‘When investor confidence is low contrarian stocks will often trade on a substantial valuation discount to higher quality stocks, which then narrows as economic conditions and investor confidence revert,’ they said.
This year the A-rated duo is focusing on ‘recovering value’ stocks in the Liontrust GF European Strategy Equity fund, which currently has a long book of 105% NAV (net asset value) against a 42% short book.
‘There is still a place for some value exposure in the fund, but the environment has shifted such that we are now looking for what we would characterise as recovering value.
'Those companies are using cost control to effect business improvements, rather than contrarian value – which tends to be for much more distressed situations.’
Gleave and Inglis-Jones said contrarian value exposure in the fund is now restricted to very select opportunities in the financials (11%) and energy (6.7%).
‘The fund’s long book continues to consist primarily of companies with strong cash flows that we also regard as being high quality. Two new additions to the fund fitting this bill are Scandic Hotels, operator of 230 hotels, and Peab, a Nordic construction and civil engineering company.’
Sweden is now the fund’s second largest long country exposure, with 15.2% allocated to the country. This sits just behind the UK which has a 30.2% long exposure.
The duo also recently increased the fund’s position in the materials sector, which is the largest sector exposure with a 23.8% long position.
‘The attraction of recovering value has led us to increase exposure to materials. A number of new stocks have been added recently – including Austrian plastics group Lenzing, Finnish paper and board specialist Stora Enso, and Swiss iron ore pellet producer Ferrexpo.’
On the short side, the duo said opportunities are fairly moderate as, on aggregate, companies are avoiding overly aggressive uses of cash. The biggest short position in the fund is healthcare, with a 2.2% long position versus a 7.9% short.
‘There are still selective short opportunities available - in the healthcare sector, for example, we have been able to take some short positions in small biotech companies that are burning a lot of cash in pursuit of ambitious growth targets.’
Over the three years to the end of May 2017, the Liontrust GF European Strategic Equity fund returned 21.6% in euro terms. This compares with a sector average of 5.4%, over the same time period.