Liontrust Special Situations – looking for 'economic advantage'

Dominic Rowles | Thu 09 January 2020

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• Anthony Cross and Julian Fosh invest in companies with an advantage over the competition
• They've stuck to the same robust investment process since launch
• We rate the managers but think the fund's annual charge is too high

Our View

Anthony Cross and Julian Fosh, managers of the Liontrust Special Situations Fund, invest in companies that make plenty of cash and have an edge over the competition. They've followed the same robust investment process since launch in November 2005.

Our analysis suggests the managers have added plenty of value through their ability to invest in companies with outstanding growth prospects, regardless of their size or the sector they're in. The managers' focus on high quality companies means we expect the fund to hold up well when markets fall but not grow quite as much when markets rise quickly.

Overall we think Cross and Fosh are talented, experienced fund managers and this fund has the potential to perform well in the long run, although there are no guarantees. That said, there are other talented fund managers investing in the UK and many of their funds are available at lower cost. That's why it doesn’t currently feature on the Wealth 50 list of our favourite funds.

What is economic advantage and why does it matter?

When a company comes up with a new product or service, they sometimes initially experience a high level of profitability. But as new competitors enter the market and the company is forced to compete by cutting prices, profits get squeezed. That's why the managers look for companies with an 'economic advantage' – a durable edge over the competition.

They believe the hardest economic advantages to replicate are intellectual property, strong distribution channels and significant repeat business. That's why a company must have at least one of these attributes before it's considered for the fund. Other less powerful but nonetheless important strengths include franchises and licenses, good customer relationships and a great company culture.

They invest in companies of any size, from FTSE 100 juggernauts through to higher-risk smaller companies. They also invest in relatively few companies which further increases risk as each one can have a big impact on performance.

Company in focus: Renishaw

Renishaw designs, manufactures and sells precision electrical equipment and its shares have featured in the fund for a number of years. The company owns large amounts of intellectual property built up through decades of research and development. It's also developed a global distribution network with 77 locations in 35 different countries. This helps cement strong customer relationships.

How's the fund performed?

The fund has a great long-term track record. An investment of £10,000 made 10 years ago would now be worth £41,447*, while the broader UK stock market would have returned £21,828. Please remember past performance isn’t a guide to the future.

The high-quality companies favoured by the managers have been popular with other investors in recent years. Their high cash flows and dependable earnings streams made them appear lower risk than more economically-sensitive businesses. Their high dividends have also been favoured in a low interest rate world. Remember dividends are variable and not guaranteed.

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2019

Performance was strong over the past year too. The fund benefited from a number of success stories including engineering business Spirax-Sarco. Its share price rose strongly amid rising sales and profits.

Please note this fund invests in Hargreaves Lansdown plc.

Find out more about this Fund including charges

Key Investor Information