Investors in Liontrust Special Situations shouldn’t be put off by the past 12 months of heavy outflows. In fact, they should consider allocating more to the fund, according to market commentators.
Run by the FE fundinfo Alpha Managers duo of Anthony Cross and Julian Fosh, the fund uses Liontrust’s in-house Economic Advantage process, seeking out stocks with at least one of three intangible assets: intellectual property, strong distribution or recurring business.
The idea is these assets provide barriers to competition, protect margins and are capable of reaping cash flow returns in excess of the cost of capital.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Over the long term, this process has helped the fund generate high returns, putting it in the top 20 performers over 10 years in the IA UK All Companies sector.
However, data from FE Analytics suggest that more than £560m has flowed out of the portfolio over the past 12 months as returns slipped into the third quartile.
This recent underperformance could be explained by the fact that Liontrust Special Situations use the growth style of investing, which has struggled this year as to the value-favouring reopening trade dominated markets.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
None of this has swayed the overwhelmingly positive opinions of market commentators, many of whom recommended adding more to the fund.
Ryan Hughes, analyst and head of active portfolios at AJ Bell, said Liontrust Special Situations had been “one of the standout UK equity funds” in recent years.
He put the fund’s recent period of muted performance down to the market rotation, but added that it has recovered well since February when the value rally slowed down.
On the outflows, Hughes said managers Fosh and Cross won’t be “unhappy with the outflows” given its titanic size of £6.5bn. Because of its size, Hughes said AJ Bell was monitoring the fund’s liquidity situation closely but Hughes said Liontrust “have managed the situation well”. The fund remains a ‘buy’ call from the platform.
Amy Kennedy, fund analyst at wealth manager Brewin Dolphin, agreed with Hughes that despite the outflows the fund was still worth holding, sharing his ‘buy’ conviction.
Kennedy said the fund size has stabilised recently due to its generally positive performance.
Looking at what the fund offers over the long term could be a more critical way of making a buy, hold or fold call, especially when dealing with a riskier asset like equities.
For Kennedy, Liontrust Special Situations is an “excellent one-stop-shop” for investors seeking broad market-cap, pure UK equity exposure. This differentiates it from some its IA UK All Companies peers which take meaningful positions in overseas equities.
Investing across the cap scale, the portfolio is generally split 20-30% into smaller companies, 40% in the FTSE 100 and the remainder in the FTSE 250 and cash.
Another element that sets it apart is the type of stocks which end up in the fund because of the Economic Advantage process. Kennedy said this creates a portfolio with “very different exposures to many of their growth-biased peers”.
The fund is concentrated with just 58 holdings with the main sector split currently in industrials, consumer products and telecom, media and technology in third. Its five biggest holdings are drinks company Diageo, analytics provider Relx, oil major Royal Dutch Shell, Spirax-Saraco Engineering and recruitment business PageGroup, not all names often found in growth funds.
Liberty Godfrey, fund analyst at interactive investor, called these “strong brands and good customer relationships”, reflective of Fosh and Cross seeking out businesses that can grow their earnings independently of the wider economy, creating some defensiveness in the stocks.
Godfrey is also on the ‘buy’ side.
A commentator who recommended just holding on to Liontrust Special Situations with necessarily buying more was Emma Wall, head of investment analysis at Hargreaves Lansdown.
She said the fund weathered the Covid market slump last year “better than many of its peers” because of a lack of exposure to cyclical businesses, such as retail, transport, leisure, restaurants and house builders – sectors which struggled the most during the sell-off and lockdowns.
Although its performance has lagged the FTSE All Share the past 12 months, pitted against the large-cap FTSE 100 its actually outperformed. Long term it’s beaten both.
Performance of fund vs sector, benchmark and FTSE 100 over 1yr
Source: FE Analytics
“While the UK has struggled against other global markets in recent years – the US in particular – it should still form part of any well-diversified portfolio, and this fund offers something a bit different with its clear process and multi-cap approach. Hold,” Walls concluded.