First 50 Funds Interview: Anthony Cross, Liontrust Special Situations

14 November 2017

Moneywise’s Helen Knapman meets fund manager Anthony Cross to get the lowdown on Liontrust Special Situations, a member of the Moneywise First 50 Funds.

What is the Liontrust Special Situations fund?

It’s a large capital growth fund that captures UK companies from right across the stock market.

We hold 40% to 45% of the portfolio in companies listed in the FTSE 100 index, about 20% to 30% in small companies, around 5% in cash, and the remainder in medium-sized companies in the FTSE 250 index.

There is no particular reasoning for this banding, but we’ve always done it and we’ve found it has worked.

How do you identify companies to invest in?

Any company that we invest in must demonstrate that they have a strength in either intellectual property, distribution networks or high contracted recurring income.

Intellectual property covers copyrights, patents, trade secrets and trade know-how. This takes us into areas such as the great engineering businesses in the UK, such as Renishaw. It takes you into healthcare companies, such as Glaxo and AstraZeneca, and into media and software companies

We look for strong distribution networks. These can be split into two types: large global networks built up over decades or hundreds of years, such as Diageo or Unilever, or more modern, data-driven networks, such as Rightmove. Other examples could be YouGov and GlobalData in market research and Fidessa in financial services.

The third thing we look for is contracted recurring income. To get a tick in that box, you must have at least 70% of your income recurring under contract, so this essentially means you’re a fee-based business, such as Compass Group [a catering company] and Brooks MacDonald [an investment management firm].

These intangible assets are difficult for competitors to replicate. Lots of our companies will have one, two or even all three of these assets.

Does price factor into your investment decisions?

We are sensitive to price; if companies meet all our criteria but they’re overpriced we won’t buy them. I was looking at adding Halmer – an engineering company – into the fund recently, but it was too expensive.

Once a company is in the fund, it’s a different story. We won’t immediately sell companies because they become overpriced. We might buy less or sell some of it, but we don’t buy and sell companies purely on valuation.

How long do you hold companies for?

It’s an indefinite position. If you take the fund since we created it, we own roughly 50 of those companies. Our turnover tends to be about 10% every year.

What have you been buying recently?

We aim to have 20% to 30% in small companies, so the biggest changes this year have been the introduction of more small-cap names. This includes companies such as Kainos in software and CareTech in healthcare provision. We’ve built up our existing holding in the Mortgage Advice Bureau.

What have you been selling recently?

We’ve sold out of alternative assets business, Sanne Group. It had been very successful – but we require all the directors of our small-cap holdings to own at least 3% equity in the business, so they are motivated by this to grow the business organically. Sanne Group’s directors sold a big slab of equity, which took their ownership below 3%, so we eased our way out.

We’ve also been cutting back on Diageo. We like it, but it kept drifting over our maximum 4% of the fund holding threshold.

What’s been your best investment decision?

The quiet compounders are the best companies – these are the ones when you forget how well they’ve done because they’re not screamers and shouters. RWS – a patenting company – is one of these; it has grown its dividend every year and generates beautiful amounts of cash.

Another is Brooks McDonald: bought at £1.60 a share, it’s now £20.

What’s been your worst investment decision?

There hasn’t been an awful decision, but The AA has been disappointing. Its share price has been down since we bought it and it hasn’t grown its profitability as we hoped it would.

What’s your top tip for a beginner investor?

Average your way in – drip a little into the market into a selected fund each month. And understand how it is that your fund manager builds and picks stocks. They always say that past performance isn’t a guide to future performance and that is very true, but you need to look at managers’ long-term numbers and see how they’ve done during value periods, growth periods and financial crises.

If you look at the managers who’ve spent 10 or 20 years running one fund, you might then be able to see if there’s more skill than luck in what they’ve achieved.

The managers behind the fund

Anthony Cross (pictured top left) has managed Liontrust Special Situations since its launch in November 2005. Anthony, who was previously at Schroders, has also managed the Liontrust UK Smaller Companies Fund since launch.

Co-manager Julian Fosh (pictured top right) joined Special Situations in 2008. He has previously managed money at Scottish Amicable Investment Managers, Britannic Investment Managers, Scottish Friendly Assurance Society, and Saracen Fund Managers.

Liontrust Special Situations Key Stats

Launched: November 2005

Fund size: £2884.7 million

Yield: 1.83%

Ongoing charges (OCF): 0.87%

Source: and Liontrust Special Situations’ August 2017 factsheet

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