A UK micro-cap fund whereby the managers use a well-established and distinctive process to identify businesses that have durable competitive advantages. The ‘Economic Advantage’ approach focuses upon intangible strengths that are difficult to replicate and support structural growth. Within its sector, the fund features in our ‘Micro-Cap, Growth’ category.
The fund’s KIID Synthetic Risk and Reward Indicator (SRRI) is 5. This is a regulatory measurement that is, where possible, calculated from the volatility of its weekly performance over a five-year period. A score of 5 means the fund’s historic volatility is between 10% and 15%.
The fund’s five-year standard deviation is lower than both mainstream UK small-cap equity indices and the peer group average. This is a function of a distinctive process that focuses on firms with strong positions within their industries. However, it is important to remember that the portfolio may display idiosyncratic behaviour and that a lower volatility outcome is not necessarily a permanent characteristic. Different share classes could have differing SRRI scores.
The Economic Advantage Team is led by Anthony Cross. Mr Cross joined Liontrust from Schroders in 1997 to develop the team’s UK equity investment process and launched this fund the following year. He works alongside co-managers, Victoria Stevens, Matthew Tonge, Natalie Bell and Alex Game. Ms Stevens and Mr Tonge joined the team in 2015, Ms Bell joined in 2022 and Mr Game joined in 2024.
The managers believe that it is possible to identify a small number of companies that can resist the natural forces of competition to maintain high profitability for longer than the market assumes. Their ‘Economic Advantage’ process is built around the identification of key factors that drive sustained profitability and the companies that meet these characteristics.
The fund’s starting universe of micro-cap stocks features companies with a market capitalisation of under £150m. The managers expect to hold stocks as they grow to £250m and then look to exit over the subsequent 12 months. All holdings must be at least 3% owned by a company’s main board directors, as, in their view, management ownership is critical. In determining position sizes, they use a company-specific risk grading, which covers financial and industry risk. The liquidity challenges inherent to micro-cap investing are mitigated by the team’s low turnover approach and long-range investment horizon.
The managers invest only in companies with intangible strengths that are difficult for competitors to reproduce. These are considered across three main categories, which are often mutually reinforcing. ‘Intellectual Property’ assets are often protected by law and encompass patents, copyrights, resource extraction rights and trade secrets. ‘Strong Distribution Networks’ that are owned by companies give them the ability to provide strong local service and to send and target clients with particular products or information. They can be physical or electronic. ‘Significant Recurring Revenues’ are often related to product strength or customer brand and the managers like the fact that these companies are able to plan and invest for long-term growth as a result of the earnings predictability created when recurring business accounts for at least 70% of turnover.
Company screening, analysis and scoring is based around the requirement for them to fit at least one of these categories. The managers assess the degree to which companies’ advantages are already understood by the market, investing in those that are underestimated or recovering and expected to benefit from earnings upgrades or a multiple re-rating.
The final stage of the process is to assess valuation. The managers note that for small companies, assessing the value of a business is a relative exercise and comparatives can be hard to find. A qualitative, rather than quantitative approach is preferred. A range of standard valuation metrics are used to assess investment candidates from different angles and the potential growth rate in earnings is also considered.
Formal documentation, including the fund prospectus and the KIID, should be sought directly from the asset manager. For ease of reference, a link to the ASSET MANAGER WEBSITE can be found above.
Your use of this website is subject to the terms of use set out in the website. By continuing to use our website we will assume that you are happy to receive non-privacy intrusive cookies. Please be aware that if you disable cookies some functionality on the site will not work. Read our cookies policy to find out more about our cookie use and how to disable cookies.
Alternatively, if you are not a financial professional and are seeking financial advice, you may wish to visit unbiased.co.uk to search for a financial adviser.