Running the data on the best performing FTSE 350 stocks in the 10 years to September 2021, Liontrust Asset Management (LIO) sits in second place with a 3,180% return. It becomes the sixth worst performing stock when you delve into the index’s performance for the past two years.

Are we at another turning point for the stock? On 24 August, Liontrust shot to the top of the FTSE 350 risers table with a 13% gain after its takeover offer for Swiss asset manager GAM flopped. The deal looked doomed from the start, with analysts questioning its merits and saying Liontrust did not have a good history with acquisitions.

The market had certainly given the bid the thumbs-down. Liontrust’s shares had fallen hard since talks first emerged about the company’s interest in GAM. That the shares have subsequently started to rise again is the market feeling relieved. Not buying GAM could be a lucky escape.

Numis analyst David McCann said Liontrust’s acquisitions of Majedie and Architas resulted in a loss of shareholder value, saying it paid too much for the former and did not generate the expected performance and asset gains for the latter. He also thought the GAM acquisition would be value destructive.

Liontrust used to be rated as one of the UK’s best asset managers. All four funds under Liontrust’s ‘Economic Advantage’ process rank top quartile for performance since launch or being appointed as manager, according to the company’s latest annual report. A further eight funds in its stable are also top quartile whereas only two of its funds are bottom quartile since launch date or fund manager appointment.

It deserves credit for going from small boutique status to becoming an asset manager capable of taking on the big players with confidence. Understandably, investors are now asking if Liontrust has lost its way.

Eight out of 10 products under its ‘Sustainable Future Funds’ process are ranked bottom quartile for performance over the year to 31 March 2023, according to the annual report. Growth stocks which populate these funds went out of favour at the start of 2022 thanks to higher interest rates negatively impacting valuations.

The failed GAM bid could be costly on multiple levels. First, Liontrust faces up to £11 million of legal and corporate finance costs linked to the deal. Second, it needs to recover an £18 million loan from GAM, a business in a fragile state. Third, Liontrust’s senior management have lost credibility given the 73% share price decline in two years.

There are very bright people working for Liontrust and I am sure there are rival asset managers who would love to poach whole teams from the business. That is an underappreciated risk to the share price.

To win back the market’s favour, Liontrust needs its funds to be at the top of the pack in performance terms so it can start to attract more customer inflows. Attempting another acquisition to drive growth would be a mistake in the near term.

Trading on 7.2 times forecast earnings for the year to March 2024 and just 3.4 times enterprise value to earnings before interest, tax, depreciation and amortisation, Liontrust could easily switch from being predator to prey.

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