2015 was one of FE Alpha Managers Julian Fosh and Anthony Cross’s best years ever in terms of consistent absolute performance, according to the management duo, who run Liontrust’s UK Smaller Companies, Special Situations and UK Growth funds.
Last year’s choppy, sideways market was the result of concerns surrounding plummeting commodity prices and China’s growth slowdown.
Performance of indices in 2015
Source: FE Analytics
In fact, within the main UK equity sectors in the Investment Association universe, only 180 funds out of 266 managed to provide a positive return of more than 1 per cent last year on an annualised basis.
Fosh and Cross’s funds, on the other hand, each achieved an annualised return of more than 8 per cent, with Liontrust UK Smaller Companies providing the ninth-highest return overall of 23.48 per cent.
“[Our outperformance] boils down to three main reasons: firstly because of the outperformance of small and mid-caps, secondly stock selection, and thirdly the quality of the returns we’ve been getting,” Fosh said.
The managers are well-known for being unafraid of straying away from the benchmark, and as such all three funds have achieved an above-average alpha generation over three, five and 10 years.
Liontrust UK Smaller Companies has a 65.4 per cent weighting in FTSE AIM stocks and smaller weightings in FTSE Small Cap and FTSE 250 companies, while the larger company focused Liontrust UK Growth fund has more than a third in mid-caps and an 11.6 per cent weighting in AIM stocks.
The Liontrust Special Situations fund is a ‘best ideas’ portfolio that combines holdings from the two aforementioned funds, and holds one third in large and mid-caps respectively, while the rest of the portfolio consists of AIM and small-caps.
“In terms of performance last year, you can see very clearly that if you were just in the FTSE 100 it wasn’t a good year for you,” Cross said.
“The FTSE All Share was up a little bit, but it was FTSE 250 and smaller companies stocks that drove the index into positive territory. Last year, small was beautiful.”
The managers said that this explains the stellar performance of the Liontrust UK Smaller Companies fund in particular, which outperformed its peer average and benchmark by 8.62 and 10.49 percentage points respectively.
Performance of fund vs sector and index in 2015
Source: FE Analytics
They add that 2015 was also a “terrific year” for their Special Situations fund, which achieved its second-best ever annualised return versus its FTSE All Share index, which it outperformed 13 times over.
“That was driven by the small-cap and AIM weighting. Liontrust Special Situations of course has a 20 per cent weighting in this, and also a strong weighting away from large-caps. That combination of weighting attributed to as much as half of the outperformance versus the benchmark,” Fosh explained.
“For our growth fund, the larger company vehicle, it was a similar story but perhaps less high -octane than Special Situations. We have 10 per cent in small-caps there and small-caps did do very well, but it delivered a return that was 4 percentage points less than Special Sits because the contribution from small-caps was 4 per cent less.”
However, Cross and Fosh say that stock-picking also contributed significantly to the funds’ outperformances. Several companies with market caps greater than £1bn – including Rightmove, Domino’s Pizza and Hargreaves Lansdown - provided some of the strongest performances across all three portfolios.
Rightmove generated some of the strongest returns, having returned 86 per cent last year.
Performance of stock vs index in 2015
Source: FE Analytics
Other winners further down the cap spectrum that bolstered the managers’ performance include recruitment company Empresaria Group, which increased in price by 129 per cent, HR solutions stock Penna Consulting which increased by 103 per cent and delivery and warehousing company Clipper Logistics, which increased by 77 per cent.
“Further down the list, some of our cyclicals did quite well. [Real estate services provider] Savills has a very different profile from the previously-mentioned stocks, which deliver consistently high returns and are constantly cash generative.”
“If you are operating in the property market, you have a brilliant global network as this company does but you can’t deny the vulnerability of the property market. Savills has done well in spite of this, providing mid-30 returns last year. That’s because of its return to growth.”
Performance of stock vs index
Source: FE Analytics
Inevitably, there were some stocks that underperformed and negatively impacted the duo’s portfolios. These included delivery services firm Dx Group, which lost 76 per cent, and UK Mail Group which lost 45 per cent.
“The parcel and general distribution sector is an area of the market we got wrong,” Cross admitted.
“We’ve sold Dx Group out of the Smaller Companies fund and we’ve started to reduce our exposure to UK Mail Group. The problem there was, what we had hoped would happen was that distribution networks would split between the very highly-invested operators and the poorly-invested operators.”
“We were seeing the poorly-invested operators going out of business, and we suspected that the pricing environment had shown some strong improvements, but it’s continued not to come through, so we’ve decided to exit from that space.”
Fosh adds that many of the underperforming stocks in the mid-cap space were hit by plummeting commodity prices – these included the likes of engineering company Amec Foster Wheeler, which lost 46 per cent, and Weir Group, which lost 44 per cent.
The duo also had direct exposure to the oil & gas sector, holding Plexus in the UK Smaller Companies fund and the likes of BG, BP, Royal Dutch Shell and Petrofac in UK Growth.
This produced mixed results overall, with Shell, BP and Plexus falling in price, and BG, Petrofac and Wood Group providing positive returns.
“If you look back on last year it was a pretty okay performance in terms of our sector exposure - BP was bid for by Royal Dutch Shell because it’s an amazing asset in terms of LNG [Liquefied Natural Gas] and its global network. BP, although it underperformed, could have been worse and actually outperformed the sector average,” Fosh said.
“The sector was really dragged down by Royal Dutch Shell and it was the bid for BG that caused that.”
“In oil services, the guys that actually make the pumps, maintain the infrastructure and decommission the infrastructure that doesn’t work, Petrofac actually had a great year last year, returning 18 per cent.”
The managers say that, in retrospect, it would have been better not to hold any oil at all. However, they add that individual stock selection from within the sector still cushioned the blow to an extent, and the funds retained a strong outperformance due to the managers’ Economic Advantage process, which sources companies that are resilient throughout the economic cycle.
“We’ve looked at some winners and losers and there are two key points about last year. The winners well outnumbered the losers. In UK Growth, for example, winners numerically outweighed the losers by a ratio of 2:1,” Cross pointed out.
“The other point is that the magnitude of the outperformance by the winners was much bigger than the underperformance losers, and that partly reflects the risk control process we adhere to.”
