Like many funds with a longterm approach, Liontrust’s UK Growth Fund has been cautious over recent months as they ride out the extraordinary volatile stockmarket conditions caused by the even more extraordinary global COVID-19 pandemic.
But his fund has taken a position in IMI, taking advantage of the general market sell-off. IMI is a highly specialised engineering firm that deals with the production and design of products that precisely control fluid movement and which are used in many markets.
And why? Because, says fund manager Julian Fosh, IMI “possesses two of the three core intangible assets the Economic Advantage investment process seeks to identify in stocks: intellectual property (IP) and distribution network strength.”
Essentially, it is in possession of proprietary designs in an area of specialist manufacture where there are high barriers to entry. On top of that, a well-established distribution network means it can get its products to market effectively. And IMI has turned this theory to consistent financial returns.
IMI, like any industrial firm, is of course at the mercy of the strength or weakness of the market it operates in, and Fosh identifies a weakness in IMI’s mining, oil and gas markets. But, he says, it has a strong balance sheet and offers a high return on capital – just like Halma, Spirax-Sarco and Rotork, similar stocks the fund also holds. In short, even though it’s a cyclical stock, it has a resilience that should mean it ought to provide strong future returns.
But why buy into IMI now? Well, despite the business’s cyclical nature, it has shown a good resilience even in periods of downturn. Its organic revenues dropped by 5 per cent in Q1 of 2020, and by 9 per cent in April as the coronavirus lockdown bit in. Yet IMI is sufficiently diverse to offset slumps in some areas of its business.
For example, the company’s Q1 and April performance is the result largely of a huge drop-off in the demand for its products in the automotive and construction industries. Yet at the same time, an increase in demand for life science and energy market products at the same time has meant the companies revenues actually dropped off far less than might have been expected.
So it has good resilient fundamentals, but it’s also in a prime position take part in a post-COVID recovery as global economies start to return to some form of normality.