Liontrust UK Growth: May 2022 fund update

• Anthony Cross and Julian Fosh are experienced investors who we rate highly
• They have a robust investment process which has served investors well over the years
• Long-term returns have been boosted by the managers' ability to select companies with outstanding growth prospects
• The fund features on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How does the fund fit in a portfolio?

The Liontrust UK Growth fund aims to grow your investment over the long run by investing in companies with unique advantages over the competition. We think it could be a good UK option in a broader global investment portfolio. A focus on high-quality companies means the fund could work well alongside other funds investing in unloved UK companies with recovery potential.

Manager

Anthony Cross and Julian Fosh are joint managers of the Liontrust UK Growth fund. They've been at Liontrust since 1997 and 2008 respectively, but both have three decades of experience analysing and investing in UK companies.

The duo also co-manage three other funds, which focus on different parts of the UK market but share the same investment process that underpins this one. Given the similarities in the way the four funds are managed, we think this is a reasonable workload.

The managers also benefit from the support of a knowledgeable team including smaller company specialists Victoria Stevens, Matthew Tonge and Alex Wedge. Stevens and Tonge joined the team in 2015, and Wedge joined in March 2020, but the trio previously built up experience working at other firms too.

Process

The managers think the secret to successful investing is to find the few companies with an 'economic advantage' – a sustainable edge over the competition that will allow them to earn above-average profits for the long term.

The managers believe the hardest economic advantages to copy are intellectual property, such as patents and trademarks, strong distribution channels and significant repeat business. A company must have at least one of these attributes before it's considered for the fund. Other less powerful but nonetheless important strengths include franchises and licenses, good customer relationships and a great company culture.

Once companies with a strong competitive edge have been identified, the managers look for proof that it's led to superior financial returns in the past. They also look for evidence of pricing power – the ability to increase prices without affecting demand for the company's product or service.

Finally, they consider the company's valuation. They compare each company's valuation on a variety of measures to try and avoid overpaying for their shares. Each investment is made with the long term in mind though, so the managers believe the initial price paid is less important to overall returns than the company's ability to grow earnings and profits over the long term.

Recent investments include personalised greeting card company Moonpig. The company has a big share of its market, a distribution network that would be very difficult for competitors to replicate and is attractively valued, according to the managers. In contrast, supermarket chain Morrison and Aggreko, a supplier of temporary power generation equipment, left the fund after being acquired by other companies.

The managers invest in companies of all sizes, but no more than 10% of the fund will invest in higher-risk smaller ones. They also have the flexibility to invest in derivatives which, if used, adds risk. Investors should also note that the fund holds shares in Hargreaves Lansdown plc.

Culture

In recent years, Liontrust has acquired several smaller asset management companies. Most recently they acquired Majedie. Acquisitions and other corporate changes can impact the culture of a business and unsettle the firm’s existing investment teams. We don’t currently see any evidence of this, but we’ll continue to monitor the situation closely and keep investors informed if our views change.

Liontrust gives managers the freedom to manage their funds according to their own investment and market views. The company simply asks managers not to deviate from their investment processes. Each manager's funds are regularly checked by other senior managers at Liontrust to ensure they're staying true to their investment processes.

We like that Liontrust fund managers invest a significant amount of their own money into the funds they run. This helps to align their interests with those of investors.

ESG integration

Liontrust takes Environmental, Social and Governance (ESG) issues seriously at company-level and provides each investment team with the information and support they need to allow them to integrate ESG. The firm publicly discloses all voting decisions and the rationale for each vote on a quarterly basis. They also communicate their voting intentions to companies and engage with them on issues of contention to encourage change.

Giving fund managers the flexibility to run their portfolios without outside interference is a core tenet of Liontrust’s approach. But as the company doesn’t impose any top-down views, it’s up to individual fund managers to decide whether to integrate ESG into their investment processes.

While Fosh and Cross have always considered governance-related issues, they recently developed their approach to formally integrate environmental and social factors too. The manager’s view on a company’s approach to ESG can now impact the amount they invest in it, but ESG risk alone does not determine a complete buy or sell decision. We’re pleased to see developments being made in this area, but we believe the team is behind many of its peers on ESG analysis.

Cost

The fund has an ongoing annual charge of 0.84%, making it one of the more expensive UK Growth funds on the Wealth Shortlist. Investors should note a higher fee means the fund manager has a bigger hurdle to deliver future positive returns. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund launched in March 1993 but Cross and Fosh took control and started applying the Economic Advantage investment process from March 2009. Since then, the fund's turned an investment of £10,000 into £46,465 before charges and any taxes*. The broader UK stock market's returned £38,801 over the same time period, although past performance is not a guide to the future.

Our analysis suggests returns were boosted by the managers' ability to invest in companies with outstanding prospects, regardless of their size or what sector they're in. The fund's focus on high quality companies means it's tended to lag the broader stock market when it's rising quickly but hold up better when markets fall. Remember the value of your investments will fall as well as rise, so you could get back less than you invest.

The fund’s also performed well over the past year, beating the broader UK stock market by 2.06%. Top performers included pharmaceutical business Indivior which benefited from significant growth in a new product used to treat opioid addiction. This allowed the company to issue better-than-expected financial forecasts for 2022. Oil & gas company Royal Dutch Shell also performed well, boosted by strongly rising oil prices.

It wasn’t all plain sailing though. Weaker performers included automotive fluids company TI Fluid Systems. The company’s revenues slipped because of supply chain disruption caused by the war in Ukraine and Covid-19 related shutdowns in China.

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2022.

More about Liontrust UK Growth, including charges

Liontrust UK Growth Key Investor Information