LIONTRUST UK SMALLER COMPANIES: £1.2bn fund shows why it’s still king of the small-cap jungle
Investment discipline underpins £1.2 billion fund Liontrust UK Smaller Companies. The managers do not invest in unquoted stocks, only pick profitable businesses that have their head offices based in the UK – and like the executives of their chosen holdings to have ‘skin in the game’ (own shares in the businesses they run).
They are exacting standards which restrict their choice of investments to around 400 companies. But they have helped deliver some solid long-term results for investors.
Although the fund is underwater over the past year – recording losses of three per cent – it has outperformed both its benchmark (the FTSE Small Cap Index) and the average of its peer group over both five and ten years.
Putting numbers on these superior results, it has generated 33 per cent over the past five years.
Over the same period, the FTSE Small Cap Index (excluding investment trusts) and the average UK smaller companies fund have recorded respective returns of 29 and 11 per cent.
The fund is overseen by a six-strong investment team who between them run a number of Liontrust vehicles with exposure to the UK stock market. The team’s Anthony Cross believes the fund’s framework ensures it has the best chance of obtaining the returns that investors expect. He says: ‘Investing in unquoted businesses is a different skill-set to what we do as holders of companies listed on the UK stock market. Unquoteds need more hand-holding which often means sitting on their boards.’
Cross adds: ‘We prefer to invest in profitable small companies that are not only listed on the UK stock market, but are headquartered here. That gives us the assurance that they are subject to all the laws governing UK companies.’
The final part of the process – ‘skin in the game’ – is all about ensuring the senior management of the companies that they are investing in have the same financial interests as Liontrust: namely to drive up the share price.
Alex Wedge, also part of the investment team, says: ‘We like management to own at least three per cent of the company’s shares. As well as aligning their interests with ours, it means they are less likely to take big risks – or build loads of company debt.’
Of Liontrust UK Smaller Companies’ 67 holdings, the average management skin in the game is 20 per cent.
The fund managers select companies that have ‘economic advantage’. This means businesses that through a mix of intellectual property, strong distribution and recurring revenues are able to maintain a competitive edge over rivals – driving profits ever higher.
An example of this is British Technologies, a Cambridge-based company listed on the London Stock Exchange in late July 2021. ‘It’s a leader in its field,’ says Wedge. ‘It has developed software and hardware that allows the location of a mix of people – from offenders to the elderly – to be monitored.
‘The company has won contracts overseas in countries such as New Zealand while the founder and chief executive Sara Murray still has a big share stake.’
Although British Technologies’ share price has fallen since it listed, Wedge is convinced it is on a ‘long runway for growth’.
The fund is not suitable for income seekers and its ongoing annual charges total 1.32 per cent.
Over the past five years, its sister fund, Liontrust UK Micro Cap, has delivered superior returns of 63 per cent.
Its emphasis on smaller businesses than UK Smaller Companies means it is a riskier investment proposition.