Liontrust Special Situations: seeking special companies with economic advantage

Kate Marshall | Fri 09 December 2016

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• The managers seek companies with a durable economic advantage that keeps competitors at bay
• This includes intellectual property, strong distribution channels and recurring business
• Long-term performance has been driven by good stock selection

The UK economy faces a period of significant uncertainty. While the full ramifications of the UK’s exit from the EU remain unclear, it is likely to have at least a short-term impact on consumer confidence and business investment.

Anthony Cross and Julian Fosh, managers of the Liontrust Special Situations Fund, focus on identifying companies they believe are well-placed to succeed and withstand unpredictable economic events over the long term. They aim to invest in companies that possess certain strengths, which competitors find hard to replicate. They look for the ownership of intellectual property - intangible assets such as strong brands or patents - as well as strong distribution channels or recurring revenues that allow reinvestment and development. These characteristics could help keep competitors at bay, allow greater control over pricing, and potentially deliver superior profit growth over the longer term.

The managers invest in a number of globally-exposed businesses, such as Unilever and Diageo, and some that export their goods and services, such as manufacturing firm Rotork. Across the portfolio, around two thirds of earnings are made overseas and these international businesses provided some resilience in the aftermath of the UK’s vote on EU membership. Concerns over the prospects for the UK economy saw sterling weaken significantly against overseas currencies. This has the effect of boosting profits when brought back to the UK.

Other businesses with high exposure to the fortunes of the UK economy, such as roadside assistance group AA and recruitment firm PageGroup, and those in the property and financials sectors, including online real estate portal Rightmove, were shunned following the EU referendum. These investments dragged on the fund’s performance, although their share prices subsequently recovered somewhat.

More recently investors have avoided some of the higher-quality companies that the managers seek in favour of some of the more undervalued and economically-sensitive areas of the market, such as banks and mining. The managers’ process naturally leads them to avoid these sectors and therefore they have missed out on some of the gains made.

As long-term investors Anthony Cross and Julian Fosh make infrequent significant changes to the portfolio. That said, they recently sold an investment in UK Mail. While the company possesses strong distribution networks, the managers do not believe the company has been active enough in taking advantage of growing its market share following the failure of a competitor. Elsewhere, shares in Reckitt Benckiser were added to the portfolio on account of the consumer goods firm’s strong international presence and ownership of some of the world’s most recognisable brands. Overall, the fund is a concentrated portfolio, which is a higher-risk approach as each investment will have a significant impact on performance.

Our view on this fund

Anthony Cross and Julian Fosh have adhered to the same successful investment philosophy since the fund’s launch in November 2005. Our analysis suggests the managers have added value through stock picking in companies of all sizes, including higher-risk smaller companies. We would expect the fund to perform well over the long term and the fund features on the Wealth 150 list of our favourite funds across the major sectors. Long-term performance is impressive and since launch the fund has grown 271%* compared with 100.2% for the FTSE All Share Index, although past performance is not a guide to future returns.

Past performance is not a guide to the future.

Source: Lipper IM * to 30/11/16

Please note the fund has a holding in Hargreaves Lansdown.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.