Liontrust UK Growth: March 2024 fund update

• The economic advantage team have a robust investment process which has served investors well over the years

• We think the team have a range of skills and expertise and are well resourced for the task at hand

• The fund has delivered significant outperformance since the Economic Advantage process began being applied in March 2009

• This fund features on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Liontrust UK Growth fund aims to grow an investment over the long run by investing in a portfolio of companies with unique advantages over the competition.

We think it could be a good option for the UK section of 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. The fund has the flexibility to invest in smaller companies and derivatives which if used, adds risk.

Manager

The fund is co-managed by Anthony Cross, Julian Fosh, Victoria Stevens and Matthew Tonge.

Cross started his career at Schroders before joining Liontrust in 1997 and has worked at the business ever since. Fosh began his career in 1984, before joining Liontrust from Saracen fund managers in 2008. Cross and Fosh are the architects of the economic advantage investment process employed.

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

Stevens and Tonge were promoted to become co-managers of the fund last year. Stevens joined Liontrust from broking and advisory firm finnCap and became part of the economic advantage team, focusing on smaller companies, in 2015. Tonge moved to Liontrust from Barclays in 2003 to work on the trading desk, before moving to the economic advantage team in 2015 to focus on analysing smaller companies.

We think the team have a range of skills and expertise and are well resourced for the task at hand.

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.

The fund is mostly focused on larger companies, with 68.9% invested in businesses that feature in the FTSE 100, with the rest of the fund invested in medium sized and smaller companies. Industrials is the largest sector allocation in the fund, accounting for around 25.5% of its assets, following by consumer discretionary companies at 17.4% and energy stocks at 15.4%.

Please note, the fund has an investment in Hargreaves Lansdown plc.

Culture

In recent years, Liontrust has acquired several smaller asset management companies. Acquisitions and other corporate changes can impact the culture of a business and unsettle the firm’s existing investment teams. We will 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 all 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

The quality of ESG integration varies across Liontrust. The firm gives fund managers the freedom to run their portfolios according to their own investment and market views. The company simply asks managers not to deviate from their investment processes. Some managers have chosen to fully integrate ESG, while others are still developing their approach.

The firm’s Sustainable Future range of equity and fixed income funds do incorporate ESG analysis and invest to achieve positive change. Every team member is responsible for all aspects of financial and ESG analysis – ESG analysis is not farmed out to a separate team. The team produces regular insight articles, available via the Liontrust website. They also produce a Responsible Capitalism report, which explores the team’s views on a variety of sustainability-related issues.

They publicly disclose all voting decisions on a quarterly basis, although no rationales are provided. They also communicate their voting intentions to companies and engage with them on issues of contention to encourage change.

Cost

The fund has an ongoing annual charge of 0.82%. Our platform charge of up to 0.45% per annum also applies.

Performance

The fund launched in March 1993 but Cross and Fosh took control and started applying the Economic Advantage investment process in March 2009. Since March 2009, the fund has delivered returns of 391.10%*, compared with 268.58% for the FTSE All Share Index, representing the broader UK market over the same period. Past performance is not a guide to the future.

Over the last 12 months, the fund has delivered a return of 1.39% to investors, ahead of the 0.57% return from the FTSE All Share index and the 0.02% average return from peers in the IA UK All Companies sector. Our analysis suggests that the fund’s investments in the industrials and technology sectors have been among the larger contributors to performance over the period.

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.