Liontrust roars on

To many investment commentators, 2020 was the year where so-called ESG (environment, social and governance) focused capitalism really stamped its authority on markets.

The latest figures for Liontrust Asset Management (LIO) – which prided itself on a sustainable approach to investing long before the pandemic – back this up. In the 12 months to 31 March, the FTSE 250 firm saw a 69 per cent leap in adjusted pre-tax profits to £64.3m, thanks to a 30 per cent rise in net inflows. Together with surging markets, those inflows powered a near-doubling in assets under management (AuM) to £30.9bn at the end of the financial year.

When inflows are this strong, it can quickly leave market expectations in the shade, as a look back to our deep-dive on the Liontrust investment case last October highlights. At the time, we noted that consensus forecasts for net flows for FY2021 had more than doubled to £3.1bn in the space of two years. But by the end of March, Liontrust’s funds had taken £3.5bn in net new client money, beating those mid-year estimates by 13 per cent. As of 18 June, AuM stood at £33.27bn, already ahead of last October’s expectation for the end of the current financial year.

As ever, the question is how much further all of this can run. Numis analyst David McCann, who raised his target price on the stock to 1,900p following these results, nonetheless believes net flows will narrow to £2.9bn this year and £2.4bn in FY2023. By the end of that year, brokers think Liontrust’s asset pile will stand at £42bn.

That suggests something of a moderation compared to the recent rate of growth, though this still translates to strong double-digit growth in revenues, profits and dividends. Indeed, thanks to the asset manager’s high and defendable margins, an average asset pile of £40bn in FY2023 is still likely to generate earnings above 110p per share. A forward price to earnings multiple of 16 isn’t particularly pricey for a growth stock.

But while it is probably sensible for shareholders to rein in expectations after such a strong recent tailwind, the group’s distribution strategy offers hope that earnings can continue their skyward trajectory.

This will come into sharp focus over the coming months with the launch of the Liontrust ESG Trust (ESGT) on 5 July. The investment trust will be managed by the same team behind the group’s Sustainable Future Global Growth fund, one of the UK’s best-performing global funds on a ten-year basis.

The trust will be unconstrained by market capitalisation and concentrate on a smaller portfolio of around 30 stocks, compared to 50 in the open-ended fund. Despite significant overlap in stock selection, AJ Bell financial analyst Laith Khalaf described the trust as “a more high octane” and “riskier” version of the existing global fund, given its gearing at around 10 per cent of assets, and greater focus on small cap companies. 

One suspects ethically-minded investors will happily swallow this – together with an annual charge of around 1.07 per cent – given the team’s track record, which should add support to future management fee cash flows.

Elsewhere, management believes a global impact fund launched with ABN AMRO’s (NL:ABN) investment arm and marketed to investors in Italy, Luxembourg and Spain can pave the way for the wider distribution of fixed income, cashflow solution and economic advantage strategies across continental Europe.

The acquisition of the UK business of diversified multi-manager Architas, for £54m net of cash, points to another potential source of growth: as Liontrust’s brand recognition grows, it should have an easier job of attracting talent in the fund management industry.

Long-term investments are usually a positive sign, particularly if struck at a decent price. The only drawback is the potential drag on the balance sheet; the Architas deal, started and completed in lockdown, brought with it £15m in associated costs, which explain half the wide gulf between full-year adjusted and reported profits.

FactSet-compiled consensus forecasts are for adjusted earnings of 105p and dividends of 61.0p per share, respectively, for the year to March 2022.

In the often rather staid world of asset management, such surges in new business can leave investors feeling nervy. But the market does not appear to have been carried away with Liontrust’s valuation in absolute terms or in comparison to ‘pure play’ sustainable fund house Impax Asset Management (IPX), which trades on 30 times consensus earnings for the year to September 2022. This means that the payback on any investment has shortened, particularly if dividends are reinvested in the years ahead. Buy.

Last IC view: Buy, 1,450p, 25 Nov 2020