The Analyst: Wait for good news – and then buy

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The Independent Online

We investment people are born worriers. I was struck by a recent piece of commentary from Jeremy Lang, who runs the £480m Liontrust First Growth fund, where he said: "My worries are few, but acute. When will the demand/supply balance tip the wrong way in commodities? When will oil companies slow their investment? Will global infrastructure spending turn from sensible to silly? Will the Chinese financial system blow up? Will inflation accelerate enough to hurt everyone?"

He went on to say that he also worried about stocks he didn't own; maybe big drug companies will come up with a burst of new drug discoveries; perhaps the banks haven't been as greedy and stupid as we think; and perhaps commercial property and house prices won't fall much at all.

My own view is that it is impossible to answer these questions with any confidence – markets are prone to being overtaken by unexpected events. Nevertheless, they are crucial issues, and I think Mr Lang's investment process focuses on the important parts of the market.

Like all the best philosophies, Mr Lang's is beautifully straightforward: company earnings growth is the major driver of share price growth. Analyst forecasts, upon which many investors rely, are often either overly optimistic or overly pessimistic, and these analysts are very slow to admit that their analyses of these companies were wrong.

The result is that companies often surprise the market when they announce their results, and those companies that do better than expected are likely to continue to "surprise on the upside". This can lead to a significant uplift in their share prices and, crucially, this improvement in performance is recognised by the stock market much more slowly than purists might predict.

Mr Lang looks to buy these stocks after the positive surprises have started to come through but long before equity analysts finally acknowledge that their forecasts were wrong (leading the stock market to "catch up" with the news). He also tries not to fiddle with the portfolio much, typically overhauling it once a year, allowing time for other investors to reappraise their views on the stocks he holds.

Overall, this approach has worked well since the Liontrust First Growth Fund launched in April 1996. But Mr Lang would be the first to admit that it has had the occasional sticky patch, leading to some refinement of the process. One of these tough periods was in 2003-05, in the early years of the bull market, when share prices of the sort of growth companies he favours underperformed in spite of good earnings results.

I am glad to say the fund is once again back on form; indeed, it is one of the best-performing UK funds this year, having risen by 6.8 per cent compared to a fall of 3.9 per cent for the FTSE All Share index.

Unlike many equity fund managers, Jeremy Lang is not taking notably large stock bets at present. Instead, three interconnected themes dominate the portfolio. The first is the global boom in infrastructure development, which has been a neglected area for quite some time and is generally underappreciated by analysts. It not only affects emerging markets, but the developed world too; we have Victorian infrastructure, whereas emerging economies often have very little at all.

The second theme is raw materials, which is linked to infrastructure due to the vast quantities of commodities required for building projects. The third theme is inflationary pressures. Some companies cope well with rising inflation and maintain their pricing power, but others – particularly in manufacturing – are likely to suffer.

One advantage all UK fund managers have is that London is such an international market. This means they can invest in companies with business interests all over the world, taking advantage of these themes.

Mr Lang's portfolio is currently overweight in the energy and industrial sectors as well as basic materials. He has a negative view on financials, for the simple reason that he anticipates disappointing earnings updates to continue for the time being. Where he does have financials is via Man Group, the biggest hedge-fund manager in the world with the potential to thrive during periods of either falling or rising stock-markets. The largest positions in the portfolio are Royal Dutch Shell and two huge mining firms in Rio Tinto and Anglo American.

I think Jeremy Lang's philosophy is coming strongly back into fashion, and the Liontrust First Growth Fund shows that one doesn't have to buy a specialised fund to benefit from some key global themes.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit

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