As the managers of the best-performing fund in the UK All Companies sector last year, Liontrust Special Situations’ Julian Fosh and Anthony Cross are continuing to back a range of stocks that are set to grow despite subdued economic growth.
The fund has been a consistent top-performer, leading its sector last year with a return of 7.6% compared with the Hoare Govett Small Cap Extended TR index’s -8.77%. It has also been among the best over three and five years, delivering 77.86% and 53.9% respectively.Fosh and Cross attribute the fund’s stellar performance to its investment process, based on intellectual capital as opposed to tangible assets. Fosh said the stocks he will invest in all share a combination of three main attributes: intellectual property, strong distribution networks and recurring revenues.
‘Everything we buy has at least one of those three factors,’ Fosh said. ‘We then look at 10 years of history for demonstrable returns from the company, to see if they have covered their cost of capital. We also try to buy them at a cheap price.’
Rather than trying to forecast economic growth, or select specific sectors or themes, the managers stick to these criteria, hunting for intangible assets.
‘Rightmove, an online property site, has a big distribution network and a large market share,’ said Fosh. ‘PayPoint also has a large distribution base, and has also managed to recover from the threat last year from Camelot coming into its market.’
The stocks also benefit from having global-facing businesses, as opposed to being only domestically focused.
Aggreko, a global energy hire company, is in the portfolio, with ‘unparallelled levels of service,’ according to Fosh.
Increasing urbanisation means cities are developing faster than their underlying infrastructure and power generation can support, so the ability to provide immediate and temporary power supply on a global basis is a compelling business model.
Fosh said: ‘This company is so strong that when GE tried to come in, they actually ended up giving up.
‘We also hold a PR firm called Next 15 Communications, which represents seven of the world’s top 10 technology companies. This company grew 26% last year.’
Despite macroeconomic headwinds affecting smaller companies more than larger firms last year, certain stocks have weathered the storm better than others and could do particularly well in the event of a significant recovery this year.
‘If we hold a small company, we like the firm to have managers or directors who have a big stake in it,’ added Fosh.
Defensive stocks deliver
Defensive stocks typically held up well last year, and Fosh said GlaxoSmithKline is at last delivering after many years of sideways movement.
‘Unilever also has a very attractive network of distribution businesses through the world, with over 140 years of building up networks.’
Although these contributed to fund performance, Fosh concedes there were stocks, largely cyclicals, which did not perform well. These included the recruitment firm Michael Page, as well as Tullett Prebon and iCap, the latter of which did badly as people were concerned about bank deleveraging.
‘About two-thirds of the portfolio outperformed, while one-third underperformed,’ said Fosh. ‘To the extent there is a recovery, this one-third should bounce back.’
He added that Tullett Prebon has already bounced 10% in 2012.
‘There are plenty of stocks geared to the recovery, but if it’s a difficult environment, then it will be about quality, defensive firms with pricing power,’ he said.
The fund holds between 40 and 50 stocks, with each capped according to risk factors based on a number of issues, such as valuation, accounting risk, and how dependent they are on a major supplier.