Samantha Gleave

Avoiding the crowds

Samantha Gleave

As we near the end of an exceptionally disruptive year, with many challenges still ahead of us, it can be tempting to seek safety in numbers when it comes to investment decisions. Taking a contrarian view at the moment can seem like just another added risk – on top of all the economic and societal uncertainties we still face. But is there actually any safety to be gained from sticking with the crowds when it comes to investing?

Our analysis suggests the answer is a resounding no. However, there is an important caveat: it depends on the market environment. We have found that selecting stocks with very good crowding scores (i.e. those that are uncrowded) works very well when the level of investor anxiety is high. Unsurprisingly, as the Covid-19 pandemic worsened earlier this year, levels of investor anxiety began to climb. Today, our measure of investor anxiety remains at an elevated level, suggesting that the current market environment is favourable for stocks with an attractive crowding score.

In very simple terms, crowding is a measure of how popular (or unloved) a stock is. Our proprietary crowding score reflects a variety of factors including price performance, valuation and analyst sentiment. A high crowding score is bad; a low crowding score is good. A typical stock with a high crowding score has seen its shares perform well and pushed to a full valuation on the back of bullish consensus analyst forecasts and a large range of investors seeking to own the stock. A share with a low crowding score, by contrast, might be unloved by analysts and not widely held by investors – resulting in a depressed share price.

In the current high investor anxiety market regime, our crowding score has proved to be a simple but very effective input into our stock selection process. It can be applied on a regional basis, to factors and industry sectors as well as to individual stocks.

From an individual stock perspective, in recent weeks we have observed initial indications that stocks with low crowding scores are perhaps turning the corner. Some stocks are further down this road than others. For example, in March this year we purchased shares in William Hill, the UK headquartered betting company. The company scored well across various screens in our investment process – a very high free cash flow yield score, an attractive contrarian value score and a very good crowding score. Put more simply, the stock seemed significantly oversold on a free cash flow basis, the valuation was very depressed and the stock had been widely shunned by investors that were very worried about the trading environment. As the months progressed, it was clear that its financial position was not as bad as many feared. The company issued trading updates reporting improved business activity, particularly in the online business, with significant cost cutting measures also taken.

This was later supported by an offer for the entire company by Caesars Entertainment – approved by shareholders earlier this month – that rewarded those investors who were prepared to avoid the crowds and take a contrarian view.

With a rotation in value perhaps only just beginning, our analysis suggests many further uncrowded investment opportunities are still available. In our investment process, examples of stocks with attractive crowding scores include Aggreko and ISS in the support services sector, automobile company Peugeot, and Bank of Ireland and Deutsche Pfandbriefbank in the financials sector.

From a sector perspective, one of the most uncrowded sectors in recent months is energy. Our analysis suggests a number of stocks in the sector are very attractive from a crowding perspective. We recently added to exposure in this sector, including Lundin Energy. Some recent price recovery in the sector is an encouraging initial signal.

In terms of investment factors, momentum, growth and quality appear to be the most crowded factors in Europe (and in the US) having enjoyed a multi-year period of very strong outperformance that has driven them to expensive valuations. At the other end of the scale, value stands out as uncrowded, with measures such as free cash flow yield prominent. Our stock selections in recent months have reflected this as we have focused on those with attractive free cash yield scores. This has contributed to many of our funds having a positive value tilt for the first time in many years.

In the world of investment, it seems we should beware the wisdom of crowds – especially when levels of investor anxiety are as elevated as they are currently.

Liontrust Insights

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Cashflow Solution team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Liontrust European Growth Fund holds a concentrated portfolio of stocks, if the price of one of these stocks should move significantly, this may have a notable effect on the value of the respective portfolio. The Liontrust Global Income Fund's expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Wednesday, December 16, 2020, 11:17 AM