The Liontrust Special Situations Fund - Retail

THE LIONTRUST SPECIAL SITUATIONS FUND - RETAIL

Fund Overview

Liontrust Special Situations Fund–Retail (LSSF-R) is a UK domiciled unit trust launched on 10th November, 2005. Liontrust Fund Partners LLP, a subsidiary of Liontrust Asset Management PLC is the investment advisor of the fund^[1]. LSSF-R targets retail investors with medium to long-term investment horizon and wish for exposure to the UK stock market. The minimum initial and additional investment is £1,000. In 2015, the fund paid its first annual dividends to investors and this has continued through to 2017. The ex-dividend date is 1st June and the dividend payment date is 31st July of every year. The fund has an active share^[2] of 75.25%.

LSSF-R has achieved average total returns of 12.96% (capital appreciation plus income reinvested) per annum since its inception^[3]. This means that £100 invested at inception with all income reinvested will have grown to £374.55, an increase of about 274.55%^[4]. As at 31st October, 2017, total net assets of LSSF-R was approximately £218 million, (Eikon).

Investment Strategy and Cost

The investment strategy of LSSF-R as described in its prospectus^[5] is to provide long-term capital growth through investing in the UK stock market.

To deliver long-term capital growth, the fund considers the following in the selection of stocks: the profitability of the company, the potential of the selected company to out-perform its peers, as well as whether the stock is under-valued. These approaches have been instrumental in ensuring that long-term capital growth is achieved. The selection of companies that have the potential of delivering growth in earnings and their ability to adopt strategies that make them market leaders in the fields of operations; ensures that the fund meets its objective of long-term capital growth.

The portfolio is reviewed periodically and shares that are believed to have lost their ability to provide long-term capital growth or smaller companies in which directors’ ownership is lower than 3% are systematically removed from the portfolio to ensure returns are unaffected.

The fund charges up to 5% of the initial investment and annual ongoing charges of 1.85%, which comprises of fund management fees (1.75%), and other additional charges of 0.10% for trustee, custody, legal and audit fees. However, there are no performance fees and charges for redemptions.

Investment Performance

From inception to 2008, the performance of the fund relative to the benchmark, the FTSE All-Share Total Return Index was quite disappointing. This was because there was not much of a difference between its returns net of fees and that of the benchmark. The poor performance from the inception of the fund to 2008 can be attributed to factors considered in the selection of the equities; there is the possibility that equities selected were over-valued. This will usually result in the fund not delivering excess returns on investment. In addition, the global financial crisis of 2007 could also account for the non-impressive performance.

From 2009, however the fund has significantly and consistently outperformed its benchmark net of fees. Appendix 2 shows the Eikon chart of the total returns^[6] of both the fund and the benchmark. From inception to 31st October, 2017, LSSF-R achieved a total return of 427.52% compared to the benchmark return of 228.82%.  

The table below (from Eikon) shows the cumulative performance of the fund with three benchmarks:

LSSF-R has investments in all the market caps^[8] and due to this; the most appropriate benchmark would be FTSE All Share TR. This is because this benchmark gives the return of the total equity market unlike the other two benchmarks that report returns of specific market caps.

Comparing the performance of the fund to the appropriate benchmark, it is realised that the fund consistently beats the benchmark regardless of the period in consideration.

This could be an indication that the strategy employed by the fund managers works since the fund consistently out-performs the benchmark.

Risk Assessment

The following have been identified as potential risks to the fund, which may not guarantee the consistent outperformance of the fund with reference to its benchmark:

• Liquidity risk – 53.72%8 of the equity portfolio is invested in medium, small cap and alternative investment market companies whose shares may not be liquid. This handicap can make it difficult for the fund to honour redemptions. The cash and cash equivalent portion of the portfolio minimises this risk.
• Price risk – poor performance of companies in the portfolio can result in unfavourable price movements. This can negatively affect fund returns. The periodic review of portfolio holdings helps in minimising this risk.
• Interest rate risk – changes in interest rates can indirectly affect the performance of the companies on the stock market. An increase in interest rate indicates increased borrowing rates. Companies would have to borrow at higher rates to expand their businesses. This puts constraints on their cash flows and profits; which can adversely affect share prices and the overall fund performance.
• Uncertainty of Brexit deal with the EU – the portfolio holdings are highly concentrated in UK manufacturing stocks^[9]. These companies may import or export goods to other EU countries. With the potential breakaway of UK from the EU, these companies may no longer enjoy free trade. This can adversely affect their operating profits and in effect negatively affect their share prices.

Investment Assessment

Considering the risky nature of equities coupled with relatively high fees of 1.85% p.a. and initial investment charge of up to 5%, investing in LSSF-R may seem unattractive. Investors of the fund are however compensated for the high risk and fees by the impressive returns of the fund relative to the benchmark. This makes the fees charged insignificant compared to the fund’s returns. LSSF-R invests in eight sectors, which makes the fund well diversified and minimises the risk of unfavourable price movements. Although past performance may not guarantee future performance, the investment strategy, as well as the track record^[10] of the fund managers may serve as a form of insurance for future performance.