Printed by The Herald
There are many great businesses listed in the UK. Some are globally oriented companies – such as Halma, Diploma and Sage – while others have strong domestically focused operations in the UK – the likes of Dunelm, Rightmove, Autotrader and Grainger.
Many UK-listed companies are trading on attractive valuations, and our approach is to look for companies we think are underappreciated by the market across the style spectrum and sit broadly within three categories of what we call ‘profit pools’: growing profit pools, stable profit pools and declining profit pools. These can all present interesting investment opportunities.
The first category comprises growing profit pool, where an industry or sector has long-term structural growth drivers that will increase the size of the available profits to companies in that industry, in real terms. The primary driver of returns to shareholders for companies operating in growing profit pools are compounding earnings, as these companies tend to prefer organic and inorganic investment in their businesses ahead of distributions to shareholders.
Diploma, a value-add distributor serving industrial and life sciences end markets, is an example of a company benefiting from its exposure to growing profit pools, including electrification, industrial automation and infrastructure spend. And within these growing profit pools, Diploma is also taking market share and has a long runway of potential future growth ahead.
Diploma has strong and enduring competitive advantages - a decentralised model of 17 smaller distribution businesses with strong technical expertise in their respective niches and a focus on significant value add across the group.
The second category comprises stable profit pools or market share opportunities. This is where a company is operating in an industry with a stable or much lower growth outlook but where there are significant opportunities to win market share and drive continued earnings growth. For companies operating in stable profit pools, the primary drivers of shareholder returns will be earnings growth, shareholder distributions in the form of dividends and share buybacks, and an improvement in the company’s valuation multiple.
An example in this area is Grainger, the UK’s largest professional landlord. The supply of private-landlord rental properties is shrinking in the UK as private landlords face headwinds, such as energy efficiency regulations, while demand continues to grow. We believe the build-to-rent segment will take share from small private landlords, and this is an opportunity that Grainger can exploit; it operates its buildings professionally, maintains high occupancy at around 98%, and has pricing power as it grows rents at least in line with inflation.
Lastly, are declining profit pools or self-help opportunities. Companies in this category are delivering sub-par performance, due to declining industry growth rates, and/or simply a lack of execution. Here, we look for a catalyst to drive a significant improvement in operational and financial delivery. The primary drivers of shareholder returns for self-help opportunities are an inflection in earnings and a rerating of the share price.
These are turnaround situations and Anglo American is one such example, in which a new management team is seeking to improve the performance of the business through the three strands of operational excellence, portfolio simplification and driving growth. Portfolio simplification is the most outwardly visible change and is focused on transitioning Anglo American to focus on future facing commodities – principally copper and premium higher grade iron ore, with some further growth options in the fertiliser Polyhalite.
This simplification includes divestments of the nickel and steel-making coal businesses, alongside the completed de-merger of the platinum group metals business, and either a divestment or demerger of De Beers – the diamond business. Upon completion of the simplification, Anglo American will become a more focused, faster growing miner with higher margins, higher returns on capital and lower capital intensity.
As we have highlighted in this article, there are many opportunities to invest in world-class businesses in the UK, such as Grainger, which is more locally oriented, and Diploma and Anglo American, both resolutely global businesses.
The UK market has a strong mix of domestic and overseas-focused businesses. We take a diversified approach, from more structural growth companies such as Diploma to self-help opportunities, to create a balanced all-weather portfolio.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Net Asset value (NAV) return of The Company corresponds directly to The performance of The securities in which it invests and The income from them. The share price, which will determine The return to The investor, will also be affected by supply and demand. Consequently, The return to The investor may be higher or lower than The underlying NAV return. The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall. The product may invest in smaller companies which may result in a higher level of risk than a product that invests in larger companies. Securities of smaller companies may be subject to abrupt price movements and may be less liquid, which may mean they are not easy to buy or sell. The product may use derivatives for efficient portfolio management which may result in increased volatility in the NAV.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
