Small-cap funds have performed strongly over the past year, with the benchmark IMA UK Smaller Companies index up by 17.6%. However, Liontrust UK Smaller Companies Fund (which has a total expense ratio of 1.68%) has done even better, delivering 21.7%. And it has more than doubled over the past five years.
The fund is run by small-cap veteran Anthony Cross and Julian Fosh. They aim to identify stocks with lasting competitive advantages. In particular, they focus on intellectual property, distribution and the ability to attract recurring business. They also look for evidence that both employers and managers are committed to the company – they expect directors to hold at least a 3% stake.
They disdain attempts constantly to fine-tune sector allocations to take advantage of short-term conditions. Not only do they prefer to look at a company’s performance through the economic cycle, they also think that economic forecasting adds very little value (although they are pessimistic about Britain in the medium term). This means they “may invest in a company even if it faces temporarily tough end-market conditions”. As a result, portfolio turnover is relatively low.
As Cross admits, these policies mean the fund has relatively few holdings in some of the best-performing recent sectors, such as banking, insurance and retail. However, he believes such stocks will struggle in the longer run as they have “few of the ‘economic advantage’ characteristics that our investment process seeks to identify”.
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Liontrust UK Smaller Co’s top ten holdings
| Name of holding | % of assets |
|---|---|
| Dechra Pharmaceuticals | 3.9% |
| Ffastfill | 3.9% |
| Iomart | 3.7% |
| Paypoint | 3.7% |
| Charles Stanley | 3.7% |
| Brooks Macdonald | 3.4% |
| Craneware | 3.3% |
| NCC | 3.3% |
| Wilmington | 3.1% |
| RWS | 3.1% |