By Ruth Alexander William Pattisson joined Liontrust Asset Management as joint investment director ...
By Ruth Alexander
William Pattisson joined Liontrust Asset Management as joint investment director with Jeremy Lang in June 1999.
In 1986, Pattisson was a senior UK equities fund manager responsible for pension funds and charities at James Capel Fund Managers. From there he moved to Fleming Investment Management in July 1994, becoming head of UK equities in October 1998.
At Flemings, Pattisson was responsible for some £13bn of UK equities, including investment trusts, Save & Prosper unit trusts and institutional funds. He was also investment manager of the Fleming Claverhouse Investment Trust.
At Liontrust he is responsible for the management of the core UK equity process, the Liontrust large cap process, and has joint responsibility for the integrity of all other processes applied to the group's investment products.
Pattisson runs the Liontrust First Large Cap fund, which is ranked 94 out of 291 funds over the year to 8 November 2000, in the UK All Companies sector, returning 7% on an offer to bid basis.
What was the thinking behind the inception of the large-cap process?
We wanted to develop another product between myself and Jeremy which would have a greater capacity than the fund that Jeremy runs and which would provide what we would call a core product for Liontrust.
We wanted a product with a less aggressive performance target, which would be more suitable for people who are looking for a minimum of 1% or 2% outperformance per annum. This would be a product that would be particularly suited to the institutional market, although we wanted it to be suitable for the retail market as well.
It is quite a complicated process in one sense but it is also just common sense in my opinion, as well. We believe the best way to consistently beat the market is by understanding and exploiting the mistakes made by others.
While Jeremy's approach looks at the behaviour of analysts, the large cap process looks at the behaviour of both analysts and fund managers.
We try and identify those circumstances in which people behave in an irrational manner and try and take advantage of that in order to gain an edge in trying to outperform on a consistent basis.
The most common mistake analysts make is having a reluctance to move their earnings forecasts for companies when circumstances change.
Earnings forecasts tend to trend both up and down. Fund managers, in addition to the pressures they suffer, are the people who have to buy and sell the shares.
The most common mistake is that fund managers do not like buying shares which have gone up and they do not like selling shares that have gone down, which is in marked contrast to the simple stock market dictum of 'run your winners and cut your losers', which is very hard to do.
So with this fund we look at the combinations of those two dynamics, earnings forecasts and share price momentum, which act as very much an initial quantitative screen to identify the interesting and the poor stocks. So we look at consensus earnings data and stocks that have already done well over the past 12 months.
This approach highlights a group of stocks that look potentially interesting. We classify those stocks with positive earnings revisions and good momentum as winners.
About 10% of the market has winning characteristics, while about 15% of the market has losing characteristics.
The majority of stocks have no interesting characteristics at all and we call those middle-ground stocks. So when we construct the fund, we try to have as many as possible of those winning stocks, which are showing long-term sustainability over the next one to two years, and offer positive surprises.
We try to avoid losing stocks in a portfolio, and use the middle ground stocks in that area where there are no clear characteristics.
The focus on that area is value, whereas at the extremes we are quite relaxed about value, to the extent that if a stock has very positive characteristics and great things are happening to it, we do not mind paying a reasonable amount of money for it in terms of traditional valuations.
This is because the work we have done suggests high valuations do not matter if a stock has positive characteristics. High valuations do matter, however, if a stock does not have those characteristics.
It is a strange fund in terms of style, there tends to be a growth dynamic in the winners and a value dynamic in the middle ground area.
If a stock you hold changes and suddenly becomes a loser, you have to show a strong sell discipline and sell it quickly. We aim to hold a stock for a minimum of six months.
A perfect stock would be held from between two and five years. The process is designed to have low turnover, and on average we will hold stocks for three to four years.
The objective is to beat the FTSE All-Share index by 1-2%, on average, by investing in larger companies.
We don't really have a team in the conventional sense. We do not think there is a need for a large investment team. Implementing any process gets harder as more people are involved.
Therefore, portfolios to which the large cap process is applied have myself as lead manager, working with Jeremy Lang. The questions of how earnings forecasts change and why analysts change them do not necessitate a research team.
We are interested in the dynamic of change rather than the absolute of where a number is going to be. It is that absolute number that tends to be time-consuming for analysts. Analysts spend an awful lot of time considering the issue of valuation.
We use a variety of sources to get information and research on a
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till