Best in Class: Liontrust UK Micro Cap
“Business opportunities are like buses, there’s always another one coming.”
It’s the sort of quote you would expect to hear from business magnate Richard Branson, a man who went from failed attempts at growing and selling Christmas trees and budgerigars to founding and running Virgin, which today controls more than 400 companies in various fields.
But it is one thing spotting an opportunity and another to take advantage of it – mostly because “it is dressed in overalls and looks like work”. For those that don’t know, I stole that quote from Thomas Edison.
This week’s Best in Class is the ultimate opportunist. The Liontrust UK Micro Cap fund has a simple, yet successful remit. It only considers companies with market capitalisations of under £175m for initial investment and will look to gradually exit holdings when they exceed £275m, when companies start appearing on the radar of many more investors.
It is a finite window – but it is where the team can really take advantage of early-stage growth in an area of the market which tends to be under-researched.
What helps this fund stand out from its peers is the disciplined process which underpins it. It utilises the 'Economic Advantage Process', which was born out of the 'Cross Report' first written by fund manager Anthony Cross in 1997. Cross is joined on the fund by co-managers Julian Fosh, Victoria Stevens and Matthew Tonge and Alex Wedge.
The key belief - backed by long-term experience exploiting companies with the Economic Advantage - is that only distinctive and hard-to-replicate intangible assets can form the basis of a sustainable competitive advantage. It is a process which has proved successful on both the Liontrust UK Smaller Companies and Liontrust Special Situations funds.
The fund only invests in profitable companies. Like all other funds run by the economic advantage team, a company must have at least one intangible asset. These include a strong distribution network, high recurring revenues or a strong brand.
Ideally, a company will have more than one of these characteristics. The team also looks for director ownership of at least 3 per cent of the company. The total portfolio will generally consist of 40 to 60 holdings.
Performance has been exceptional, with the fund returning 153 per cent to investors in the last five years, compared with 94 per cent for the average IA UK Smaller Companies fund.
What we really like is the team’s ability to keep taking advantage of their window of opportunity. There are more than 1,200 companies capitalised at under £250m on either London’s Main Market or AIM (Alternative Investment Market).
Over the last five years the team has exited a total of 43 stocks – a third of which have been because they have reached the £275m market-cap threshold. But, as the team is keen to highlight, there is a strong future pipeline of opportunities.