Funds targeting smaller companies give investors the opportunity to access businesses with strong growth potential, before they reach their prime. Although small-cap investing is typically higher risk than large-cap investing, the possible returns are also greater, particularly if you gain early exposure to growth companies of the future. And with a substantial technology focus and high weighting to Alternative Investment Market (Aim) shares, Liontrust UK Smaller Companies Fund (GB00B8HWPP49) is in a good position to discover these potential growth winners.
- Strong performance
- Experienced managers
- Lower volatility than peers
- Focus on small companies and Aim
- High ongoing charge
This fund has demonstrated excellent long-term absolute and relative performance. It is among the top performers in the Investment Association (IA) UK Smaller Companies sector over one, three and five years. It has also outperformed its benchmark - FTSE Small Cap excluding Investment Trust Index - over one, three, five and 10 years, delivering 220 per cent over 10 years compared with 58 per cent for the index.
The fund is managed by Anthony Cross and Julian Fosh who have a strong record when it comes to investing in smaller companies. They also manage IC Top 100 Fund Liontrust Special Situations (GB00B57H4F11), and they have recently been highly ranked among the fund managers who have provided the most value and consistency by wealth manager Tilney Bestinvest
Liontrust UK Smaller Companies employs the same investment strategy as the Special Situations Fund, but with a small-cap bias. The managers look for companies with durable economic advantages, which include ownership of intellectual capital, distribution channels or repeat business revenues. They believe these intangible assets are difficult to replicate and give companies that possess them a competitive advantage, pricing power and sustained profitability.
The companies the fund invests in must have a minimum 3 per cent of directors' equity ownership as its managers believe this motivates a company's key employees to maintain its competitive edge. And the investment process means Mr Cross and Mr Fosh prefer less capital-intensive businesses such as technology, media and support services: the fund has a substantial weighting to technology, which accounts for 35 per cent of its assets.
"Liontrust UK Smaller Companies is attractive because of its relatively high allocation to small, dynamic tech and biotech companies - the leaders of the future," says Brian Dennehy, managing director at research site FundExpert.co.uk. "You don't find the next Apple (AAPL:NSQ) or Microsoft (MSFT:NSQ) by investing in Apple and Microsoft."
The fund is different to a number of other smaller companies' funds which tend to have a high proportion of their assets in FTSE 250 companies. Only 5 per cent of Liontrust UK Smaller Companies' assets are in the FTSE 250, while almost 70 per cent are in Aim stocks.
Analysts at research company FundCalibre say: "The quality bias and the managers' preference for avoiding cyclical stocks mean this fund is one of the least volatile in the UK Smaller Companies sector. That said, it should still be considered higher risk than the FTSE 100, as the small size of the underlying companies means they are more vulnerable to economic shocks than their larger counterparts."
The fund's ongoing charge of 1.37 per cent is higher than the average level in the UK Smaller Companies category, according to Morningstar. However, the fund's strong performance means it has more than compensated its investors for this.
So with strong long-term performance, an experienced management team and a focus on smaller companies with potential, this fund looks like a good option for strong growth. Buy. EA
| Liontrust UK Smaller Companies (GB0007420788) | |||
|---|---|---|---|
| Price | 1,007.73p | 3-yr mean return | 15.31% |
| IA sector | UK Smaller Companies | 3-yr Sharpe ratio | 1.24 |
| Fund type | Unit trust | 3-yr standard deviation | 11.13% |
| Market cap | £532.18m | Yield | 0.03% |
| No of holdings | 61* | Ongoing charge | 1.37% |
| Set up date | 07/08/1995 | More details | www.liontrust.co.uk/Products/FundRange/UKSmallerCompaniesFund.aspx |
| Manager start date | Anthony Cross: 08/01/1998. Julian Fosh: 02/06/2008 | ||
Source: Morningstar, as at 22/11/16, *Liontrust
Performance
| 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) | |
|---|---|---|---|---|
| *Liontrust UK Smaller Companies Fund | 10.6 | 44.6 | 143.6 | 220.3 |
| IA UK Smaller Companies sector average | 5.1 | 23.0 | 97.0 | 107.3 |
| FTSE Small Cap Ex Investment Trust Index | 6.4 | 20.8 | 127.5 | 58.3 |
Source: Morningstar as at 22/11/16
Performance is of a share class older than the one mentioned in the text
Top 10 holdings as at 30/09/16 (%)
| Craneware | 4.1 |
| Sanne Group | 3.0 |
| Brooks Macdonald | 3.0 |
| Next Fifteen Communications | 2.9 |
| Renishaw | 2.8 |
| Gamma Communications | 2.7 |
| dotDigital | 2.7 |
| Clipper Logistics | 2.6 |
| RWS Holdings | 2.6 |
| Redcentric | 2.6 |
Source: Liontrust Fund Partners LLP
Sector breakdown, as at 30/09/16 (%)
| Technology | 34.9 |
| Industrials | 24.7 |
| Financials | 12.5 |
| Consumer Services | 11.0 |
| Healthcare | 3.2 |
| Telecommunications | 2.7 |
| Oil & Gas | 0.5 |
Source: Liontrust Fund Partners LLP
IC Tip Rating
| Tip style | Growth |
| Risk rating | High |
| Timescale | Long term |
