FE drops Liontrust UK funds over capacity concerns

The ratings service has questioned the funds' ability to cope with sizeable inflows, suggesting their size could inhibit future returns.

The Liontrust UK Smaller Companies fund - run by quartet Anthony Cross, Julian Fosh, Victoria Stevens and Matthew Tonge - has grown almost 50 per cent in the last eight months on the back of strong performance.

The fund is top quartile versus peers over one, three and five years, as is the larger Special Situations vehicle. The latter, too, has seen sizeable inflows in recent months, growing by almost £1bn since last February.

FE senior analyst Thomas McMahon said: “We have become concerned that the [UK Smaller Companies fund] is now too large to be able to implement its strategy so are uncertain how it will perform in future,” he said. “We see the significantly smaller Liontrust UK Micro Cap fund as better able to recreate the success of the Smaller Companies fund, which was built on investing in the lowest market cap companies early in their lives.”

The team had similar concerns over Special Sits, despite the fund being an all-cap vehicle with more than 70 per cent of its assets in FTSE 100 or FTSE 250 shares.

FE instead recommended Liontrust's £16m UK Micro Cap fund, which launched last year and is managed by the same team as the small-cap fund. It has matched peers in the IA UK Smaller Companies sector since launch, returning 20 per cent versus a 21 per cent average.

Other changes to the approved list saw FE add in the £42m Amati UK Smaller Companies fund run by Paul Jourdan, based on its ability to remain “small and nimble” enough to exploit opportunities.

As part of a wider move to turn more defensive - in the advent of the UK’s decision to the leave the EU, Donald Trump’s US election victory, and further political uncertainty ahead - FE also added a further six funds and removed 10 from its list.

This included dropping Insight Investment’s Absolute Insight fund for the more defensive BlackRock Absolute Return Bond and Premier Defensive Growth strategies.

Head of FE fund research Rob Gleeson said: “In light of all this we believe that markets will be extremely difficult to predict and it is important that investors remain as diversified as possible in order not to be caught out.”

Also taken out was Majedie’s UK Income strategy, replaced by Franklin Templeton’s fund of a similar name. FE said Majedie manager Chris Reid had altered the £941m fund’s strategy after struggling post-Brexit vote - meaning it no longer matched requirements.

Research manager Charles Younes said: “We have lost our conviction in the fund and there are strong alternatives in the UK Equity Income space.”

The previous round of FE Invest changes saw the firm opt for JPMorgan’s Global Macro Opportunities ahead of Standard Life Investments’ Gars product, adding to a rise in criticism of the strategy. Mr Younes said he had lost conviction in the Gars team’s ability to learn from its mistakes after what had been a difficult opening to 2016.