With the recent Alibaba initial public offering and the launch of the iPhone 6, you may be considering some exposure to technology. We already include two technology funds in our IC Top 100 Funds: Polar Capital Technology Trust (PCT) and Allianz Technology Trust (ATT), but single sector funds are higher risk as they are focused on one area, and technology shares can be volatile. In March and April, for example, technology companies and funds with a large percentage of their assets in them took a hit when there was a shift in focus from growth to value stocks.
So a good option could be a fund that offers meaningful exposure to that area but is not wholly focused on it.
- Good performance
- Experienced managers
- Different to other smaller companies funds
- UK technology exposure
- Can lag peers
- Smaller companies are higher risk
IC TIP RATING
Tip style: GROWTH
Risk rating: HIGH
Timescale: LONG TERM
"Concentration in one area is dangerous, and can generate spectacular profits or losses," says Sam Lees, head of UK and North American research at fund information site FundExpert. "In contrast, Liontrust UK Smaller Companies (GB0007420788), with over 40 per cent in technology but also diversified exposure to other sectors was fairly well insulated against the March/April shock."
Valuations both for the US stock market and technology stocks are very stretched but Liontrust UK Smaller Companies focuses on small and dynamic UK technology companies.
"The small-cap focus is valuable in the technology sector because of the scope for large companies growing through acquiring smaller ones," adds Mr Lees. "And if you are going to benefit from the next big thing do you think you are likely to do this via a huge company such as Facebook or Apple, or via a selection of exciting smaller companies?"
Liontrust UK Smaller Companies is also a good option for UK smaller companies exposure. It beat its benchmark, the FTSE Small Cap ex investment trusts Index, over one and five years, and is among the top 10 performing funds in the Investment Management Association (IMA) UK Smaller Companies sector over three and five years, as well as being first quartile over one year.
It offers different exposure to many UK smaller companies funds: as well as its specialism in technology, two-thirds of its assets are in Alternative Investment Market (Aim) shares. Many 'smaller companies' funds have a high proportion of their assets in the FTSE 250.
See our IC Top 100 update for more on this
Liontrust UK Smaller Companies only has 5 per cent of its assets in the FTSE 250: if any of its holdings graduate into this area it holds them until it can find a suitable replacement.
Liontrust UK Smaller Companies is run by Anthony Cross and Julian Fosh who also run IC Top 100 Fund Liontrust Special Situations (GB00B0N6YF70). This fund also has a strong track record, and its managers run Liontrust UK Smaller Companies using a similar investment process.
Read more in our update on Liontrust Special Situations in the issue of 19 September
Among smaller companies, they believe economic advantage is created and maintained by talented individuals. They also believe equity ownership motivates key employees, and aligns employee and shareholder interests, so they require that at least 3 per cent of each company it invests in is held by its main board directors.
"The quality bias and the managers preference to avoid cyclical stocks mean this fund is one of the least volatile in the UK Smaller Companies sector," comment analysts at research company FundCalibre. "It has a great track record and is particularly strong in down markets."
However, the distinct investment style has also led to periods of underperformance relative to its peer group and benchmark - for example, it doesn't keep up with the FTSE Small Cap Index over three years. The small size of its investments also means they are more vulnerable to economic shocks than larger companies.
But with an overall good record, experienced managers and differentiation from other smaller companies funds, for technology and smaller company exposure Liontrust UK Smaller Companies Fund remains a good option. Buy.
LIONTRUST UK SMALLER COMPANIES (GB0007420788) | |||
| PRICE: | 749.54p | MEAN RETURN: | 23.65% |
| IMA SECTOR: | UK Smaller Companies | SHARPE RATIO: | 2.65 |
| FUND TYPE: | Unit trust | STANDARD DEVIATION: | 7.87% |
| FUND SIZE: | £293.56m | ONGOING CHARGE: | 1.66% |
| No OF HOLDINGS: | 57* | YIELD: | 0.26% |
| SET-UP DATE: | 8 January 1998 | MINIMUM INVESTMENT: | £1,000 |
| MANAGER START DATE: | 8 January 1998/June 2008 | MORE DETAILS: | liontrust.co.uk |
Source: Morningstar & *Liontrust
| 1-year cumulative total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) | |
| Liontrust UK Smaller Companies Inc | 11.9 | 84.3 | 154.5 | 225.9 |
| FTSE Small Cap Ex Invest Trust TR GBP | 5.0 | 87.9 | 80.7 | 104.4 |
| FTSE Aim All Share TR GBP | -3.8 | 7.3 | 22.4 | -9.1 |
| IMA UK Smaller Companies | 7.5 | 65.9 | 102.0 | 174.1 |
Source: Morningstar, as at 25 September 2014
Top 10 holdings (as at 31 August 2014)
| Holding | % |
| Emis | 3.9 |
| Iomart | 3.5 |
| NCC | 3.2 |
| Redcentric | 3.0 |
| Pressure Technologies | 2.8 |
| PayPoint | 2.7 |
| Craneware | 2.7 |
| Charles Stanley | 2.7 |
| Wilmington | 2.7 |
| Mattioli Woods | 2.7 |
Sector breakdown
| Sector | % |
| Technology | 41.4 |
| Industrials | 28.0 |
| Financials | 9.2 |
| Consumer services | 8.4 |
| Healthcare | 3.7 |
| Oil & gas | 1.3 |
| Cash | 8.0 |
| Other | 22.6 |
