Emma Wall: Hello and welcome to the Morningstar Series, Why Should I Invest with you. I am Emma Wall and I am here today with Anthony Cross, Manager of Liontrust Special Situations Fund.
Hello, Anthony.
Anthony Cross: Hello there.
Wall: So this trust – this fund sorry, is Bronze-rated by Morningstar analysts which means we really believe and have conviction in your process and the people. But one of those ‘Ps’ is performance and if we look back over the last five years, this fund has had 20% returns, 20% returns, even 40% returns in 2009, then last year only 1.6% returns to investors, what happened last year?
Cross: Well last year the market was pretty flat and although the fund is not exactly of course like the FTSE All Share, it's quite different. If the equity market is strong, the fund will be strong and likewise if the equity markets are not that strong, the fund will perhaps buck that, but it can't buck it completely.
Wall: I think the problem sometimes with the investing environment that we're in, ever since the global recession, is people have become quite obsessed with short-term performance and forget to look at the long-term and indeed to the future. So with that in mind, is the new norm just lower returns because we've had this fantastic rally coming out of recession?
Cross: I don't think the new norm will be necessarily lower returns. But what you can see is volatile returns. Investing in equities a long-term game, some years will be great, some years will be flat, some years will be down, but net-net over time, you should be able to grind out some really quite nice returns and that's the joy of equity investing.
Wall: Your fund, of course, is an unconstrained fund, which means you and your co-manager able to invest from small-caps, right up to large-caps. Where are you seeing the greatest opportunities at the moment?
Cross: Well, probably back in small-caps again. Small-caps had some very strong performance. They've now underperformed for bit, they are looking cheaper therefore and we're seeing some quite interesting new companies come to the market, which fits our style. So, probably back in small-cap is where we see some more exciting opportunities.
Wall: And this just goes to show how cyclical everything is, because 2012 mid-caps were the best performing of all markets and your funds did extremely well that year. Normally those sorts of stocks do very well in a recovery, but we are recovered now, so why is it that those opportunities are there?
Cross: It's more of the opportunity to actually below the FTSE 250. So below the mid-cap and down in the small-cap level. What you find there are a lot of companies actually that aren't particularly allied into general economic growth. What they have is new emerging industries and often nice niche areas with strong structural growth going on. So they don't actually require amazing economic growth for them to grow themselves and that's where I think the exciting stocks are.
Wall: This plays quite well into your process, which is that, you like intangible assets, those things that perhaps the average investor can't see on the books. Perhaps you could example a little bit more about that?
Cross: Yes. I mean we're huge believers in finding companies with strong barriers to competition and pricing power, and it's our belief that you gain pricing power and your barriers to competition through exploiting intangible assets asset.
Assets such as intellectual property, distribution networks, high-recurring income, the value of your contracts, the value of your order books, if we find companies with those of characteristics and perhaps brands and customer relationships, these are sort of companies that have got the barrier to competition that gives them the pricing power and then the ability to compound out earnings over a long period of time.
Wall: You talked about distribution there. One of the big things coming up in the macro horizon is the possibility of Brexit, Britain leaving the EU. Europe is the U.K.'s biggest revenue stream, especially with larger-caps. How much of that is a concern to you?
Cross: It's not actually a huge concern. I think that if we were to exit the EU, it would've been via negotiation. We would have come out and we will then perhaps be able to set up trade deals as you would see with other countries like Norway and actually the U.K. could then do trade deals themselves around the world without having to piggyback on the general EU trade deals. So I'm not personally keen on leaving the Eurozone. But I don't think this is the end of the world if we do either.
Wall: So, we won't see sort of return to old, where it becomes expensive to do business in Europe?
Cross: I don't think so. No, I think we are an important market for Europe. I think we could set up some very good trade deals ourselves. But overall I'm not pro-it, but I am just pointing out that I don't think it is a complete nightmare for investors in the market.
Wall: Anthony, thank you very much.
Cross: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
