Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Julian Fosh, Co-Manager of the Liontrust UK Growth Fund, to give his three stock picks.
Hi, Julian.
Julian Fosh: Hello.
Wall: So, what's the first stock today?
Fosh: Rightmove (RMV) is a company that's done very well for us over the long run and which we think will continue to do very well. Essentially, our process is about finding companies with very strong intangible assets deriving either from their IP or very strong distribution or high levels of recurring revenue and Rightmove fits that mold. The point of that is to hopefully companies that have that will have an effective barrier to competition. It will allow them to earn stronger returns for longer than the market thinks and also people do attack these attractive franchises.
The companies should be able to fight them off. So, turning to Rightmove, it's sort of a company all of us know, earns very high returns from its franchise and has seen off two attacks in the past most recently from on the market where Rightmove has emerged stronger than ever and actually perhaps before that several years ago from Google who attempted to move into Rightmove space but then gave up within a year.
Wall: What's the second stock today?
Fosh: Our second is one that we've got wrong but we think it's starting to come right now which is Pearson (PSON). So, again, relating this to our process, I mean, Pearson has got a terrific distribution footprint. It's the global leader in education, educates over 100 million people worldwide. Share prices have performed poorly last year, three profit warnings notably and we think that's because the education cycle in North America has taken much longer to turn than we thought or indeed the Pearson thought prompting a restructuring.
The thesis, of course, is that if you have a strong market share that will ultimately enable you to earn excess returns. Pearson have very strong market shares, in some segments 60% or more in North America and the challenge for them is to translate that into achieve superior earnings. The challenge is complicated by a transition to digital. But we think the management is implementing a brave and correct strategy there by selling off trophy assets such as the FTE last year and reinvesting that in the core proposition.
Wall: Of course, Pearson is one that people have felt strongly positively about for some time but the share price has disappointed which is just one thing about being a long-term investor is you just sit tight through these difficult periods. But what would – you say you've got it wrong so far but you believe it will come good. Is there a timeline that you stamp on that as a fund manager? At what point you just say, you know what, we're done?
Fosh: It's always on a case-by-case basis. There is no substitute for monitoring on an ongoing basis, talking to the management and seeing how they are progressing versus plan. I think I'd say bravely Pearson itself is committed to providing much greater disclosure by 2018, so that's a natural timeline for us to follow with them. So far so good this year though.
Wall: What's the third and final stock?
Fosh: Our third stock is an interesting stock, Halma (HLMA). So, Halma is a company that is engaged in environmental protection and safety and again, has protected niches by virtue of that. Four major divisions, well spread globally. A very quiet company, never flashy, never producing amazing uplifts in profits, but just quietly year-by-year produces steady returns and that's been reflected in one of the best unbroken dividend growth records of any company in the U.K. market. So, every portfolio I think needs quiet, stealthy applauders and Halma is one of those.
Wall: Julian, thank you very much.
Fosh: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
