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Investment Research: Three-year track record – Liontrust UK Micro Cap

25 June 2019

In her monthly column for Professional Paraplanner, Juliet Schooling Latter, research director, FundCalibre, looks at funds that have just passed or are approaching their three-year track record. This month she examines the Liontrust UK Micro Cap.

When we launched the Elite Radar last year, one of the first funds to get the new badge was Liontrust UK Micro Cap. We’d supported the fund since launch and it was perfect for the new rating, as it was based on a tried and tested and – importantly –  a very successful investment process. Moreover it would be run by the same team behind the Liontrust UK Smaller Companies and Liontrust Special Situations funds. What was there not to like?

It has just passed its three year anniversary and, this month, we have no hesitation promoting it to a full Elite Rating after our investment committee review: its AlphaQuest score (produced by stripping out market movements to lay bare the value added by the managers, their consistency and the probability of them adding this value again in the next 12 months) is exceptionally high.

Launched in March 2016, it is run by Anthony Cross, Julian Fosh, Victoria Stevens and Matthew Tonge. The tried and tested process is the ‘Economic Advantage’ developed and honed by Anthony over the past two decades.

The basic premise of the process is to identify a durable economic advantage which will allow a company to sustain a higher than average level of profitability for longer than expected. The distinct and hard-to-replicate characteristics of this type of company, according to the team, are intellectual property, strong distribution channels and significant recurring business – each stock held must have at least one of these intangible assets; ideally more.

The team also look for director ownership of at least 3% of the company, so they know management interests are aligned. Luckily at the very small end of the market, companies tend to be entrepreneurial and have pretty high levels of management ownership.

Another advantage of investing so far down the cap scale is that businesses tend to be very capital-light with the ability to scale quickly and achieve rapid growth. They are also under-researched – particularly post RDR – so a fund management team that spends the time looking for good businesses can really add value.

Having launched just before the EU referendum, the fund has been continually subjected to economic uncertainty, political upheaval and Brexit worries – but the team has managed to ignore the market noise and by focusing on such a robust process they have delivered for investors: the fund is up 62%* since launch – some 17% more than the sector average of 45%*.

It currently has around a third** of the portfolio invested in technology stocks, 20%** in financials, 19%** in industrials and 10.5%** in healthcare. As anyone who has invested with the team before in other funds might expect, there is very little in sectors such as oil and gas and basic materials.

The holdings – all 67 of them – are, however, varied. For example, SimplyBiz Group, which many readers may actually use themselves, is a 2% holding in the top 10**, after the team participated in its March 2018 IPO. SimplyBiz’s network of member firms grew by 9% in 2018 to 3,726, and it’s this distribution network which is one of two core Economic Advantage intangible assets the team believe it possesses – alongside significant recurring income. The acquisition of Defacto (which serves over 8,500 advisers) should further strengthen the company.

A completely different investment is AB Dynamics, which supplies advanced testing systems to the global motor industry. Its  driving robots and guided soft targets are both good examples of intellectual property. The team expects the company to benefit from the growth of autonomous vehicle technology and Advanced Driver Assistance Systems. Recent results showed a 69% increase in revenues and a near doubling of profit before tax in the six months to 28 February 2019.

While the charge on the fund isn’t cheap – the OCF is 1.4% – at £50 million assets under management, we think it is a hidden gem in the UK Smaller Companies landscape – and is well worth investor consideration. 

*Source: FE Analytics, total returns in sterling, 9 March 2016 to 21 May 2019

**Source: Fund factsheet, 30 April 2019

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.

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