Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Julian Fosh, Co-Manager of the Liontrust UK Growth Fund.
Hi, Julian.
Julian Fosh: Hi.
Wall: So, U.K. Growth. Now, let's leave the growth one side and just look at U.K. Very interesting times in the U.K. market over the last couple of months due predominantly down to Brexit and the market anomalies that were thrown up immediately afterwards and then in the months following that. Did you take advantage of those market anomalies?
Fosh: We benefited from them, although I would say we didn't take advantage of them. I mean, like everyone else I'm sure obviously Brexit was coming down the tracks for a long time. So we had a good look at our portfolios to see if there was any evasive action we needed to take, if there were any stocks that might have been particularly suffered from Brexit and we concluded there wasn't.
Our style is very much a quality of investing style, so companies that have high return on capital, strong balance sheets. I mean, we were surprised, as anyone else, with the outcome and I think it was interesting monitoring the price moves in the days and weeks that followed. The market broadly got, we would say, things right. So it punished companies that were U.K. domestically oriented. It rewarded companies with high levels of overseas earnings.
But I think the magnitude of the moves certainly surprised me on the day. But what we found in the portfolio was that, overall we benefited. I mean, the portfolio had been performing well this year but got an extra impetus as Brexit created a flight to safety as quality companies were re-rated I guess.
Wall: And you are up 16% this year which is pretty good. Having a look at those underlying stocks, as you mentioned, a lot of them do have global revenues and there's 20% of the portfolio in industrials which I think is actually quite a controversial area to be in. If you have a look at the top 10 holdings, you've got Shell and BP in there. People are worried about industrials. They are worried about miners. You seem not to be?
Fosh: Sure. So, I the overriding point we'd make is industrials is a broad label but it disguises a whole host of very different individual characteristics even within particular sectors. Engineering is widely thought to be a cyclical sector. But I mean the beauty of being a bottom-up stock picker and not a top-downer is that if you examine the individual returns as we do as a part of our process using the cash to return on capital profile going back 20 years, you will see that even for engineers the prospects of particular companies are differentiated.
Rotork (ROR), an actuator maker, is obviously suffering a bit from the oil price downturn nonetheless has a very good record of very high and stable cash flow returns. Spirax Sarco (SPX), another one of our long-standing holdings, is what we term a quality cyclical. So returns are cyclical, but even at the low point of the cycle, the companies always consistently manage to cover its cost of capital. And Renishaw (RSW), a world-leading probe manufacturer, highly cyclical business, with very low visibility but a good business nonetheless and it will suffer severely in downturns, but over the long run has outperformed for us.
So, all these three are broadly engineers but I mean that label, as I say, disguises very different underlying profiles and the point of the fund is to blend businesses together so that it affects overall, you smooth out the volatility and hope to outperform overall in nearly all market conditions.
Wall: Julian, thank you very much.
Fosh: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
