Liontrust Asset Management: Gross exposure reaches its highest level since its launch


We increased the gross exposure of the Liontrust GF European Strategic Equity Fund at its highest level since the Fund adopted its variable long / short investment strategy in 2014. This increase in gross market exposure is a direct reflection of the attractive investment opportunity that we are currently seeing in markets. Due to unprecedented levels of value dislocation in the equity markets, this opportunity is equally attractive for long and short portfolios.

The net market exposure is around 58% of the fund’s net asset value (NAV), a fairly typical level for the fund which reflects a cautious and constructive overall outlook we have for equities. But the gross portfolio reached 214% of NAV, comprising 136% long positions and 78% short exposures.


This gross book size is a record for the Fund and we expect such a high level to occur relatively infrequently in the future. This results from a very particular set of market circumstances: a large dispersion of stock valuations across the stock market, which means that we find a large number of stocks that we think are undervalued but also lots that we consider too expensive.

If there were less valuation dispersion in the markets, we would likely be more clearly bullish or bearish, which would manifest as a weaker gross pound.

If we were bearish in the markets, we would have a large exposure on the short side but a small long portfolio, which would result in low (or negative) net market exposure and lower gross exposure. If we were more bullish, we would have a large long portfolio and high net exposure to the market, but few positions in the short portfolio, which means – again – relatively low gross exposure.

The graph shows the positioning of the Fund on four investment exposures since its inception: long, short, net and gross. We can see that the increase in raw exposure (gray) to over 200% versus less than 150% during the summer months was driven by an increase in long exposure (green) and an expansion of the short wallet (gold).


In the long book, one of the value dislocations we seek to exploit is the one between growth stocks and value stocks. The former typically trades at very high levels while the latter remains historically depressed despite some signs of better relative returns in late 2020 / early 2021. After a decade of underperformance culminating in a capitulation during the initial market liquidation of Covid-19 in early 2020, we believe value stocks are poised to deliver returns.

We recently explained that the increase in our short book was driven bypockets of the market where aggressive corporate investment is alarming but stock valuations are sky-high.

With markets growing steadily in recent months, the larger short portfolio has been a hindrance to the Fund’s performance in absolute terms, but since the start of the year our short positions have significantly underperformed the market. At the same time, our long positions outperformed the market.

We are delighted that there are early indications that momentum is heading in our direction, but the value dislocations are so large that we believe there is significant performance potential in the current portfolio.

TThe value dislocations we see today are by far the most extreme we have seen in our data set dating back to the 1980s. Never have the unattractive stock valuations on our cash flow solution process – companies with poor cash flow control that are expensive and suffering from poor business dynamics – only seemed as expensive as they are today compared to stocks that the process finds attractive.

We know from our own empirical work in markets around the world that the most powerful predictor of factor performance is whether a factor is cheap or expensive relative to history. This suggests that there is now significant potential for the Fund’s short portfolio to perform well in the coming months.

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Main risks

Past performance is no guarantee of future performance. Remember that the value of an investment and the income from it can go down as well as go up and is not guaranteed. Therefore, you risk not getting back the amount originally invested and risking a total loss of capital. Investment in Funds managed by the Cashflow Solution team involves foreign currencies and may be subject to fluctuations in value due to fluctuations in exchange rates. The Liontrust European Growth Fund holds a concentrated portfolio of shares, if the price of any of these shares were to fluctuate significantly, this could have a noticeable effect on the value of the respective portfolio. The expenses of the Liontrust Global Income Fund are charged to capital. This has the effect of increasing dividends while limiting capital appreciation.

Disclaimer

The information and opinions provided should not be construed as investment advice in any product or security mentioned, an offer to buy or sell units / shares of the Funds mentioned, or a solicitation to buy securities in any company. or an investment product. Always research your own investments and (if you are not a professional or a financial advisor) consult a regulated financial advisor before investing.

Thursday, September 30, 2021, 10:47 a.m.

Disclaimer

Liontrust Asset Management plc published this content on September 30, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on September 30, 2021 11:41:05 AM UTC.


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