MARKETING - The PRIDE Magazine by Liontrust - Flipbook - Page 13
ASIAN EQUITIES
Fund managers: Mark Williams, Carolyn Chan, Shashank Savla
Liontrust’s Asia Income team explains why, in spite of an impeached South Korean president and
“volatile” – to put it politely – neighbours to the north, they’re positive on Korean companies’
prospects to pay out dividends.
The Korean Peninsula has rarely been
out of the headlines in 2017 with both
countries, North and South, in the news,
although for very different reasons.
North Korea stepped up its missile
testing programme this year, alongside
demonstrating
improved
nuclear
capabilities. While North Korea’s risk
to global stability is nothing new, the
stakes have certainly risen.
And given that the two key protagonists
in North Korea’s conflict with the West
– Donald Trump and Kim Jong-Un – are
both politically inexperienced, the risks
of a policy misstep have also surely
risen. The likely outcome has to be that
Kim Jong-Un will not embark on a war
he will inevitably lose, but the situation
remains unpredictable.
Investors have long been able to set
these concerns aside when assessing the
investment appeal of South Korea, but
it too has undergone significant political
developments. In an extraordinary series
of events, President Park Geun-hye was
impeached, effectively removing her
from power in March this year. She was
accused of giving undue access and
influence to an unelected adviser, who
in turn is accused of bribery. Investors
would be forgiven for thinking it is best
to steer clear in these circumstances, but
the subsequent elections, which saw
leftist leaning Moon Jae-in gain power,
have markedly improved the outlook for
income investing in South Korea.
Moon Jae-in has committed to tackling
the country’s system of ‘chaebol’ (literally
‘moneyclan’ in Korean), which comprises
a small number of powerful families running
large conglomerates with government
blessing. These companies have tended
to hoard cash. Reform of both corporate
governance and taxation policies now
look likely to incentivise them to increase
returns to shareholders. This is good news
for us as investors looking for companies
in Asia offering attractive combinations of
dividends and potential capital growth.
Our recent research trip to South Korea
involved meeting 19 dividend paying
companies. Only a couple of years ago,
we would have struggled to identify
this many prospective investments in
the country. We have increased our
exposure to South Korea recently,
reflecting its improving dividend culture,
and continue to look for fresh investment
opportunities in the country.
EUROPEAN AND GLOBAL EQUITIES
Fund managers: James Inglis-Jones, Samantha Gleave
The managers of the Liontrust European Growth and Global Income Funds explain the results of
their latest annual review.
We believe the most important
determinant of shareholder returns is
company cash flows. We aim to find
companies that generate significant free
cash flows from their asset base and
are lowly valued on their cash flows
while being run by a management team
that allocates these cash flows in an
intelligent way.
As part of our investment process, we
forensically analyse companies’ annual
report and accounts, historic cash flows
and balance sheet developments. Most
of this review process for our European
Growth Fund takes place from March
onwards each year because most
companies in continental Europe have
December year-ends and their annual
reports are thus released late in the first
quarter or early in the second quarter of
the calendar year. We apply a simple
quantitative screen using two measures
of cash flow to create a ranking of
companies; the top and bottom 20% of
these qualify - in our eyes - for further
analysis. We then apply additional
scores, and from this whittle the
companies down to the best investment
opportunities.
By using a number of proprietary
indicators, we can form a view of the
prevailing market environment and the
kind of strong cash flow characteristics
that we should favour in the stocks we
select during the portfolio’s annual
restructuring. This year‘s analysis implied
positive European equity market returns
and low levels of volatility.
Our Funds continue to consist primarily
of companies with strong cash flows
that have good business momentum and
are able to self-fund growth. They also
typically possess robust balance sheets
which allow shareholder cash returns.
This year, we have largely avoided
what would be considered ‘distressed’
companies as these tend only to perform
well when investor confidence is very
low, which can allow them to exceed
modest expectations. But investor
confidence is currently high and many
of the pockets of value available in
distressed companies have already
been squeezed out.
There have been some opportunities,
however, to invest in companies
showing signs of recovery – those that
are using cost control to prompt business
improvements. We have found this is
particularly true in the materials sector,
where we have been able to add some
non-mining companies involved in, for
example, the manufacture of plastics,
paper and board.
Issue 1 Winter 2017 - TH E P R I DE - 13