The Lion's share
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I remain, as ever, positive on the long-term potential of shares but I am far more cautious about the short-term outlook. It seems to me that a lot of highly cyclical, highly indebted companies have gone up a long way despite little evidence to suggest their situation has really materially improved.
Furthermore, my opinion is that we are seeing a dead cat bounce in the housing market. A bit of a bounce was inevitable and it would have been catastrophic if we had not seen some increase in transactions but this does not necessarily mark a new dawn for the market.
Houses still look far too expensive, especially considering that unemployment will continue to rise from here and that we have the spectre of the 2010 Budget looming on the horizon.
Whichever party is in charge by then will have no option but to raise taxes significantly (VAT at 20 per cent?) and make tough public sector cutbacks. That will be bitter-tasting medicine but sadly it is the only realistic course of treatment for our sick economy. None of this gives me confidence that a huge economic turn-round is just around the corner.
We must remember though that the stockmarket and the economy are not the same thing. Stockmarkets can actually perform well even during times when the economy is doing poorly. Over the next two or three years, I think investors should be focusing on high-quality companies. With this in mind, I was especially interested to meet the managers of the Liontrust first opportunities fund this week.
The fund launched back in November 2005 and despite achieving relative success since, is still incredibly small at just £7m. However, this can be a great advantage in that it allows the fund managers to be far more nimble and largely relieves them of concerns about liquidity.
The fund is run by Anthony Cross, who has been with Liontrust almost from the start, and Julian Fosh who joined around a year ago from a small but successful fund run by Saracen.
The fund has a strong investment philosophy that Liontrust calls "economic advantage". It seeks companies with at least one of three key attributes. First, a higher than average level of profitability, which will tend to translate into a strong share price. Second, intellectual property, which can include things that are hard to replicate and should increase a company's pricing power together with the ability to protect its profit margin. Finally, it looks for a company with strong recurring income, enabling it to weather poor economic conditions.
The fund presently has 26 per cent invested in FTSE 100, around 22 per cent in the Mid 250 index of medium-sized companies and the remainder in smaller companies. It holds a good cross-section of defensive and more cyclical stocks. The biggest sector overweights include industrials and technology while the biggest underweights are oil and consumer goods.
Neither of the managers wants to be drawn on whether we are seeing a genuine economic recovery or merely a rebuilding of inventories. Essentially, what this means is that it is unclear if increases in manufacturing and industrial output could be due to a real increase in demand or simply because companies are restocking their shelves from an extreme low point.
In reality, this is a best ideas fund, drawing on promising stock ideas from across the full spectrum of the market.
Liontrust as a company are going through a period of flux after two key managers left the firm earlier this year, but I believe they are making a determined effort to get the ship back in shape.
Providing you can afford to be patient and take a five-year view, I believe the UK market currently looks very interesting and, in my view, funds such as Liontrust first opportunities are positioning themselves in the right place to benefit.
Mark Dampier is head of research at Hargreaves Lansdown
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