Liontrust Asset Management (LIO)

Thought I would post some thoughts on Liontrust. The write-up is my contribution to an investment group in which I am a member. We meet every month or two (currently virtually, but previously face to face) to discuss shares. Each meeting sees everyone chip in with their research.

Welcome any feedback or extra info on Liontrust (or any other fund manager) – what have I missed? I will publish future write-ups here as well. Anyone else wish to publish their share research?

Thanks
Maynard

LIONTRUST ASSET MANAGEMENT (LIO)

Share price: £13
Market cap: £793m

Why look at LIO?

  • Comparison with my holding in City of London Investment

  • A greater understanding of fund-management sector

  • Favourite Buffettology stock

Share price comparison with CLIG

sharepad Close - Portfolio_ LIO vs CLIG

Buffettology favourite

  • LIO first appeared in the fund during 2012:

  • Still in the fund during 2020:

  • Holding still represents 6% (not checked if a consistent 6% throughout)

  • Probably a 13-bagger from initial purchase.

  • Not exactly a Buffett-type stock during 2012:

  • a) Between 2008 and 2010, LIO’s assets under management (AUM) dropped from £5b to £1b following 2008/9 market collapse and departure of leading fund managers.

  • b) AUM drop led to minimal profits/losses and suspension of dividend.

  • c) New chief exec appointed 2010.

10-year AUM growth

  • AUM since rallied from £1bn to £16bn:

spreadsheet aum growth

  • Economic Advantage AUM underpinned company growth

  • Acquisitions of Global Equity/Sustainable Investments reduce dependence on Economic Advantage (total £5.5bn AUM acquired).

  • Not shown: Acquisition July 2020 brings a further £5.6bn AUM.

  • Cashflow Solution AUM static at c£900m since 2010.

Economic Advantage

  • Team of 5: Anthony Cross, Julian Fosh, Victoria Stevens, Matt Tonge and Alex Wedge

  • INVESTMENT PROCESS

  • The process seeks to identify companies that possess intangible assets which produce barriers to competition and provide a durable competitive advantage that allows the companies to defy industry competition and sustain a higher than average level of profitability for longer than expected. In the fund managers’ experience, the hardest characteristics for competitors to replicate are three classes of intangible asset: intellectual property, strong distribution channels and significant recurring business.

  • Main fund: Liontrust Special Situations:

  • c£5bn at early Sept 2020 — perhaps c20% of all AUM given AUM after July 2020 acquisition was £25bn.

  • Top 5 shares in fund: Reckitt, Sage, Unilever, Diageo, Spirax.

  • SharePad shows a £1.6b Sustainable fund and the rest appear minor in comparison:

  • Special Situations fund has done well over time:

  • Drawback: c20% of AUM and perhaps fees dependent on one fund and 5 managers. Explains acquisitions to diversify AUM.

10-Year AUM changes

  • LIO has impressively attracted net new client money every year for the last 10 years :

spreadsheet aum change

  • Green circles highlight the growing scale of net new client money:

  • Net AUM Inflow as a percentage of year-start AUM and acquisitions:

  • a) 17.5% for 2020, 16.9% for 2019, 11.1% for 2018

  • b) Average of 13% during last 10 years and 12% during last 5 years .

  • Note market movements not as influential on AUM: £0.8bn over 10 years versus net new client money of £8bn.

AUM 5-year net inflow/year-start AUM comparison

  • LIO: 12% pa

  • Jupiter Fund Management: 1% pa; Schroders: 3% pa; City of London Investment: 2% pa

  • See Appendix for wider sector comparison.

AUM relative investment performance

  • LIO’s funds have collectively outperformed the FTSE 100:

spreadsheet vs ftse

  • 5-year comparison: LIO’s funds: +14%, FTSE 100: +3%

  • 10-year comparison: LIO’s funds: +71%, FTSE 100: +47%

  • No doubt outperformance has underpinned the AUM inflow

Acquisitions

  • July 2020: £75m for £5.6b AUM = 1.3%

  • July 2019: £40m for £2.8b AUM = 1.4%

  • Dec 2016: £30m for £2.3b AUM = 1.3%

  • For context, LIO’s £793m market cap = 3.2% of £25bn AUM.

