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Liontrust UK Smaller Companies

IA Sector:
UK Smaller Companies
Asset Manager:
Liontrust
Asset Manager Website:
Asset Manager Factsheet:

A UK smaller companies fund whereby the managers use a well-established and distinctive process to identify businesses that have durable competitive advantages. The 'Economic Advantage' approach focuses upon intangible strengths that are difficult to replicate and support structural growth. Within its sector, the fund features in our 'Smaller-Cap, Growth' category.


Opinion, Characteristics & Utility

Opinion

  • This Established fund benefits from the discipline with which the managers apply their long-standing process of identifying companies with a long-term competitive advantage.
  • The process is unique and very clearly articulated.  It has been tried and tested over the course of many years and through a wide variety of market conditions.
  • By dint of the success of the strategy, the fund has grown to a large size in the context of the asset class and its liquidity.  While the fund is not soft closed, the firm is not actively marketing the strategy to ensure its size does not compromise the investment strategy.

Characteristics & Utility

  • Just as the approach is unique, so the portfolio has idiosyncratic characteristics. It is more highly exposed to the lower end of the small-cap market compared to some peers.
  • The portfolio has an overt growth bias. Exposures tend towards IP-rich manufacturing, IT, service companies and fund management.
  • The team is prepared to accept elevated valuations for stocks within the portfolio on the expectation of superior growth opportunities.
  • Given its idiosyncratic nature, investors should expect the fund's risk and return outcome to carve its own path. It is likely to struggle when value/cyclical recovery stocks are leading the market.
  • The fund should appeal to long-term investors who are attracted to growth opportunities in UK small caps and are aware of the elevated risks and liquidity constraints associated with this part of the market.

Risk Commentary

The fund’s KIID Synthetic Risk and Reward Indicator (SRRI) is 6.  This is a regulatory measurement that is, where possible, calculated from the volatility of its weekly performance over a five-year period.  A score of 6 means the fund’s historic volatility is between 15% to 25%.

The fund’s five-year standard deviation is lower than both mainstream UK small-cap equity indices and the peer group average.   This is a function of a distinctive process that focuses on firms with strong positions within their industries.  However, it is important to remember that the portfolio may display idiosyncratic behaviour and that a lower volatility outcome is not necessarily a permanent characteristic.  Different share classes could have differing SRRI scores.

risk_and_reward_profile_6

Description

Investment Team

The Economic Advantage Team is led by Anthony Cross and Julian Fosh*.  Mr Cross joined Liontrust from Schroders in 1997 to develop the team’s UK equity investment process and launched this fund the following year.  Mr Fosh* joined to support the Economic Advantage team in 2008.  They work alongside co-managers, Victoria Stevens, Matthew Tonge, Alex Wedge and Natalie Bell. Ms Stevens and Mr Tonge joined the team in 2015, Mr Wedge joined in 2020 and Ms Bell joined in 2022.

*Julian Fosh is on a leave of absence.

Investment Philosophy

The managers believe that it is possible to identify a small number of companies that are able to resist the natural forces of competition to maintain high profitability for longer than the market assumes. Their "Economic Advantage" process is built around the identification of key factors that consistently drive sustained profitability and the companies that meet these characteristics.

Portfolio Construction & Risk Controls

The managers believe that management ownership of companies is important to ensure an alignment of interests and encourage a conservative approach. All holdings must be at least 3% owned by main board directors. In determining positions sizes, they use a company-specific risk grading, which covers both financial risk and industry risk. The liquidity challenges inherent to small-cap investing are mitigated by the low turnover approach and the long-term investment horizon. A restriction on sector deviations from the benchmark, with a maximum overweight or underweight of 50% of the index weighting, is designed to ensure a reasonably balanced portfolio.

Investment Process

The managers invest only in companies with intangible strengths that are difficult for competitors to reproduce. These are considered across three main categories, which are often mutually reinforcing. 'Intellectual Property' assets are often protected by law and encompass patents, copyrights, resource extraction rights and trade secrets. 'Strong Distribution Networks' that are owned by companies give them the ability to provide strong local service and to send and target clients with particular products or information. They can be physical or electronic. 'Recurring Revenues' are often related to product strength or customer brand and the managers like these companies' ability to plan and invest for long-term growth as a result of the earnings predictability created when recurring business accounts for at least 70% of turnover.

Company screening, analysis and scoring is based around the requirement for them to fit at least one of these categories. The managers assess the degree to which companies' advantages are already understood by the market, investing in those that are underestimated or recovering and expected to benefit from earnings upgrades or a multiple re-rating. For recovery areas, cyclically-adjusted P/E ratios are considered for companies that are seen to be able to survive economic weakness.


Key Fund Facts

Inception Date:

08 January 1998

Manager(s) (Since):

Economic Advantage Team ( Jan 98)

Fund Domicile:

United Kingdom

Base Currency:

£ Sterling

Fund Benchmark:

FTSE UK Small Cap ex IT

IA Sector:

UK Smaller Companies

Formal documentation, including the fund prospectus and the KIID, should be sought directly from the asset manager.  For ease of reference, a link to the ASSET MANAGER WEBSITE can be found above, as well as a link to the ASSET MANAGER FACTSHEET.


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