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.
“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.
Mr Fosh says: “In 2015 we picked more winners than losers by a ratio of 2:1 – some 33 stocks beat the benchmark return of 1.8 per cent, while just 15 lagged. Furthermore, our winners were bigger winners than our losers were losers. Our top performer, Rightmove, rose 85 per cent and contributed around 1.7 per cent to performance, whereas our worst-performer, Amec Foster Wheeler, lost 46 per cent, though it only impacted us by around 0.7 per cent.
“A further factor explaining this outperformance is that quality as a style factor – stocks with high returns [on equity, or capital] and strong balance sheets or solvency – is back in favour and performing well.”
There were holdings that detracted from performance last year, with Mr Fosh observing most of its worst-performing stocks had a degree of exposure to the oil and gas or basic materials sectors, although Imperial Tobacco was an exception.
He insists they are not “unduly concerned” by the weak markets that have so far characterised 2016. “Since adopting the economic advantage process in March 2009, the fund has produced an annualised return of 15.8 per cent through good times and bad,” he adds.
EXPERT VIEW
Gill Hutchison, head of investment research, The Adviser Centre
Anthony Cross and Julian Fosh deploy their economic advantage process with focus and enthusiasm. Their main philosophical tenet is that firms with hard-to-replicate intangible assets are better placed to build a sustainable competitive advantage and therefore grow their businesses. The long-established approach has been more typically associated with small-cap investments across the years, but since taking over this fund the managers have applied the process to large caps as well. With distinct industry preferences, this fund’s performance has the potential to differ meaningfully from the main UK index, though to a lesser degree than other funds in the suite.
