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Ebb and cashflow

Many companies go through their own unique business cycle, experiencing prosperous and less prosperous times. Investment companies are no different. At times, they seem to have the in-vogue funds and the performance to boot while at other times they find themselves deeply out of
favour. This can be for a variety of reasons, not least as a consequence of fund managers leaving, creating a vacuum within the company.

Liontrust know this only too well. They have certainly been through the mill over the past 18 months, partly owing to the departure of two of their
leading fund managers.

Liontrust are quoted on the stockmarket and you only have to look at the performance of their share price to see how these moves this hit the
company. The loss of so much momentum is like a boat losing the wind from its sails and fighting a strong tide. Yet I get the feeling the tide is now turning and with the wind back in their sails, the group may just be coming about.

The truth of the matter is that Liontrust had more than just two good fund managers. They have a core of exceptionally talented individuals
who were somewhat overshadowed by the fundmanagers who originally helped set up the company.

I thought I would draw your attention to the Liontrust first income fund. It went through a sticky time, even with one of those founding managers at the helm, but I think it is just starting to shine once again.

Since March 25, 2009, the fund has been managed by Gary West and James Inglis-Jones, a pair of highly experienced fund managers who are well known within the industry. They have brought their own process into the running of the fund, which under the previous “star manager” experienced periods of brilliance, only to be followed by periods of particularly poor performance.

What is interesting about Mr West and Mr Inglis-Jones is they don’t spend their time trying to arbitrarily forecast the future following meetings with company management or after speaking with analysts. Both believe such activities to be a waste of time.

Instead, they spend their time studying cashflow. This may sound rather geeky, yet they are essentially looking at what makes a company tick, appreciating cashflow is the true lifeblood of any company. Using this approach, they feel they are in a better position to gauge exactly what a company can deliver in the years to come. It particularly suits running an income fund as dividends will ultimately be paid out of cash.
Any sign of weakness in cashflow is often a harbinger of bad news and an early warning of future problems.

Mr West and Mr Inglis-Jones are proving themselves more than capable of competing favourably with their peers. The fund has risen by 44.61 per cent during their tenure while the sector is up by 36.48 per cent. Now, of course, this is a very short timeframe but it has not been an easy time for income managers, with so many dividends being cut.

I should say at this point that they do hold BP shares but, given stronger dividend performance from their other companies, they should be able to pay an increased dividend on the fund during the year ahead. This gives the fund a prospective yield of 5.5 per cent for the year to June 2011, one hell of a starting yield when you consider where interest rates are currently.

I realise the capital has fluctuated no end but, when investing for the long-term, such fluctuations over shorter periods should be of less concern when receiving a good income stream. Also bear in mind that most people who put money into cash deposits and live off the income gradually see their capital eroded by inflation. So when you have a moment, take a look at Liontrust first income. It is in a competitive sector but remember my opening observation – investment companies go through cycles and maybe the cycle is now turning in favour of Liontrust.

Mark Dampier is head of research at Hargreaves Lansdown


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