LIONTRUST UK SMALLER COMPANIES: £1.2bn fund shows why it’s still king of the small cap jungle
Investment discipline underpins the £1.2 billion Liontrust UK Smaller Companies fund. The managers don’t invest in unlisted stocks, only pick profitable companies headquartered in the UK – and like the managers of their chosen holdings to have ‘skin in the game’ (own shares in businesses they run).
These are demanding standards that limit their choice of investments to around 400 companies. But they have helped deliver strong long-term results for investors.
Although the fund has been underwater over the past year – recording losses of 3% – it has outperformed both its benchmark (the FTSE Small Cap Index) and the average of its peer group on five and ten years.
Putting numbers on those top results, it has generated 33% over the past five years.
Over the same period, the FTSE Small Cap Index (excluding investment trusts) and the UK Small Business Average Fund have returned 29% and 11% respectively.
The fund is overseen by an investment team of six people who alone manage a number of Liontrust vehicles with exposure to the UK stock market. The team’s Anthony Cross believes the fund’s framework gives it the best chance of delivering the returns investors expect. He says: “Investing in unlisted companies is a different skill set to what we do as holders of companies listed on the UK stock market. Unrated people need more grip, which often means sitting on their board.
Cross adds: “We prefer to invest in profitable small businesses that are not just listed on the UK stock market, but are headquartered here. This gives us confidence that they are subject to all UK company laws.
The final part of the process – “skin in the game” – is to ensure that the senior executives of the companies in which they invest have the same financial interests as Liontrust: namely to drive up the share price.
Alex Wedge, also a member of the investment team, said: “We want management to own at least 3% of the shares of the company. In addition to aligning their interests with ours, this means they are less likely to take big risks or go into heavy debt.
Of Liontrust UK Smaller Companies’ 67 holdings, the average in-game management skin is 20%.
Fund managers select companies that have an “economic advantage”. This means companies that, through a combination of intellectual property, strong distribution and recurring revenue, are able to maintain a competitive edge over their competitors, thereby generating ever-increasing profits.
One example is British Technologies, a Cambridge-based company listed on the London Stock Exchange at the end of July 2021. “It’s a leader in its field,” says Wedge. “He has developed software and hardware that can monitor the whereabouts of a mix of people – from criminals to the elderly.
“The company has won overseas contracts in countries such as New Zealand, while founder and chief executive Sara Murray still has a significant stake.”
Although British Technologies’ share price has fallen since its IPO, Wedge is confident it is on a “long growth streak”.
The fund is not suitable for income seekers and its ongoing annual charge is 1.32%.
Over the past five years, its sister fund, Liontrust UK Micro Cap, has generated 63% higher returns.
The focus on small businesses versus UK small businesses means this is a riskier investment proposition.