Managers Peter Michaelis and Martyn Jones specialise in sustainable investing and have worked in the area for many years, having managed a number of funds in the Sustainable Future range at Alliance Trust prior to its merger with Liontrust. They aim to outperform the mainstream benchmark and peer group, but the biases to quality and growth mean performance can diverge from the market. They have a solid track record which demonstrates some defensive characteristics, frequently outperforming the benchmark in down markets. Their key mantra is "Investing for tomorrow, today" so they look for companies that are early adaptors or innovators in their sectors.
The investment process has three stages. It starts with a universe of 500 stocks (typical minimum £1bn market cap), which is screened on sustainability and “quality”. The managers then select 100-150 stocks based on predicted future financial returns and valuation upside. They then construct an end portfolio of 40-50 stocks using standard risk modelling across sectors.
Stage 1) Liontrust SF have their own sustainability matrix, which assigns a rating to each company based on their management (1-5, 5 being worst) and product sustainability rating (A-E, E being worst). They use MSCI data plus internal analysis. An A rating indicates a company whose products or services contribute to sustainable development i.e. renewable energy. An E rating would be tobacco stocks. The management axis is a qualitative measure of policies and practices in place for managing its ESG risks and general management quality. Companies must score C3 or higher to be considered for portfolio inclusion. Stage 2) The primary metrics they measure companies on are ROE and sales growth. They are looking on a 3-5 year time horizon, but use historic multiples to derive a 3-year future predicted stock value. The managers then add stocks they believe have >30% upside potential or have an attractive ROE relative to peers - this leaves the universe at 100-150 stocks to construct the portfolio. Stage 3) Portfolio construction - from the 100-150 stocks left the managers select the best 40-60 stock combination that diversifies risk across sectors/ regions and uncorrelated growth themes and reduces volatility of returns relative to the benchmark. The portfolio is reviewed by an independent advisory committee, which meets at least three times a year to monitor the social and environmental impact of the portfolio.