Taking a macro approach to investing

14 March 2014 - Liontrust Macro Equity Income fund was a new entry onto the Chelsea Selection this month. It has a Chelsea Risk Rating of 5. In this fund manager interview, the co-managers, Stephen Bailey and Jan Luthman, outline their investment process, share with us the current themes of the fund and discuss the sustainability of the UK economic recovery.

Stephen Bailey and Jan Luthman, co-managers of the Liontrust Macro Equity Income fund

You take a macro thematic approach to running the fund. What are the advantages of this approach? 

We think that by looking at macro-thematic issues – by which we mean the major political, social and economic events that are shaping, not just this country, but the rest of the world – we have a far better chance of identifying asymmetries of information that result in investment opportunities. 

As we all know, regulators quite rightly seek to reduce the opportunity to obtain unique stock-specific information. Price sensitive, stock-specific news is announced on the regulatory news service (RNS), meaning that everyone has the same information. Themes, however, are fundamentally different creatures for which there are considerable asymmetries in terms of awareness, understanding and interpretation.

What are some of the current themes in the fund?

One of the fund’s biggest exposures currently is to a global healthcare theme. We think there is the potential for a substantial rerating of the pharmaceuticals sector as it is increasingly viewed as a growth rather than income sector. Following something of a ‘lost decade’ the sector is finding growing political support, a more efficient research process and is successfully negotiating the so-called ‘patent cliff’. 

Another example would be our theme ‘Prudence and her children’, which has evolved out of the UK government’s commitment to financial prudence and the favourable environment for the establishment and expansion of smaller challenger banks orientated towards retail and Small & Medium Enterprise (SME) clients. We are playing the increased competition for retail deposits through a holding in comparison website Moneysupermarket.com. We also have challenger bank exposure through Secure Trust Bank and Paragon Group – a buy-to-let lender that last month launched a Bank subsidiary – while we are avoiding the incumbent banks completely as they are likely to suffer from increased competition. 

You mention that you don’t hold any incumbent banks - are there any other areas of the market you are avoiding?

Yes, we are avoiding utilities and tobacco – both large sectors of the UK market and traditional staples for income funds. We think that they have too much political risk, which is only likely to increase as we edge towards a general election.

The political risks to investment in the utilities sector are brought to life when one considers how many more potential voters are customers rather than shareholders of power utilities. Given such an imbalance, the temptation for politicians to pander to consumers is obvious, as illustrated by Ed Miliband’s promise on price freezes last year.

For tobacco stocks, we fear that the tide of opinion in emerging markets – the growth engine that has preserved tobacco companies’ business over the last decade – seems to be turning in favour of anti-tobacco legislation. This could mean that the sector can finally be consigned to the ex-growth bucket. Tobacco stocks look to be something of a yield trap and we have avoided them entirely since late 2012.

Have you added any new themes recently?

The most recent major theme to develop in the fund is designed to take advantage of favourable conditions for the central London property market. London has a long established standing as the commercial bridgehead into Europe and as a centre of international finance, and this is a status cemented by the continued importance of English as the lingua franca of business. In addition, capital values and rental growth in the commercial sector are underpinned by scarcity of supply and the significant lead times required for planning permission and construction. 

These trends seem to have been recognised by overseas buyers, who are flocking to invest in the area. The sovereign wealth funds of China, Singapore, Norway and Kuwait are among those to invest in prime London real estate recently. We have christened this theme as ‘London Calling’ and have enacted it within the fund through a number of commercial and residential real-estate plays such as British Land, Capital and Counties and Shaftesbury.

Do you believe the UK has started a sustainable recovery? 

The UK has clearly enjoyed something of a recovery and we have been willing to selectively increase the fund’s exposure to the domestic economy as the recovery has gained momentum, but in general we prefer to be invested in companies and sectors which are international in their sales profile – such as telecoms and pharmaceuticals – or whose operations are confined to the UK but benefit from international demand, such as the real estate stocks which form a core element of ‘London Calling’.

What are the threats to any recovery?

Well, we cannot help but notice that much of the expansion in domestic activity has been driven by expansion in debt, and not by growth in ‘real’ earnings. In the long term that is clearly unsustainable. In the meantime, ‘austerity’ has not gone away, and social disharmony seems likely to be further inflamed by political rhetoric in the run up to the General Election in 2015. 

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Stephen's and Jan’s views are their own and do not constitute financial advice.