Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I am joined today by Stephen Bailey, Manager of the Liontrust Macro U.K. Growth Fund.
Hi, Stephen.
Stephen Bailey: Hello.
Wall: So, we're here today to talk about your three stock picks. But in a different way with you because you are not a bottom up stock picker, you let macro themes determine the areas to invest. So with that in mind, what's the first stock you wanted to talk about?
Bailey: I think perhaps Virgin Money (VM.) is one of those stocks which we've actually done rather well on over the last few months. But it is part of this broader theme on challenger banks and essentially we see the benefit of these new businesses, these new entrants to the U.K. market expanding their lending profile into an area which is perhaps been ignored or perhaps even vacated by some of the larger incumbents.
Virgin Money in particular we look at a period now particularly post-election where we see perhaps prospects for the housing market remaining, I think fairly positive. With that I think the mortgage market looks rather buoyant.
Even today we've had some encouraging figures on that mortgage lending. Virgin Money is there to exploit this business. It's got some very good links with mortgage brokers and of course with the new rules and regulations on mortgages, I think the days of the mortgage broker have actually returned to the U.K. market and Virgin seems to be one of those companies, which has got a very good positioning.
Wall: Are there any risks associated with Virgin because of course, is a challenger bank, it doesn’t have that legacy of PPI fines and LIBOR fixing. But it is still a bank, which people are nervous about. I mean are there – what are the risks associated with it?
Bailey: There is always risk associated with any kind of equity investing. But to be honest, I think if you look at the risks, I think perhaps the risk profile is actually greater with the incumbents. I think perhaps the public perception of the new challengers is actually far more favorable than it would it would be for the incumbents.
Wall: What's the second, you wanted to highlight.
Bailey: Legal & General (LGEN), we think is one of the big beneficiaries of the liberalization that's happening in the pensions industry. And essentially what we're seeing is, the government has sort of recognized the sort of the need or requirement to sort of shift responsibility away from its balance sheet and actually put that responsibility back on the individual or indeed the corporates and Legal a great example of a company, that’s set to benefit particularly with companies moving away from defined benefit scheme and actually moving towards, defined contributions schemes.
And with that in mind, you know Legal & General have got a very, very good bulk annuity business, which we think is actually set to prosper.
I think from a shareholder perspective, I think going forward, you can look forward to perhaps a period of somewhat rather decent dividend growth and indeed profits growth for perhaps the next two or three years.
Wall: That’s quite interesting one because Budget 2014 when George Osborne first announced that he was scrapping compulsory annuity purchase. Overnight, share prices of all those large assurance businesses Aviva and Legal & General fell very heavily because the understanding was well, a large proportion of that business is null and void as you were. But you were saying actually the flip side of that, is they can actually see this as an opportunity.
Bailey: Absolutely we actually weren’t owning any of these businesses at the time, it wasn’t because we predicted what was happening in the budget and initially, in fact on that afternoon, these share prices fell exceptionally quickly.
Most them by in excess of 20%, but I think upon reflection it has given the industry a chance to restructure, a chance to move away from the annuity business and of course stocks like Legal & General got a very diversified range of businesses and indeed assets that they actually work upon.
LGIM for example, I think that’s a classic beneficiary of the fact that people are going to be sort of compelled to say, and of course with the sort of very low cost savings industry, which is actually being encouraged through this compulsion to save, I think LGIM will be one of the major beneficiaries.
Wall: What's the third and final stock today?
Bailey: The third and final stock today will be Secure Trust (STB), another bank that we think is actually sort of set to benefit. It's a business which is perhaps not very well know, and not very well, held either. There is a majority shareholder which owns in excess of 50%, which is Arbuthnot, it's perhaps described as a challenger bank. But over the last 5 or 6 years Secure Trust have expanded their operations.
At a time really when the major incumbents were moving away from particularly lending into that SME space. Secure Trust have actually been able to expand their operations, expand their lendings, at the same time getting exceptionally high level or indeed return on capital employed.
Wall: Thank you very much.
Bailey: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