  • Gross profit per AUM has declined following the acquisitions:

  • Was c0.90% between 2012-2018. Now 0.74% for 2019 and 2020.

  • Acquired AUM charging notably lower fees?

Financials

  • Revenue and adjusted operating profit have advanced significantly:

  • Company-adjusted operating margin 30%-plus since 2014

  • Cash up from £4m to £40m since 2011. No debt.

  • Downside: significant adjustments:

  • Last 5 years:

  • a) Reported aggregate operating profit of £71m

  • b) Aggregate adjustments of £58m

  • c) Adjusted aggregate operating profit of £129m.

  • Major adjustments:

  • a) Share schemes, severance pay and similar: £23m.

  • b) “Professional services”: £18m

  • c) Depreciation(!), amortisation and impairment: £16m

  • Remuneration — another downside:

  • a) Remuneration report runs to 27 pages for just 2 executives.

  • b) Daren’t look at the details — presumably executives are highly paid.

AUM/Employee

  • LIO: £97m (at March 2020 low)

  • Jupiter: £81m

  • Schroders: £93m

  • City of London Investment: £57m

Valuation

  • Trailing/forecast P/E c21:

LIO sharepad daily pe

  • Arguably time to buy was:

  • a) 2016/Brexit vote, when business had shown a recovery/growth for a few years, but P/E was 9

  • b) March 2020, when crash pushed P/E to c13

  • Fund managers can sell on modest P/E ratings:

  • City of London Investment/Schroders/Jupiter — currently 8-12x

Early verdict

  • Not clear why Buffettology bought originally (special industry insight?), but LIO’s subsequent performance/financials underpin decision

  • 12% AUM average increase per annum from new client money is impressive

  • No wonder stock trades at twice the P/E multiple to City of London Investment/Schroders/Jupiter with their comparable c2% new client money growth

  • Too dependent on large Special Situations fund and 5 fund managers? Perhaps.

  • Too dependent on acquisitions? Maybe not. But deals risk diluting overall AUM quality/growth/fees etc.

  • Hefty profit adjustments (and probably generous pay) can be overlooked given the impressive AUM/earnings progress.

  • General sector risks apply — volatile markets, underperformance, star managers leave etc.

  • Traded at c12-15x P/E for years, then re-rated to 20x. Can re-rating go further? Will another market slump de-rate back to 13x or less?

  • Instructive to revisit in future and compare returns with ‘value’ peers City of London Investment, Schroders and Jupiter.

Appendix

  • Jeremy Grime chart showing net new client money flows within the sector:

fund flows

Maynard,

Thanks. Really interesting and I like the punchy format.

I don’t know much about LIO and it is probably a bit big for me now. I would like to know more about the model, timing and management.

I am not a market timer, but I suspect we are much nearer the top than the bottom. Long only fund managers could be seen to be a leveraged bet on the market.

LIO attracts signficantly more new money due to its strong relative performance. I wonder if this will endure. As the press keep saying, over the last five to 10 years, growth investing has outperformed. The Charlie Munger (compounding high ROE - Fundsmith, Lindsell) and Phil Fisher (ride technology cycles - Scottish Mortgage, tech funds) have done particularly well. LIO seems to be in the former camp. Over the long term, this philosopy appears to outperform. However, I wonder if buying now is close to a peak for that strategy and risks a period of mean reversion - Buffetology appear to have deliberately bought that philosophy just after a crash.

I am not sure who I would be backing. The senior team appear to have been there a while and have some equity, but would not drive a sale.

Like you, I am suspicious of the “star” fund manager issue and agency issues around pay and retention.

Hi Mike,

Well, the Buffettology manager Keith A-L has been employing Buffett-type investing for 20-plus years, and it has seemed to have worked (at least for him). Of course, what counts as a Buffett-type stock is up for debate and some of the shares Keith A-L has bought have exhibited much more ‘value’ than ‘quality’ at times.

But yes, the high-ROE-compounder approach could be called a ‘crowded trade’ at present and surely there is a limit to valuations. Mind you, ultra-low interest rates appear here to stay so a 3% earnings yield may seem to some as good value. Not the easiest market conditions in which to invest if you believe valuations do influence your returns.

Maynard