustainability which leads us to companies exposed to structural
growth. We believe the world is becoming cleaner, healthier, and safer and we want to own
businesses that are helping the world make that transition.

3 mega trends we invest behind:
Better Resource Efficiency. Improved Health. Greater Safety and Resilience (there are 20 themes within these three mega trends).

Our investment process looks to find sustainable companies that we believe have better growth
prospects and are more resilient than the market gives them credit for. We use this
underappreciated advantage to deliver outperformance.

Active share ratio?

Which screens do you use?
1. Thematic analysis – identifies companies with strong and dependable growth prospects due
to alignment with our sustainability themes. Ideas generation – we are looking for
companies that have tailwinds, companies in a growing rather than shrinking sector. We
look at % of revenues, at least half of a business must have exposure to one of our
sustainable investment themes.
2. Sustainability analysis – focuses on those companies with excellent management and core
products or services that contribute to society or the environment. We have been rating
companies on our proprietary matrix rating for over twenty years and we focus on the key
environmental, social and governance issues most relevant to the company and industry in
3. Analysis of business fundamentals – selects only those companies positioned to deliver
high returns on equity. We use cashflow return on capital at a portfolio level. At end of
December 2023, it was 33.4% for portfolio vs. 27% for benchmark (source of data is Liontrust and Factset).
4. Valuation analysis – determining that the shares of the company should be worth
significantly more in the future. We are looking for at least a 10% annual absolute return in a
company over a period of five years for it to be eligible for the fund.

We believe we have two major competitive advantages. Firstly, we fully integrate sustainable
analysis rather than outsource this process. Secondly, our time horizon is five years. For US equities, in the 1970s, the average holding period for stocks was over five years. By 2022, that had fallen to nine months. We see this as an opportunity as there are so many market participants focusing on the next quarter, whereas our job is to evaluate what a company will be worth in five years. We zoom out from near-term noise and market stress and focus on the long-term potential in the businesses we invest in.

Average market cap?
The top 50 stocks in the MSCI make up half the index. We only held six of those at launch so we will have differentiated results from the index. To be active managers you must invest differently, otherwise you will just get benchmark returns. The great thing about the timing of our launch in July 2023 was that mid-caps and small-caps had been left behind (by the megacaps) and that’s where we see the valuation opportunities. We have a mid-cap bias, with c. 36% of the fund invested in companies with less than $30 billion market cap.

Average holding period?
Five years.

As you are an Article 9 fund, which sectors can’t you invest in?
Companies with exposure to diesel engines, coal and oil, natural gas, tobacco, A&D, gambling and nuclear.

How do you split sectors?
Every fund manager is also an analyst, so each sub-theme has an analyst covering it. For example, I cover “saving for the future” which is all about the savings gap, so I cover Charles Schwab (held in the US and global funds), Avanza, which is a Swedish version and AJ Bell, which is held in the UK funds.

We have a collegiate approach – it’s a team effort. The team was founded in 2001 and there are
some long tenured members of the team. We meet each Friday morning to go through the
sustainability analysis of a company, a new idea, or an annual refresh. (We refresh every holding in the portfolio at least once a year). If a company is presented on a Friday for sustainability analysis, on a Tuesday we collectively go through the business fundamentals and the valuation. However, the fund managers make the final decision about how a stock fits into the portfolio (size of position, timing of purchase etc).

We are back in the office three days a week minimum as there are tangible benefits to being in the office, particularly given we have been reinvesting in the team in recent years and have hired three new analysts on both the equity side and fixed income side over the past three years.

Discuss some of the larger holdings in your portfolio.
Thermo Fisher Scientific (NYSE:TMO) 4.2% of the fund. It is exposed to “enabling innovation in
healthcare” – at 13% of the fund it is our biggest theme. Plus, there’s lots of valuation excitement as the healthcare sector has been hit by events such as normalisation of the pandemic, weakness from China and finally, the weight loss drugs that spooked the sector. Thermo Fischer is a life science tools company, providing analytic instruments and services to laboratories. It has a substantial installed base which generates an attractive stream of consumable and service revenues. ThermoFisher is the ‘picks and shovels’ of innovation in healthcare – a way of getting exposure to an exciting, growing area of the economy without having to pick a life changing drug. We also own Waters (NYSE:WAT) and Agilent (NYSE:A). If you are long-term and bullish on innovation, and the spend from laboratories and pharmaceutical companies, then these companies are a fantastic way to get exposure to that theme.

American Tower Corporation (NYSE:AMT) 3.4% of the fund. It owns >220,000 wireless
communications and broadcast towers worldwide but as the name suggests, the US is its biggest geography. These towers are used by telecoms companies as the backbone infrastructure for their mobile networks. As American Tower is independent, the same tower can have multiple tenants which enables a higher density of coverage and a more efficient network. It is clearly a huge area of growth in terms of the demand for connectivity such as 5G and the IoT. This company is exposed to our “connecting people” theme.

Markel Group (NYSE:MKL) 3.3% of fund. One of the benefits of investing in the US is the depth and size of the market. Markel’s market cap is $20 billion but it’s a company that not everyone is aware of. Its predominant business is to provide specialist/super niche insurance, for example, for musical festivals. This plays into our “insuring a sustainable future” theme given the safety net that insurance provides (no need for large cash reserves). Markel also deploys the capital from its premiums in its own equity book and buys private companies in a variety of industries which offsets the cyclicality of the insurance industry.

Palo Alto Networks (NASD:PANW). It would be a much larger position, but the valuation holds us back. We’ve held it since 2017/18 in the global fund and it has been an incredible investment. We believe it has become a platform in much the same way that Microsoft has. Cyber security is so difficult/complex for companies to understand/manage and Palo Alto has become the platform to outsource that business to. “Enhancing Digital Security” is the theme Palo Alto plays into, and we think that’s a huge opportunity as the world becomes increasingly digital and the attack surface broadens (desktops, laptops, mobile phones, printers, CCTV etc). Add AI and the complications that poses from a cyber security risk and the growth is unlikely to abate, so it is an exciting area to be invested in.

Do you like to meet management before you buy a stock?
We try to but it is not always practical. We really like to understand the culture of an organisation and believe this is hugely overlooked by the market. It is difficult to put culture into a cell in Excel and hard to model. If you are going to own a company for five, ten or fifteen years, then culture really matters. You get a good feel for the culture by visiting HQ but also from speaking to people who used to work there.

Preferred method of meeting management?
Generally, a one-on-one at HQ as people are more relaxed, you can get a tour etc. Edwards
Lifesciences is a holding we visited in December. It makes heart valve replacements and following the visit we now have a better understanding of what it’s like to work there and the manufacturing process, which is largely by hand. You don’t tend to get such insights from attending a large conference.

Why should companies meet you?
We have a five-year time horizon and do a lot of work before we make an investment. We are
patient and supportive of long-term actions that the management team may make vs. potential
short-term difficult decisions to cement the future. Our meetings are very much focused on the
long-term potential of the business and where possible, we try to help the company improve their ESG disclosure.

An edition of this interview appeared in IR Magazine (March 2024).

Leave a Reply

Your email address will not be published. Required fields are marked *