Luthman and Bailey tell Dan Jones how political risk affects investment strategy and why their macro-thematic style is more than a short-term idea.
After ten years at the helm of their UK equity income fund, Liontrust’s Jan Luthman and Stephen Bailey have reached a simple conclusion: it is “very difficult” to add value at a stock-specific level.
Instead, the pair have employed a macro-thematic investment style to construct their portfolio, and with some success – Liontrust Macro Equity Income is top quartile in the UK Equity Income sector since launch in October 2003.
Numbers are also strong on a longer view – the fund has returned 122.9% in the five years to 18 October, according to Morningstar, compared with an IMA sector average of 106.9%.
Liontrust duo return to pharmas
Over three years, the fund’s return is below the sector average, at 36% compared to 39%, but performance has picked up again this year, with a gain of 23.7% against a sector average of 22.2% over the past 12 months.
Though their investment process has not changed, the past decade has seen a significant shift in many aspects of Luthman and Bailey’s thinking.
Of most recent relevance, given politicians’ comments on the utilities sector, is the problem of political risk, and which sectors it impacts. The duo discuss this issue and other aspects of their thinking below.
Your largest overweight is currently to pharmaceuticals, a sector in which you were zero weighted for many years. What has changed?
Pharmaceuticals is a sector we are expecting to be re-rated. The rationale behind this is the degree of political acceptance now enjoyed by the sector. At a stock-specific level, we are also starting to see a gradual unbundling of non-core activity.
The likes of GlaxoSmithKline want to go back to focusing on their core pharmaceutical business, as can be seen by its ambitions to sell its Lucozade arm. These companies are also now working with government-sponsored entities, a sign they are back in political favour.
Where do you see political risk now emerging?
We have held nothing in the utilities sector since last year, because of the political risks, such as the environmental obligations being placed upon them by the government, and that is now apparent to everyone.
Only in the last few weeks have politicians come into the open on the subject, but we suspect a number of our peers are now looking at political risk, and lowering utilities in favour of things like pharmaceuticals.
This article continues…
