The five crown-rated Liontrust Special Situations fund, which is headed up by the FE Alpha Manager duo of Anthony Cross and Julian Fosh, has become increasingly popular with investors over the years thanks its strong long-term track record and its managers’ clear-cut approach to the UK market.
However, while Metcalfe – who is investment director at the firm – still rates Cross and Fosh highly, he has become increasingly concerned about the growing size of the now £1.4bn portfolio, given that the managers tend to invest across the market cap spectrum.
He has therefore removed it from his portfolios, replacing it with the lesser known CF Miton UK Value Opportunities fund – which has an AUM of just £150m.
“I think size is the main issue, as it always is with us, but there always has to be a fund that is either the same or better to replace it – and we think the CF Miton is,” Metcalfe (pictured) said.
“We were looking at the fund flows of the Liontrust fund and £80m went into it last month and it is now £1.4bn. As far as we are concerned, although there is no real science to it, we don’t see any benefits to a fund getting bigger; it only reduces the manager’s investment universe – especially if the managers will buy smaller companies, like they do in Liontrust Special Situations.”
He added: “I don’t see any advantages of the fund getting bigger, only potential disadvantages.”
Cross launched Liontrust Special Situations in November 2005, with Fosh joining him as co-manager in June 2008.
According to FE Analytics, the fund has been the fifth best performing portfolio in the highly competitive IA UK All Companies sector since launch with returns of 197.78 per cent, beating its FTSE All Share benchmark by more than 120 percentage points in the process.
Performance of fund vs sector and index since Nov 2005
Source: FE Analytics
The fund has also been a very consistent performer, as a result of the managers’ “economic advantage” model for investing – whereby they look for companies which have intangible assets that competitors struggle to reproduce, such as intellectual property, distribution channels and repeat business. They also consider a company’s culture and its brand power.
Our data shows the fund was a top quartile performer in 2006 and though it slipped into the third quartile in 2007, it was the one of only two portfolios in the sector – the other being CF Lindsell Train UK Equity – to beat the FTSE All Share and be a top quartile performer in 2008, 2009, 2010, 2011 and 2012.
Source: FE Analytics
However, as the managers’ growth-orientated approach tends to lead them to high quality companies, the fund was bottom quartile in the strongly rising market of 2013 – though it still returned 20 per cent that year.
It also narrowly underperformed against the index last year, but was second quartile. Its relative underperformance last year is likely to have stemmed from its chunky positions in the oil majors, its bias towards mid-caps as well as high weightings to mega-cap multinationals – such as Unilever and Diageo – which were hurt by the strength of sterling at the start of the year.
However, Metcalfe is more concerned about the growing size of the fund, not its recent underperformance.
Our data shows the fund has grown from just £210m this time three years ago to its current £1.4bn size, though it must be pointed out that there are a number of funds within the sector that have a much larger AUM.
Nevertheless, Metcalfe is a big believer that size does ultimately impact returns and has sold out of funds like M&G Global Dividend, Schroder UK Opportunities and Unicorn UK Income over capacity concerns, right before their recent periods of underperformance.
“When you compare and contrast the size of the Liontrust and Miton funds, the Miton fund is just £150m and has a high weighting to AIM-listed stocks. It can pretty much invest in anything at the moment though,” Metcalfe said.
CF Miton UK Value Opportunities was launched in March 2013 and therefore might have too short track record for many investors. But Metcalfe says that as the managers – George Godber and Georgina Hamilton – started this strategy at Matterley and have worked together since 2008, they have enough experience.
Since its launch, the CF Miton fund has been the third best performing portfolio in the sector with returns of 31.1 per cent. As a point of comparison, the FTSE All Share has gained 8.64 per cent, while the Liontrust fund is up 9.41 per cent.
Performance of funds vs sector and index since Mar 2013
Source: FE Analytics
It outperformed in the rising market of 2013 and it was top decile again in last year’s flatter market conditions.
However, both funds have very different approaches to UK equities as Liontrust Special Situations is effectively a growth portfolio, while the Miton fund – as its name suggests – is value orientated and focuses on stocks which the manager considers to be undervalued by the market.
“They don’t have the same styles but I’m more concerned about the net result,” Metcalfe said. “At the moment, it’s very difficult to call whether growth or value will outperform so we are looking more at long-term returns.”
The other major reason why Metcalfe has started buying Miton UK Value Opportunities is because he is avoiding out-and-out small-cap funds as the outlook for smaller companies still looks difficult, despite their relatively poor returns last year.
He therefore wants genuine multi-cap managers – like Godber and Hamilton – who can seek out value within the small-cap space, rather than just buying the index.
Our data shows the CF Miton fund has 36.4 per cent in the FTSE 250, 24.5 per cent in the FTSE AIM, 20.1 per cent in the FTSE Small Cap and 8.3 per cent in the FTSE 100. The rest of the portfolio is split across cash and overseas stocks.
Though Metcalfe is a fan of CF Miton UK Value Opportunities, given that it is becoming more and more popular with investors and is seeing decent inflows of its own, he will be watching the portfolio AUM closely over the coming years.
“Miton said they would review the capacity at £800m and look to close it at £1.2bn. However, it is £150m at the moment so that gives us plenty of time. I think it is in the sweet spot at the moment,” Metcalfe said,
CF Miton UK Value Opportunities has an ongoing charges figure (OCF) of 0.94 per cent, which is slightly more expensive than the Liontrust fund’s OCF of 0.88 per cent.