Mark Dampier: Tide may be turning for Liontrust income fund

The Analyst

Many companies go through their own unique business cycle, experiencing prosperous and less prosperous times alike. Investment companies are no different. At times, they seem to have the in-vogue funds and the performance to boot, while at other times they find themselves deeply out of favour. This can be for a variety of reasons, not least as a consequence of fund managers leaving, thus creating a vacuum within the company.

Liontrust knows this only too well. It has certainly been through the mill over the past 18 months, partly because of the departure of two of its leading fund managers. Indeed, Liontrust is quoted on the stock market and you only have to look at the performance of its share price to see how badly this hit the company. The loss of so much momentum is like a boat losing the wind from its sails and fighting a strong tide. Yet I get the feeling the tide is now turning and, with the wind back in its sails, Liontrust may just be coming about.

The truth of the matter is that Liontrust had more than just two good fund managers. It had a core of exceptionally talented individuals who were somewhat overshadowed by the fund managers who originally helped to set up the company. I thought today I would draw your attention to the Liontrust First Income Fund. It went through a sticky time, even with one of those founding managers at the helm, but I think it is just beginning to shine once again.

Since 25 March 2009 the fund has been managed by Gary West and James Inglis-Jones, a pair of highly experienced fund managers who are well known within the industry. They have brought their own process into the running of the fund, which under the previous "star manager" experienced periods of brilliance, only to be followed by periods of particularly poor performance.

What is interesting about Mr West and Mr Inglis-Jones is that they don't spend their time trying to arbitrarily forecast the future following meetings with company management or after speaking to analysts. Both believe such activities to be a waste of time. Instead, they spend their time studying cash flow. This may sound rather geeky, yet they are essentially looking at what makes a company tick, appreciating that cash flow is the true lifeblood of any company. Using this approach, they feel they are in a better position to gauge exactly what a company can deliver in the years to come. It particularly suits running an income fund as dividends will ultimately be paid out of cash. Weakness in cash flow is often a harbinger of bad news and an early warning of problems.

Mr West and Mr Inglis-Jones are proving themselves more than capable of competing favourably with their peers. The fund has risen 44.61 per cent during their tenure while the sector is up 36.48 per cent. Of course, this is a very short timeframe, but it hasn't been an easy time for income managers with so many dividends being cut. I should say at this point that they do hold BP shares, but given stronger dividend performance from their other companies, they should be able to pay an increased dividend on the fund during the year ahead. This gives the fund a prospective yield of 5.5 per cent for the year to June 2011 – one hell of a starting yield when you consider where interest rates are currently.

I realise the capital has fluctuated no end but, when investing for the long term, such fluctuations over shorter periods should be of less concern when receiving a good income stream. Also bear in mind that most people who put money into cash deposits and live off the income gradually see their capital eroded by inflation.

So when you have a moment, take a look at Liontrust First Income. It is in a competitive sector, but remember my opening observation: investment companies go through cycles and maybe the cycle is now turning in favour of Liontrust.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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