While value investors will lean towards stocks that are cheap compared to their history, growth managers look for companies where earnings are expected to grow at an above-average rate compared to their industry or the overall market.
It means they may underperform value managers in strongly rising markets, but in flatter market conditions – which many experts say we are in now – their focus on businesses that are growing revenues, sales and most importantly earnings means they are well-suited to beat the index.
There are a number of UK funds that follow this strategy, but two of the highest-profile examples are AXA Framlington UK Select Opportunities and Liontrust Special Situations.
Both are managed by highly-rated managers, have relatively strong long-term track records and have shown an ability to consistently outperform.
FE Alpha Manager Nigel Thomas – who has been running money since the 1970s – took over the £4.6bn AXA Framlington UK Select Opportunities fund in September 2002 while FE Alpha Manager duo Anthony Cross and Julian Fosh’s five crown-rated Liontrust fund was launched in November 2005.
According to FE Analytics, the AXA Framlington fund has been a top decile performer in the highly competitive IMA UK All Companies sector since Thomas took over with returns of 306.83 per cent, beating its benchmark – the FTSE All Share – by 125 percentage points in the process.
Performance of fund vs sector and index since Sep 2002
Source: FE Analytics
The £1.3bn Liontrust fund has also been top decile since its launch, and has more than doubled the returns of the FTSE All Share, with gains of 203.61 per cent.
It has beaten Thomas’ fund by close to 80 percentage points over that time as well.
Performance of funds vs sector and index since Nov 2005
Source: FE Analytics
Both of the funds’ outperformance hasn’t just been down to one or two good years, however.
Since Thomas has been at the helm, AXA Framlington UK Select Opportunities has beaten the sector in 10 out of the last 11 calendar years, outperforming its benchmark in nine of those years.
Liontrust Special Sits, on the other hand, has beaten the sector and index in six of the last eight calendar years.
The Liontrust fund and FE Alpha Manager Nick Train’s CF Lindsell Train UK Equity fund are the only two portfolios which posted top quartile returns in each year between 2008 and 2012.
Given the consistency of their returns, it isn’t too surprising to see that AXA Framlington and Liontrust funds have had strong capital preservation scores.
Our data shows, for example, that both have been top decile for their annualised volatility, downside risk, maximum drawdown and Sharpe ratios over seven years.
However, while looking back at past performance is intriguing, the most important factor is what are investors getting if they were to buy now? Ben Willis, head of research at Whitechurch, says while Thomas and the Liontrust duo are growth investors, their styles do differ slightly.
“Thomas is a growth orientated investors and, though I hate using the expression, he is a GARP [growth at a reasonable price] investor as he won’t pay over the odds,” Willis said. “He likes companies with sustainable earnings streams, he also tends to buy companies that have fallen out of favour with the wider market.”
Willis says that while Thomas’ approach to picking companies hasn’t changed over the years, the companies he invests in have.
“Due to his outperformance, Thomas has attracted a lot of inflows and has had to compromise. When he first started running the fund, he would roughly have a third each in large, small and mid caps.”
“The small and mid caps were how a lot of his returns were generated, but he is actually one of the managers who have successfully made the transition as he now holds roughly 50 per cent in large-caps and less than 10 per cent in small-caps.”
Cross and Fosh, on the other hand, have an approach to picking companies which they call the “economic advantage model”.
They look for companies that have intangible strengths which competitors struggle to reproduce and 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 Liontrust managers are more defensive. They have a clearly defined process which means they tend to hold non-cyclical companies,” Willis explained.
“Their focus is a company’s earnings as well, but they are quite prepared to pay up a higher price for those expected earnings.”
Cross and Fosh’s focus on quality was the main driver of their fund’s returns during and immediately after the financial crises in 2008. However, Willis says it means they will underperform in strongly rising markets.
This was shown in 2013, when Liontrust Special Sits underperformed the sector and index even though it returned 19.97 per cent.
AXA Framlington UK Select Opportunities, due to Thomas’ slightly different approach, outperformed with returns of 28.74 per cent.
Performance of funds vs sector and index in 2013
Source: FE Analytics
Cross and Fosh hold 39 per cent of their fund in the FTSE 100 and count the likes of Royal Dutch Shell, AstraZeneca and Unilever as top 10 holdings. They then hold 30 per cent in the FTSE 250 and around 25 per cent spilt across the FTSE Small Cap and AIM indices.
The expert's view
Willis rates both funds highly because of their respective management teams.
Though he says size is a slight issue with the AXA Framlington fund, he would usually always pick the fund due to Thomas’ abilities.
However, as the manager is expected to step down from the fund over the coming years as he is reaching retirement age, Willis says long-term investors may be better off with Liontrust Special Situations.
“You can’t ignore how well Nigel Thomas has done as his track record is excellent. But the fact he is nearing the end of his career could be a potential issue,” Willis said.
“The plan is that Chris St John, who manages the mid-cap fund, will work closely with Thomas over the coming few years and this isn’t anything against him, but I would go with Liontrust at this point in time.”
“If you are putting your money in AXA Framlington UK Opportunities, you are putting it in their because of Thomas and with him expected to step down in a few years’ time, it’s just a risk we don’t want to take.”
Liontrust Special Situations has an ongoing charges figure (OCF) of 0.88 per cent, while the AXA Framlington fund is slightly cheaper at 0.83 per cent.
