Liontrust UK Growth: May 2021 fund update

Dominic Rowles | Fri 21 May 2021

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• Anthony Cross and Julian Fosh are experienced investors who we rate highly
• They have a robust investment process which has served investors well over the years
• Long-term returns have been boosted by the managers' astute stock picking
• The fund features on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How does this fund fit in a portfolio?

The Liontrust UK Growth fund aims to grow your investment over the long run by investing in companies with unique advantages over the competition. We think it could be a good option for the UK section of a broader global investment portfolio. A focus on high-quality companies means the fund could work well alongside other funds investing in unloved UK companies with recovery potential.

Manager

Anthony Cross and Julian Fosh are joint managers of the Liontrust Special Situations Fund. They've been at Liontrust for 24 and 13 years respectively, but both have three decades of experience analysing and investing in UK companies.

The duo also co-manage three other funds, which focus on different parts of the UK market but share the same investment process that underpins this one. Given the similarities in the way the four funds are managed, we think this is a reasonable workload.

The managers also benefit from the support of a knowledgeable team including smaller company specialists Victoria Stevens, Matthew Tonge and Alex Wedge. Stevens and Tonge joined the team in 2015, and Wedge joined in March 2020, but the trio previously built up experience working at other firms too.

Process

The fund managers think the secret to successful investing is to find the few companies with an 'economic advantage' – a sustainable edge over the competition that will allow them to earn above-average profits for the long term.

The managers believe the hardest economic advantages to copy are intellectual property, such as patents and trademarks, strong distribution channels and significant repeat business. 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.

Once companies with a strong competitive edge have been identified, the managers look for proof that it's led to superior financial returns in the past. They also look for evidence of pricing power – the ability to increase prices without affecting demand for the company's product or service.

Finally, they consider the company's valuation. They compare each company's valuation on a variety of measures to try and avoid overpaying for their shares. Each investment is made with the long term in mind though, so the managers believe the initial price paid is less important to overall returns than the company's ability to grow earnings and profits over the long term.

Recent investments include business telecoms provider Gamma Communications. The managers believe the company possesses all three of the core strengths that their Economic Advantage process looks for. Over many years, the firm has developed market-leading cloud communications technology, which it distributes via an established network of partners, and most of its income is earned on recurring monthly contracts. Having already built a leading position in the UK market, the company’s expanded into Europe, where it sees significant potential for future growth.

The managers invest in companies of all sizes, but no more than 10% of the fund will invest in higher-risk smaller ones. They also have the flexibility to invest in derivatives which, if used, adds risk.

The fund holds shares in Hargreaves Lansdown plc.

Culture

Liontrust gives managers the freedom to manage their funds according to their own investment and market views. The company simply asks managers not to deviate from their investment processes. Each manager's funds are regularly checked by other senior managers at Liontrust to ensure they're staying true to their investment processes.

We like that all Liontrust fund managers invest a significant amount of their own money into the funds they run. This helps to align their interests with those of investors.

While Liontrust takes Environmental, Social and Governance (ESG) issues seriously at company-level, this has not yet fed through to all the company's funds. The Liontrust UK Growth fund, for instance, doesn't formally integrate ESG analysis. However, the managers are considering ways to bring ESG analysis into their portfolio construction process in the future.

Cost

The fund has an ongoing annual charge of 0.87%, making it one of the more expensive UK Growth funds on the Wealth Shortlist, Investors should note a higher fee means the fund manager has a bigger hurdle to deliver future positive returns. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund launched in March 1993 but Cross and Fosh took control and started applying the Economic Advantage investment process from March 2009. Since then, the fund's turned an investment of £10,000 into £42,591*. The broader UK stock market's returned £31,759 over the same time period, although past performance is not a guide to the future.

Our analysis suggests returns were boosted by the managers' ability to invest in companies with outstanding prospects, regardless of their size or what sector they're in. Remember the value of your investments will fall as well as rise, so you could get back less than you invest.

The fund's focus on high quality companies means it's tended to lag the broader stock market when it's rising quickly, but hold up better when markets fall. That was the case over the past year. Since the announcement of several Covid-19 vaccines in November 2020, a new wave of optimism has coursed through markets and, as expected, the fund’s struggled to keep up.

Weaker performers included financial services business TP ICAP, whose acquisition of anonymous share trading specialist Liquidnet met some shareholder unease. The company also announced that revenues and operating profits had slipped in 2020 amid the ongoing Covid-19 pandemic.

Several companies did well though, including pharmaceutical company Indivior which recently settled a legal dispute with former parent Reckitt Benckiser. The company also released an update in which it said pre-tax profit was expected to be ahead of expectations. Digital marketing specialist Next Fifteen Communications also did well and continues to benefit from our increasingly digitized economy.

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2021.

More about Liontrust UK Growth, including charges

Liontrust UK Growth Key Investor Information