Luthman and Bailey head up the Liontrust Macro UK Growth and Liontrust Macro Equity Income funds. They use a top-down thematic approach, investing in companies that give them the best access to long-term macroeconomic trends.
One of their longest-standing themes has been to buy and hold developed world consumer staple companies that tap into the consumerisation of the developing world. Until recently, they argued that these types of stocks were much more attractive than those with a domestic focus, as the UK economy has been so weak.
However, Bailey told FE Trustnet that he and Luthman have started to sell out of positions such as Unilever and Reckitt Benckiser, as their valuations do not reflect the slowing economic growth that is currently taking place in many emerging markets.
The emerging market theme has driven growth in both Liontrust UK Growth and Liontrust Macro Equity Income since Bailey took them over in the early 2000s, but the manager says the team will be going down a different route for now.
"It is definitely still a long-term theme if you look at how these economies are developing and how consumerism is picking up; however, in the short-term it is not the right place to be at all, so we have stepped back," Bailey explained.
He says that over the next decade there will still be money to be made from companies with exposure to emerging middle classes, and that he and Luthman (pictured) will continue to look out for opportunities.
"We have wanted to tap into the global readjustment of currencies and wages for some time," he explained. "We wanted to have access to consumer staple businesses which had access to developing regions like the emerging markets. In 2003, we initially bought Unilever and Reckitt Benckiser and in 2009 we bought Heinz, PepsiCo and Kimberley Clarke."
"The point of buying these companies was that they would benefit from increased demand for consumerism and population growth."
However, he says that has all changed recently – both because of valuations and the slowdown in emerging markets.
Record-low bond yields have encouraged traditionally cautious investors to look to higher-risk assets to generate income. One of the main beneficiaries has been less economically sensitive stocks that pay dividends.
These kinds of companies, including the likes of Unilever, Reckitt Benckiser and Diageo, have been dubbed the expensive defensives: although they are generally considered to be well-run companies with strong balance sheets, steady earnings and a sustainable dividend, the price investors have been willing to pay for them leaves no room for disappointment.
Slight earnings-downgrades have resulted in significant losses for these companies of late – particularly Unilever and Reckitt Benckiser.
Performance of stocks and index over 3 months
Source: FE Analytics
The fall in Unilever's price prompted another FE Alpha Manager – Nick Train – to argue that a significant buying opportunity had opened in the company, but Bailey is not so sure, saying these stocks are not as safe as they used to be.
"Basically, we felt that at the start of the year – especially with Warren Buffett buying Heinz – that there had been a general re-rating of the sector," he said.
"That was partly down to the function of yield-hungry investors – effectively refugees of the fixed income market – who wanted a steady income and strong balance sheets. That drove up valuations and around Easter we decided to chop down our exposure to PepsiCo and Kimberly Clark and we sold out of Heinz."
"We have also sold out of Unilever and Reckitt Benckiser. That was down to a number of factors, not just because of their ratings, but also because demand is slowing in emerging markets such as China."
"Because of that, the attractions of those stocks have become far less attractive, as not only is demand slowing, but there has been increased competition," he added.
Since Bailey took charge of Liontrust UK Growth in March 2002, it has been a top decile performer in its IMA UK All Companies sector, with returns of 209.02 per cent. Its sector average, which is also its benchmark, has returned just short of 100 per cent over the period.
Performance of fund and sector since Mar 2002
Source: FE Analytics
The Liontrust Macro UK Equity Income fund has also performed very strongly under Bailey: it is up 170.79 per cent since he took over in late 2003, compared with 118.8 per cent from the IMA UK Equity Income sector average and 127.9 per cent from its FTSE All Share benchmark.
Performance of fund vs sector and index since Mar 2002
Source: FE Analytics
Returns have been less positive of late, however, in part thanks to the funds' focus on emerging markets. While the likes of Unilever have performed strongly until only recently, others were affected much earlier by the slowdown in developing countries. Our data shows that both funds have fallen short of their benchmark over one- and three-year periods, but are still well ahead over five years.
Liontrust Macro UK Equity Income is popular with the FE AFI panel of leading experts, and is included in their recommended Cautious portfolio. It requires a minimum investment of £1,000 and has ongoing charges of 1.6 per cent.
Liontrust Macro UK Growth is slightly cheaper, with ongoing charges of 1.57 per cent.
