Stocks in Focus: Liontrust Special Situations

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This week Alastair Macdougall of NW Brown Wealth Management looks at the Liontrust Special Situations fund, an open-ended investment vehicle that operates within the UK All Companies sector.

The fund was launched with Anthony Cross as the lead manager in 2005, with co-manager, Julian Fosh, joining in 2008. Anthony has been with Liontrust since 1997 and quickly after joining he formulated what they call the “Economic Advantage” process of investing. This process was initially tested on their UK Smaller Companies strategy, and the fund performed well so this approach was rolled out to encompass mid and larger sized companies as well.

As the name suggests, the Economic Advantage process has a key focus on identifying companies with durable profits that will outlast market expectations and remain strong during periods of economic stress. In order to achieve this, they believe that companies need to show strong characteristics in areas that are very difficult to replicate, and this leads them to look for  three intangible assets: intellectual property, strong distribution channels and significant recurring revenues. Once they have identified these companies , position sizes are determined by how strong these advantages are, with a particular focus on balance sheet strength and current valuation levels. This generally leads them to focus more on companies within the industrial and consumer sectors.

This process has been extremely successful in providing strong returns for investors. Over the last 10 years the fund has returned 301% against 114% for the FTSE All-Share Index. This performance and the strength of the process driving it have grabbed the attention of investors and the fund now sits at just over £5bn in assets. This size naturally brings with it the question of whether returns can be sustained but the team at Liontrust believe that their investment process is strong enough to allow them to manage a fund of this size.

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