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Buy cheap stocks with an advantage via Liontrust Special Situations

Liontrust Special Situations offers exposure to companies with economic advantages
April 25, 2019

Many investors think that the UK has problems ahead, because uncertainty over how it will leave the European Union means the outlook for British businesses may not be good. Exporters do not know what future trade arrangements will be and domestic-facing companies could be affected by a fall in consumer spending. Economic statistics so far paint a mixed picture: unemployment continues to fall and wage inflation to rise, meaning that UK consumers should be better off. But gross domestic product (GDP) growth has been held back by poor productivity, and domestic and foreign businesses do not want to invest in the UK.

IC TIP: Buy at 103.1p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Experienced managers

Excellent performance

Low valuations

Multi-cap diversified strategy

Bear points

Potential volatility

Political risk

However, Ed Monk, director of personal investing at asset manager Fidelity, says: “The Bank of England appears unlikely to raise interest rates in this environment, which helps UK stocks by giving consumers and companies lower borrowing costs, and making returns on risk-free assets such as cash less attractive.”

Valuations of UK equities are also attractive. MSCI United Kingdom index was on a forward price/earnings (PE) ratio of 12.5 at the end of March, versus 15.3 for MSCI World index and 16.8 for MSCI USA index. So adding to your UK equity exposure could be beneficial in the long term.

But if you do, make sure your exposure to this area is well diversified. Invest in smaller businesses that are benefiting from wealthier consumers and, in case there is a bad Brexit, also hold mega-caps that derive revenue from abroad.

A good way to get diversified exposure to the UK is Liontrust Special Situations (GB00BG0J2688), which has been managed by Anthony Cross and Julian Fosh since 2008. Mr Cross designed asset manager Liontrust’s Economic Advantage stockpicking process, which involves screening for companies that have an advantage over their peers. This could be, for example, because they have intangible assets such as a brand or intellectual property, or distribution advantages.

Mr Cross and Mr Fosh  are supported by the other members of Liontrust's Economic Advantage team – Matt Tonge and Victoria Stevens. They collectively have a complimentary range of skills, which is beneficial when running a fund that invests in companies of various sizes. Mr Cross mainly focuses on small- and mid-caps and has implemented the same strategy with Liontrust UK Smaller Companies Fund (GB00B8HWPP49) since 1998. Mr Fosh has good knowledge of large-caps. 

Because the fund's managers run a strict business-model screen when selecting potential investments, it tends to invest in capital-light companies that they expect to grow organically. The fund has 26 per cent of its assets in industrial stocks, mainly support services. And it has 27 per cent in consumer stocks and 10 per cent in technology companies, giving it substantially different sector exposure to the FTSE All-Share index.

The fund typically holds around 50 stocks. At the end of March nearly half of its assets were in FTSE 100 shares, with 23.3 per cent in mid-caps, 3.7 per cent in smaller companies and 16.5 per cent in Aim shares. The fund's 10 largest holdings are weighted to mega-cap companies because its managers allocate according to risk, putting more into their least volatile and more certain holdings. Its largest holdings include GlaxoSmithKline (GSK), BP (BP.) and Diageo (DGE).

This approach has resulted in excellent performance, both recently and over the long term. Since Mr Cross and Mr Fosh started running the fund in 2008, they have returned 392 per cent, versus the IA UK All Companies sector average of 99 per cent. Liontrust Special Situations has also beaten the FTSE All-Share index and IA UK All Companies sector average over one, three and five years, and is among the top 25 per cent of funds in its sector in terms of performance over the same periods.

UK equities may be relatively cheap but the outlook is still uncertain, particularly for smaller and more domestic-focused companies which this fund has exposure to. And equity markets could soon enter a down period.

However, this fund should be held over the long term – as with any equity investment – over which time it should ride out any volatility. And its managers have an excellent track record, proven stock selection system and experience of difficult periods in the past. So, if you can withstand bouts of volatility, Liontrust Special Situations still looks like a great way to access cheap UK stocks. Buy. TL

 

Liontrust Special Situations (GB00BG0J2688)
PRICE:103.1p*MANAGER START DATE:20/11/05
IA SECTOR:UK All CompaniesSHARPE RATIO:1.32*
FUND TYPE: Unit trustSTANDARD DEVIATION:9.18%*
FUND SIZE:£4.5bnONGOING CHARGE:0.87%
No OF HOLDINGS:53YIELD:1.89%
SET-UP DATE:;10/11/05MORE DETAILS:liontrust.co.uk/funds
Source:  Liontrust Asset Management, as at 31 March 2019, *Morningstar as at 17 April 2019

 

Performance
Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)10-year cumulative total return (%)
Liontrust Special Situations9.9446.3572.44429.27
IA UK All Companies sector average4.3827.5435.91180.92
FTSE All-Share index7.3932.2139.44182.33
Source: FE Analytics as at 16/04/19

 

Top 10 holdings as at 31/03/19 (%)
GlaxoSmithKline4.1
Diageo4.1
Reckitt Benckiser4.1
Compass4.0
Unilever4.0
BP4.0
Royal Dutch Shell3.9
Relx3.7
Sage3.4
Spirax-Sarco Engineering3
Source: Liontrust Asset Management
 
Sector breakdown as at 31/03/19 (%)
Industrials26.2
Consumer services14.3
Consumer goods13.0
Technology10.1
Oil & gas9.9
Healthcare8.2
Financials8.1
Telecommunications2.0
Cash8.3
Source: Liontrust Asset Management