Liontrust Special Situations in "sweeter spot"

Over five years to 31 August 2014, Liontrust Special Situations was the third best-performing fund in the IMA All Companies Sector, beaten only by Standard Life Investments UK Equity Unconstrained (GB00B0LD3B90) and MFM Slater Growth (GB00B8YPGL91), according to Lipper data analysed by Tilney Bestinvest.

Morningstar data (to 16 September 2014) shows the fund has produced a 146 per cent return over five years, thumping the FTSE All-Share index, which has returned 66 per cent over the same period. Over three years it has produced a healthy 57 per cent return, compared with 46 per cent from the index, but over one year the fund has disappointed. Its performance has slumped behind the All-Share, returning 8.6 per cent compared with 8.8 per cent from the index.

But Mr Cross and his co-manger, Julian Fosh, are sticking rigidly to their investment process, which requires only that the companies they buy have a specific set of qualities that make their line of business difficult for rival companies to replicate.

Mr Cross says that over the past year or two, cyclical companies (such as retail, leisure and mining) that they choose not to invest in, because they don't tend to have the competition-safe characteristics they look for, have been experiencing a rally, which has caused the fund to slip behind its peer group.

The pair look for intellectual assets and property, strong distribution networks, and large market share, and say these are much more important in companies than their actual valuations.

Liontrust Special Situations Fund invests in a portfolio of UK companies from throughout the UK stock market, aiming for capital growth in excess of the FTSE All-Share Index over rolling three-year periods. It has a weighty 10 per cent of its portfolio in Scottish-based companies. However, in the run-up to the referendum on Scotland's independence, Mr Cross said that he didn't think a 'yes' vote would spell disaster for the fund because these companies were making contingency plans.

Despite having slipped behind the benchmark, Mr Cross has owned a number of companies that have generated excellent returns. One of Liontrust Special Situations' most successful holdings, Weir Group (WEIR), a provider of pumps equipment to the oil, gas and mining industries, has produced a 30 per cent return since the start of 2014. He also owns a large holding in Domino's Pizza (DOM), which has made a 20 per cent return since the start of the year.

Also boosting the portfolio have been oil producer Royal Dutch Shell (RDSA), which is up 17 per cent since the start of the year, and multinational conglomerate Unilever (ULVR), which is up 13 per cent.

More recently, he has purchased automobile breakdown company, the AA Group (AA.), which listed on the stock market in June. Mr Cross doesn't usually buy stocks as fresh to the stocks market as this, but he believes the shares have real potential for long-term investors. In particular he likes AA Group's recognisable brand and strong distribution network, and the fact that 88 per cent of its income comes from recurring business. The company also has a 50 per cent share of its market, which makes it look like a safer bet.

Performance data for Liontrust Special Situations

Source: Morningstar, as at 16/09/2014