The fund manager: Good news is a moneymaker

the fund manager
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The Independent Online
Jeremy Lang adopts a highly academic approach to fund management, stemming in part from his background as an economics student. He says: "I went straight from university, having done a masters degree in economics, into fund management, originally as a quantitative analyst at James Capel (now HSBC). I went into analysis because I thought it was the best way to look at lots of different companies and see what made the best of them successful, with the idea that I could then go off and run my own company."

Once involved in investment management, Mr Lang quickly moved into fund management, specialising in North American companies. "I did that for five years until I got bored and basically went off and sailed for four years. Then when I came back, I picked up my career again and decided to take some research I had previously done into the US market to see if it was applicable to the UK."

It was a result of Mr Lang resuming his research activities, that his distinctive approach to fund management developed. "The history of my approach is unusual in that when I was a US fund manager I was working for a house that had a `value investment' style. It was a horrible time to be a value investor because that approach was simply wrong for the prevailing market conditions. Being a kind of intellectual gypsy, I wanted to see why it wasn't working and try to come up with a better alternative."

What he came up with was an approach to investing based on human psychology rather than traditional analysis. "Value investing involved latching on to the irrationality in the market and that just wasn't happening, so I got interested in looking at market expectation.

"The first research in this area came out in the US in 1986 and it established that, amazingly enough, the way analysts behave is irrational in the way they change their forecasts, but the market believes they behave rationally so stock prices move in line with these changes."

Mr Lang's new psychological approach did not sit easily with the value management style so he took his career break. "While I was sailing, I had a lot of time to think about human psychology and although my roots were as a quantitative analyst, the more I thought about it the more I became convinced that what really drives the market is human nature. So when I came back I was keen to try a totally new approach. That would not be easy to do in a large organisation, because it would mean completely ripping the guts out of the existing investment management department."

The solution was to join River & Mercantile, a small fund management company run by some of Mr Lang's for-mer HSBC colleagues, and was restructured as Liontrust earlier this year. "I joined in January 1996 and started running money that April, starting with the First Growth Fund which, at that point, was only around pounds 1m in size. It was great because I was effectively starting with a blank sheet of paper. The approach to managing the fund is quite simple - I just try to buy lots of stocks which are likely to have more good news than bad news. After all, what makes stocks gain more than the average is a balance of good news and the fact that good news is going to keep coming for a reasonable length of time."

This means Mr Lang undertakes a lot of company analysis, but focuses on different factors than the majority of fund managers. "The focus is now where newsflow is changing and changing for the better. One good way of filtering out the companies to look at is to look at changes in analysts' forecasts and concentrate on those where forecasts are rising."

There is a drawback. Mr Lang says: "It is not quite as easy as it sounds. What is important is the psychology of why they are changing. What I am looking for is situations where analysts have got it wrong and have trouble admitting they are wrong. I am not so interested in those changing for rational reasons, say, if they have misread the moves in the oil price. The kind of fundamental analysis I do is much more like management consultancy, looking at how the position of the company is changing within its market. It is big picture stuff analysts often miss."

Mr Lang adds: "My risk is that I underperform my benchmark, which is the FTSE All Share Index. Whenever I invest more of the portfolio in a stock than that stock's weight in the Index, I am taking a risk. Equally, when I elect not to own a stock in the Index, I am taking a risk, especially if it is a big company.

"But if I want to outperform the Index, clearly I have to take on some of this kind of risk. When more and more companies are disappointing, it is easier for me to be wrong and when I am wrong it tends to hurt. This was the case in the first half of this year, when I made a number of changes to the portfolio to reduce some of the risks that usually I am quite happy to tolerate."

As a result, the portfolio of Liontrust First Growth is broadly spread in terms of size, with a relative bias towards mid-cap and small stocks. Currently, 58 per cent is in FTSE 100 stocks, 31 per cent in 250 companies and the remainder in small caps. The two largest holdings are the giants BP Amoco (just under 8 per cent) and Vodafone Airtouch (7.4), followed by British Telecom (4), Glaxo Wellcome (3.6), HSBC Holdings (3.3) and one of the recent growth stars of the UK market Arm Holdings (3).

Sectorally, the biggest exposure is to cyclical services (20 per cent) followed by financials (17) and non-cyclical consumers goods (13) and services (also 13 per cent).

FUNDAMENTAL FACTS

Fund Manager: Jeremy Lang

Age: 35

Fund: Liontrust First Growth

Size of Fund: pounds 227m

Fund Launched: February 1993

Manager of Fund: Since April 1996

Current Yield: 0.19%

Initial Charge: 5.00%

(Investors may be able to buy at lower cost via a discount broker)

Annual Charge: 1.50%

Current Bid/Offer Spread: 5.97%

Minimum Investment: pounds 2,500 (subsequently pounds 1,000)

Minimum Monthly Savings: n/a

Standard & Poor's Micropal Rating (maximum KKKKK): KKKK

Fund performance (to 6 December 1999):

One Year 26.81%

Two Years 41.84%

Three Years 84.67%

Five Years 181.85%

Since Launch 263.28%

Source : Standard & Poor's Micropal

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