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Cross and Fosh: The secrets of our success

The Liontrust managers say they look for companies with an economic advantage, meaning intangible strengths that competitors struggle to reproduce.

Alex Paget

By Alex Paget, Reporter, FE Trustnet
Wednesday January 23, 2013

Ignoring market noise and focusing purely on company fundamentals is the best way to make consistently high returns in a volatile market, according to FE Alpha Managers Anthony Cross and Julian Fosh.

ALT_TAG The duo run Liontrust’s five crown-rated Special Situations, UK Growth and UK Smaller Companies funds, which are all top-quartile performers over three and five years.

At yesterday’s Liontrust annual conference, Cross (pictured) said that gaining an "economic advantage" has been the key to the portfolios' outperformance.

"We have had a good run over the long-term across the three funds, with top-quartile performances in recent years."

"Unfortunately the growth fund was hit last year because we don’t have any exposure to retailers, banks or miners and they all had a profitable 2012," he said.

"The way we try to get this economic advantage is by locating companies that have intangible strengths that competitors struggle to reproduce."

The main three intangible assets that the duo look out for are a company’s intellectual property, distribution channels and repeat business, although they also consider a company’s culture and its brand power.

The largest of the management team’s funds is the £715m Liontrust Special Situations.

Launched in November 2005, it has been a top-quartile performer over one, three and five years – coming in as the second-best performer in the sector over three years and the third-best over five.

Performance of fund vs sector and index since November 2005

ALT_TAG

Source: FE Analytics

According to FE Analytics, the fund has returned 155.83 per cent since its launch. This beats its benchmark – the FTSE All Share – and the IMA UK All Companies sector, which have returned 52.93 per cent and 46.63 per cent, respectively.

It has also been one of the least volatile funds over this period.

Fosh says taking a top-down approach makes investors "merely pawns in the macroeconomic environment".

He highlights four characteristics that he and Cross have stuck by through thick and thin during their time at Liontrust: high growth, high quality, low quality and low turnover.

He commented: "When we talk about a high-quality business we are basically looking at whether or not the company can work and, if so, can it generate excess returns? To achieve this we look at the company’s cash-flow return on capital against its cost of capital."


"At its heart, its cash-flow returns on capital should be a lot higher than its cost of capital. Take GlaxoSmithKline, for example: it has consistently kept returns up while keeping the cost of leverage of distribution and research and development down."

As shown in a recent FE Trustnet study, Liontrust Special Situations has been a top-quartile performer for maximum drawdown, annualised volatility, downside risk and its Sharpe ratio over the last five years.

On top of that, it is one of only two UK growth funds that have posted top-quartile performance in each of the last five calendar years.

Fosh says the fund’s low volatility stems from the portfolio’s bias to safe but strong businesses.

"There has always been the argument that high risk leads to high rewards, but this simply isn’t the case," he explained.

"To quote the Harvard professor Malcolm Baker: 'When you look back over history, there isn’t a pattern of higher returns for higher-risk stocks.'"

"This myth stems from the investor psychology that you must ignore boring companies and chase exciting ones to find growth."

"Also, investors might feel that they have to over-pay for low volatility, but from our experience a quality valuation bias does play out over time."

The manager says they like to maintain a low-turnover rate in their funds and he likens this process to a game of tennis between two non-professionals.

"We also want to keep a low turnover rate in the portfolios – for instance last year it was just 5 per cent – because we are happy to do the hard work at the front end and then look to hold a company indefinitely," he said.

"Like an amateur game of tennis, we look to play our own game and try to make fewer mistakes than our competitors, not go for a big winner to smash the competition."

"We are bottom-up stockpickers – no style can work all of the time but it is just about making sure that you don’t drift away from your own style."

"When we talk about high growth, we mean buying stocks with strong and growing earnings – growth – and buying stocks that look cheap compared with their fundamentals – value."

The final characteristic of their fund is locating high-growth companies. Fosh says to find these, investors have to be prepared to pay a premium.

"Sometimes the markets wrongly think that companies are too expensive and that means investors have the disinclination to do the hard work, basically being a bit lazy and not looking into the company’s fundamentals," he said.

"They can get over-swayed and ignore the inherent strength of the business."

"We have now started to dip our toes into the value market and are trying to locate companies that can offer superior growth."

Liontrust Special Situations has a total expense ratio (TER) 1.92 per cent and a minimum investment of £1,000.

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