MARCH 2024
Flexibility and Balance: Liontrust European Dynamic
This fund is a relatively new addition to our buy list, having been added just over a year ago in January 2023. In anticipation of an increase in our portfolios’ allocation to European equities, we decided to find an active fund capable of providing returns in excess of the benchmark, over an investment cycle.
To be held through a cycle, a fund must demonstrate an ability to outperform the benchmark in a range of market conditions. We often talk about Growth investing (buying businesses expected to grow faster than the index) and Value investing (buying businesses for less than their intrinsic value). Depending on market conditions, often one or the other of these styles prevails. Liontrust European Dynamic has a proven track record of outperforming in both scenarios. The green bar below shows the returns of the fund when Value or Growth have led, and the gold bar shows the returns of the benchmark. We can see it has beaten its benchmark in both cases.
In addition to Growth and Value, you may hear us talk about bottom-up and top-down investing. Bottom-up investors will tend to avoid macroeconomic decisions, and instead focus on business fundamentals and valuations on a stock specific basis. Top-down investors will prioritise macroeconomic factors, such as GDP, inflation, or interest rates, over fundamentals. Liontrust European Dynamic blends the two, selecting their pool of stocks based on fundamentals, and then tilting the portfolio towards certain factors, or styles, depending on the environment. This can lead to the portfolio drifting between the Growth and Value styles we discussed.
Their bottom-up analysis is based around the thesis that the most cash generative businesses outperform over time. The chart below compares returns from the worst fifth of business based on cashflow, the market, the best fifth, and the companies Liontrust favours. Choosing more cash generative businesses (the green/second-top line) clearly provides a significant performance benefit, which is extended further once the fund’s fundamental analysis is incorporated (the orange/top line).
Overlaying their macroeconomic models with this fundamental research has built a persistent record of outperformance. One which we feel they can continue moving forward. A more volatile investing environment may produce more opportunities for their macro process to enhance returns. Unstable geopolitics, greater inflationary pressures and higher interest rates will likely contribute to stock market volatility and reward the best active managers; more so than through the 2010s. As with many active managers, they are benchmark agnostic, meaning they run the risk of looking significantly different to their target benchmark. But this deviation is what we pay them for, and to make returns in excess of their fees requires a level of differentiation from their benchmark. This also improves diversification, as they look different not only from the index but also from peers.
All in all, this is a good fund to own at any point in the business cycle. Using the team’s fundamental research as well as the top-down analysis positions them to outperform their benchmark in most environments. This flexibility and balance between two different approaches is what makes this a core holding within European equities.
This commentary was prepared by Ollie Rubinstein.
Ollie is an Investment Analyst, responsible for meeting and researching fund managers, assisting all teams with data queries and researching the macro-economic side of investing. Having recently graduated from Bath University, his interest in numbers and background in economics gives him an extra level of insight. Keen to continue his professional development, Ollie is currently studying for his IMC and CFA exams. Outside of work, Ollie enjoys cooking, rock climbing and music; as well as playing the guitar, he is an accomplished singer, having performed alongside a BBC Young Chorister of the Year.