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Advantage to Cross


Last year was a period of upheaval for Liontrust but Anthony Cross and his economic advantage process have continued to produce top results.

Cross joined the group in 1997 from Schroders and, with process integral to the firm’s approach, he spent the first three months finetuning his system of running money.

Julian Fosh also came on board in 2008 from Saracen Fund Managers, where he had co-run the group’s growth fund.

Economic advantage is all about buying high-quality growth companies with intangible strengths. These create defendable barriers to entry, which competitors struggle to reproduce.

Cross says his major complaint on current markets lies in their short-termism, with huge attention paid to short-term macro noise and
little to the long-term drivers of company returns.

“Stock turnover has grown massively in recent years, indicating either a lack of conviction or basic knowledge of the fund manager,” he adds.

Sixty per cent of equity holdings now are computerdriven and valuation metrics are skewed towards one-year earnings rather than further out, which means longer-term drivers are largely ignored.”

Primary among these is globalisation and economic advantage companies are those with the capacity to thrive in this environment. “In a world of relentless global competition – driven by technology – these strengths enable some companies to grow their market share, protect prices and margins and thus drive sustained profitability,” adds Cross.

Economic advantage has three main strands, namely, intellectual property, distribution and recurring contracted revenue. Stocks have to boast one of these to pass the initial screen, before the managers look into other intangible assets, such as licences/franchises, customer relationships, brand and culture.

On smaller companies, in particular, this emphasis leads towards owner-manager businesses likely to use less gearing and grow organically
rather than by acquisition.

They only hold small-caps where the managers own at least 3 per cent of the business and 80 per cent of their holdings in this market have net cash on the balance sheet.

Three funds come under the economic advantage banner – first opportunities, intellectual capital and first growth – previously run by Jeremy Lang
– since last year. The latter enjoyed a strong last quarter of 2009 after the process shifted the fund into more growth and cyclical stocks.

Lang’s approach was based on earnings’ revisions and the pair inherited first growth with extremely defensive positioning. They added more growth and cyclicality in March but, in hindsight, said this shift was neither quick nor extreme enough to keep pace with the subsequent rally.

The success of economic advantage is clear from numbers on the pair’s other funds, with best ideas first opportunities 38th out of 281 UK All Companies funds over 12 months to March 8.

Meanwhile, the small capfocused intellectual capital is fifth in its sector over three years and one of the few portfolios in its peer group to perform in 2008 and 2009.

Cross says much of this success was down to the focus on well financed businesses, with many that were forced to seek new capital down –
graded. Looking at valuations, the team search out companies consistently returning above cost of capital but say this does not mean buying
expensive growth.

Like most managers, Cross wants to buy undervalued companies and highlights cyclically cheap opportunities to buy stocks like Michael Page
and Carpetright last year.

On the FTSE 350-focused first growth, they imple – mented the defensive to growth shift by adding holdings such as Fidessa, Rightmove, Hargreaves Lansdown and Renishaw.

“We financed this with sales of inherited companies, either with no economic advantage, that were too expensive or where we had too big a position – notably oil, pharma and tobacco,” says Cross.

“We retained a tilt towards late-cycle stocks, which stood us in good stead in Q4.”

Cross says there are more stocks experiencing positive earnings’ revisions than a year ago and these are more likely to be rewarded by the market. Overall, the process tends to keep Cross overweight and underweight the same sectors, with little in housebuilders, mining companies and retail banking, for example.

In contrast, he is usually overweight areas where intellectual capital is rife, such as manufacturing, pharmaceuticals and technology.


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