Lang's unique strategy has seen liontrust first income become one of the most consistent performers in its sector
In the five years since he took control of Liontrust First Income, Jeremy Lang has turned the fund into one of the most consistent performers in its sector.
However, far from espousing traditional methods of equity valuation, Lang has managed to achieve returns far in excess of the sector average by developing his own strategy, which Liontrust calls the Lang Approach.
During his time at James Capel, Lang identified what he believed were weaknesses in the traditional value and growth approaches to investing, instead focusing on stocks within the All-Share that offered attractive yields.
His unusual approach means the portfolio is often very different to the benchmark. Despite believing the UK stock market is relatively unattractive at the moment as yields are low by historical standards, Lang feels there are still sufficient stock opportunities around to be able to add value.
According to figures provided by Standard & Poor's, over the five years to 1 April 2002, the fund was ranked fourth out of 78 funds in the UK Equity Income sector, returning 85.7% to investors on an offer-to-bid basis, net income reinvested. This compares to the sector average of 39.44% over the same period.
Over three years to the same date, again on an offer-to-bid basis, the fund is ranked fifth out of 82 funds. Investors would have seen capital appreciation of 33.2% during this period, which compares favourably to the sector average of 0.61%.
The fund's one and three-month figures are also well above average. Over one year to 1 April 2002, it was the top performing fund in its sector with a return of 15.98% on an offer-to-bid basis, while over three months to the same date, bid-to bid, it has given positive returns of 9.21%, ranking it seventh out 88 funds.
You have said in the past that you rarely buy shares in good companies. A lot of people might find that a little odd?
It's quite possible that they would. Mind you, that would only be true if you equate good companies with good investing. Frequently, good companies are not good investments because you have to pay too much for them.
There is a tendency for people to get too enthusiastic about companies and end up paying far too much for them. In many cases, they will then turn out to be disappointing investments.
Analysts tend to behave in a similarly extreme manner when considering the investment prospects of high yielding or 'bad' companies. There is a kind of stigma attached to them. Investors and analysts frequently believe the prospects are far worse than is likely.
A bad company today may not be seen as such in a few years time. My approach is to take a long-term view on stocks and be prepared to hold them for three to five years. Quite often, the reasons a share has performed badly will disappear over time.
How were you able to develop your theories? Most fund management groups would not accept positions that were a long way from the benchmark.
Most big fund management groups don't tend to like this approach, which is why I wanted to work for a boutique when I came back to the industry. When I joined Liontrust, I was able to start from scratch, there was nothing to fight against as there was no house style.
The most difficult part is being able to work out when you should buy bad companies aggressively. There are times, for example, when it's not appropriate to buy anything.
I know from working in the industry that it's very easy for people to be far too optimistic and, at the other end of the spectrum, far too pessimistic about stocks. The fact people don't like to be wrong about something exaggerates this effect. I just look for these extremes.
What are the factors which lead you to buy a stock?
I categorise prospective buys in three categories. First, I look for the extreme views on companies. If the consensus is that a company is not worth buying but it is paying a good dividend, I will look at the balance sheet. It may be that it will always be a dodgy company but if it has a solid balance sheet and can meet its dividend payments, I may consider it.
I will also consider companies that are not subject to such extreme market views. These are below average companies that are not yet considered to be bad companies but are not far off.
The third category consists of companies that others view as average.
How do you add value in a bull market when the market is against you?
When the market is against you, I aim to add value by not losing money. It's about recognising there is not much opportunity around and structuring the portfolio accordingly.
If you look at the performance of the fund during these periods, it tends to do as well as the market does because we're not deviating away from the benchmark. This is because we're not playing the yields as much. The problem is that, in comparison to other approaches, in a rising market, it doesn't look exciting. It appears to plod along but, in absolute terms, it does very nicely.
How many stocks will you have on average in the fund at any one time?
We have around 65 in the portfolio at the moment but it does vary. In the past, it has been as low as 35 to 40 and has been known to get as high as 100. It is unlikely to ever be more than that as I operate in a market where there are only about 1,000 stocks. At any one time, there aren't going to be that many attractive stocks in a universe of this size. The consensus view is about right on an awful lot of stocks.
A great deal of research suggests that, in order to achieve sufficient portfolio diversity, a manager needs to have at least 30 stocks. There is a direct payoff in terms of risk diversity from 0-30 stocks. Above this it flattens off considerably and you don't continue to benefit in the same way as you do below 30.
What forces you to sell a stock?
There are two reasons why I will sell a stock. Either its share price has changed so that its yield is too low or its dividend growth prospects have changed so that the current yield is not high enough for the growth offered.
I recently sold 10 of our investments. Five were sold because their share prices had gone up more than their dividend growth, rendering their current yield unattractive. The other five no longer have growth and income prospects high enough to compensate for their current yield.
What opportunities or themes do you see in the market today?
With profits appearing to be more slippery than they should be, it is worth remembering what profits are all about. I like to think of it as money in less money out, minus any money required to stand still.
This seems fairly straightforward but things can get complicated in an ever-changing world. Companies produce an annual snapshot of their profits and the freezing of time can give rise to all sorts of distortions.
Since working in financial markets, I have noticed how other investment professionals pay less and less attention to accountants' definitions of profit.
Now, many managers resort to earnings before interest, tax, depreciation and amortisation (EBITDA). This seems strange. It implies that it either costs nothing for a company to stand still or it is so complicated to work out that it is best ignored.
How do you tackle this problem?
I can understand the frustration. If you are trying to value a company, which, by and large, I am not, an accountant's profit seems an increasingly poor guide. Instead of sticking your head in the sand, there are two alternatives.
First, be conservative and assume a company can not grow anywhere near as fast as it thinks ' in other words, assume most of the company's capital expenditure in a year is actually required to help it stand still.
Second, give up looking at profit and concentrate on how much money a company pays out when you own it in the form of dividends. Companies are usually loath to cut dividends; when they do, it is usually a sign their business is struggling.
Holdings in liontrust first income fund
Boots Company plc manufactures and sells health and personal care products via retail pharmacies and stores throughout the world. The group offers a range of wellbeing services, encompassing dentistry and chiropody, optician services via nearly 300 Boots Optician stores and retails cycles and car/cycle parts and accessories at more than 400 Halford outlets.
Price at 2 May 709.5p
52wk high 23/11/2002 732p
52wk low 19/06/2002 562.5p
Ytd change 125p
% change 21.39%
1 yr total return 19.05%
Market cap £6,385.5m
Devro plc produces manufactured casings for the food industry. The group has product offerings in each of the key market segments of collagen, fibrous and plastic. Applications include edible and inedible casings for sausage, salami, ham and other processed meat.
Price at 2 May 81.5p
52wk high 29/04/2002 82p
52wk low 10/05/2001 42.5p
Ytd change 26p
% change 46.85%
1 yr total return 91.98%
Market cap £130.81m
New Look Group plc is a retailer of womenswear that sells own-label clothing and accessories through more than 480 stores in the United Kingdom. The group's product line encompasses a full range of clothing, as well as jackets, lingerie, footwear and a range of lifestyle products including accessories for mobile phones.
Price at 2 May 264.5p
52wk high 25/04/2002 265.5p
52wk low 08/05/2002 65.5p
Ytd change 99p
% change 56.82%
1 yr total return 304.84%
Market cap £529m
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