Smaller companies funds have traditionally been seen as volatile and risky investments, but five FE-crowned Liontrust UK Smaller Companies belies the stereotype.

Its five-year annualised volatility of 16.7 per cent is not only lower than its IMA UK Smaller Companies sector average and benchmark – the FTSE Small Cap Index (ex IT) – but also lower than the average fund in the IMA UK All Companies sector. 

FE Alpha Managers Anthony Cross and Julian Fosh have maintained this stability while producing top-quartile returns in the fund's sector over three, five and 10 years. 

Performance of fund vs sector and benchmark

Name	6-month returns (%)	1-yr returns (%)	3-yr returns (%)	5-yr returns (%)	10-yr returns (%)
Liontrust - UK Smaller Companies	11.57	7.73	76.81	27.53	170.35
FTSE Small Cap Index	10.72	-10.28	28.19	-30.56	25.33
IMA UK Smaller Companies	6.73	-7.6	54.73	-2.61	109.99

Source: FE Analytics

Liontrust UK Smaller Companies' ability to protect against the downside has been particularly impressive: in 2008, for example, Cross and Fosh lost around 13 per cent less than the average UK All Companies portfolio, and it is the best-performing fund over the past year, returning 7.73 per cent while the sector lost 7.6 per cent. 

At the end of April the managers explained how they achieved this despite challenging market conditions.

"The strength of our investment process, particularly in such a time of uncertainty, is its unremitting focus on finding companies that have created strong barriers to competition through their intangible intellectual capital strengths," they said in a statement.

"Our companies have good pricing power and many operate in markets that are experiencing structural growth." 

Software and IT companies dominate the portfolio’s most overweight positions. Data from FE Analytics shows that the managers are contrarian in their approach, as the fund’s top-10 holdings are not among the most popular in the sector. 

For example its biggest holding, software security company NCC Group, is only the 17th most popular stock in the sector.

The managers wrote of the March results: "Information technology in the form of software and services remains an important area for the fund." 

"Companies with particular niches such as Advanced Computer Software (healthcare and business services), EMIS (healthcare), IDOX (local government) and Tikit (legal) continue to do well." 

"There were good results from a diverse range of companies including Brainjuicer, a market research company; Brooks Macdonald, a private client fund management firm; Concurrent, which is a specialist in computer boards; as well as two newer holdings, Bioquell and oil services company Plexus.” 

"There were no notable disappointments."

Fosh told FE Trustnet last month that his style is particularly suited to recessionary times, when investors seek quality companies.

Liontrust UK Smaller Companies has experienced strong inflows this year, growing by 30 per cent since January, but still remains smaller than the average fund in the sector, at £95.5m. 

The fund has a minimum investment of £1,000 and a total expense ratio (TER) of 1.66 per cent.