Fund Review: Liontrust UK Growth

This article is part of
Fund Review: UK Growth

This £228m fund is co-managed by Julian Fosh and Anthony Cross, who took the helm of the portfolio in March 2009.

As its name suggests, the vehicle’s objective is to provide long-term capital appreciation by investing in UK equities.

The seasoned managers apply their “economic advantage” investment process to the portfolio. Mr Fosh explains this is based on the idea it is intangible assets, rather than tangible assets, that are the key to a company’s success.

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“Specifically, the process asserts that three distinct types of intangible assets – intellectual property, distribution or high levels of recurring revenue – are the most important in enabling businesses to defy normal competitive pressures and earn higher returns than average for longer than average,” he says.

Businesses only make it into the portfolio if they display “strength” in one of these intangible assets. The manager notes: “Their past and future expected financial returns are then analysed – using cashflow return on capital as our primary test – to see whether, in practice, they have managed to capitalise on that theoretical advantage to earn higher returns than average. We then thoroughly assess their valuation and seek to ensure that we can buy them at a price at which their prospects have not already been fully discounted by the stockmarket.”

Smaller companies only qualify for inclusion in the fund if their main board directors have 3 per cent equity in the businesses, although the portfolio may only hold up to 10 per cent in small caps. The portfolio comprises 40-60 holdings at any one time, with the latest factsheet showing the number of holdings at 46 at the end of November 2015.

The managers were already using this process on the Liontrust Special Situations and Smaller Companies funds when they started running the UK Growth portfolio. Mr Fosh says: “The fund is thus a vehicle for investors who like the process and approach but are confined predominantly to the large-cap space.” It’s an entirely bottom-up stockpicking approach, he adds.

“By studying the return on capital profile of the individual holdings going back as far as 20 years, we are able to understand how a business performs at all stages of the economic cycle and its own industry cycle, and blend holdings that fit our investment criteria to build a portfolio that is sufficiently diversified by size and type of company to perform well.”

The fund sits at level five on the risk-reward spectrum, according to its key investor information document, which also shows ongoing charges of 1.65 per cent apply to the clean fee R-share class.

The fund has outperformed both its peer group and benchmark over long and short-term time frames, data from FE Analytics shows. In the 10 years to January 6 2016 it returned 111.5 per cent, compared with the Investment Association UK All Companies sector average of 70 per cent and the FTSE All-Share index’s gain of 64.2 per cent. In the past 12 months the fund has delivered 6.2 per cent, while its peer group averaged a return of 3.7 per cent and the index was up by just 1.2 per cent.