Liontrust UK Smaller Companies: too much held in the smallest market caps?

aroominyork

I posted a similar question a couple of days ago which had no responses but I think this is an interesting issue so I’m reposting and hope this is more clearly written.

An article in ftadviser.com two years ago said “Concerns over the size of Liontrust’s £2.5bn UK Special Situations and £636m UK Smaller Companies funds have led FE Invest to remove the strategies from its approved list… FE senior analyst Thomas McMahon said: “We have become concerned that the [UK Smaller Companies fund] is now too large to be able to implement its strategy so are uncertain how it will perform in future”. The smaller companies fund is now £812m despite the soft close through a 3% bid/offer spread.

I’ve looked at ten UK smaller companies funds comparing their fund size to the market caps of their holdings:

• Standard Life and Merian are £1.3b funds with about 55% of their holdings in market caps under £1bn.
• Liontrust’s is an £800m fund with 90% of its holdings in market caps under £1bn.
• Buffettology is a £600m fund with 45% of its holdings in market caps under £1bn.
• Jupiter is a £400m fund with 80% of its holdings in market caps under £1bn.
• Miton, Baillie Gifford, Axa Framlington, Amati and Aberforth are under £250m funds with approx. 90%, 75%, 85%, 70% and 75% respectively in market caps under £1bn.

Do people agree with Thomas McMahon that Liontrust's fund is now out of balance?

Tcquins

The size of funds does limit their investment flexibility to invest in smaller cap companies at size big enough to amount to a reasonable position. E.G a 3% holding of the fund may amount to 15% of the total listed equity of the the small company. Also makes dealing in the shares difficult.

Small cap funds are often victims of their own success, so soft closing the funds is quite common. Liontrust think they can still operate the smaller companies fund to about £1.2bn successfully. They have a 1.25% AMC along with the spread to discourage large inflows and run their own micro cap fund to sit below it, so it’s not likely to grow much further unless there’s a really strong run for U.K. smaller companies anyway.

Buffettology isn’t a small cap fund by the way. It’s in the all company sector and has a broad mix of large, small and mid cap investments.

aroominyork

Where do Liontrust say they can operate to £1.2bn successfully, and if they want another £400m of inflows why have they soft closed?

Buffettology insists it is not small cap but primarily it is, with 75% of its holdings in companies under £3bn market cap. Morningstar categories it as small cap. In that regard perhaps it’s similar to UK funds that invest a chunk overseas, eg Lindsell Train UK Equity is c.80% UK, 10% Europe and 10% US.

Tcquins

That’s where they stated they’d be compromising their investment aims. It’s a what their rep quoted to me.

Wouldn’t say below 3bn is small cap. Vast majority of FTSE 250 constituents are below that, which is Mid cap space. Definitely a tilt towards smaller companies but not representative of a small cap fund.

IA U.K. all companies sector can have 20% overseas shares, so not unusual to meet the classification. Similar with strategic bond funds where they can invest a chunk of equities.

TBC15

They have returned over 2% in less than a month. I’m pleasantly surprised.

short_butt_sweet

aberforth are managing a total of about £1.6bn in this space (i.e. UK small-ish companies), when you also include their 2 investment trusts (ASL and ASIT+ASIZ).

aroominyork

Tcquins wrote: »

That’s where they stated they’d be compromising their investment aims. It’s a what their rep quoted to me.

Putting aside what Liontrust’s reps say, do people think an £800m - aiming for £1.2m - fund can invest 90% of its funds in companies with market caps under £1bn with the ability to build and sell substantial holdings?

short_butt_sweet

yes, just about, provided they are not trying to run too concentrated a portfolio. but it may be harder for an open-ended fund to do this than for a closed-ended fund (such as an investment trust).

compare that to aberforth smaller companies investment trust (ASL), which has c. £1.2bn invested (out of a total c. £1.6bn in all aberforth's smaller companies vehicles). so they are investing a similar (or slightly greater) amount than liontrust plan to.

ASL selects shares from a "universe" defined by the numis smaller companies index (excluding investment companies). this index contains (from ASL's latest factsheet) 357 companies, of which the largest has a market capitalization of £1.6bn. this covers approximately the smaller half of the FTSE 250 index, and below.

ASL is currently invested in 82 out of those 357 companies. so that's not super-concentrated, but active share is reasonably high (at 76.9%).

ASL has only 37% in FTSE 250 companies, compared to 60% exposure in their benchmark index. that covers companies with market capitalizations in approximately the range £1.6bn to £600m. so they have less than 37% in £1bn+ companies; it may be the same as the 25% figure you mentioned for aberforth's open-ended fund; but more than the 10% liontrust might be aiming for.

the largest holding in ASL is valued at 3.1% of the trust's investments. that's in a £1.1bn company, so they must have a holding of c. 3.4% of the shares in that company. that's the kind size of holding you will need to build or sell off gradually. but not ridiculously large. however, i would be happier with this in a closed-ended fund rather than open-ended, so the managers aren't forced to sell investments when unit holders want to cash in their holdings.

aroominyork

The top ten Liontrust holdings have a mean average £555m market cap (range £232m - £1.32bn), and Liontrust’s holdings comprise a mean average 5.1% of those firms’ share capital (range 1.7% to 8.6%). The two companies in which Liontrust holds over 8% of share capital both have market caps under £300m.

On FE rating and, I think, on reputation, Liontrust is seen as one of the less volatile UK small cap funds, but I see Thomas McMahon’s concern.

Thrugelmir

aroominyork wrote: »

The two companies in which Liontrust holds over 8% of share capital both have market caps under £300m.

Say the market capitlisation of one of the holdings is £250m, 8% equates to a £20m stake. If the share price were to rise 15%. That's a £3m gain.

On the entire portfolio of £812m, the £3m gain has an impact of 0.0037%. In effect it doesn't register any materiality.

aroominyork

Thrugelmir wrote: »

Say the market capitlisation of one of the holdings is £250m, 8% equates to a £20m stake. If the share price were to rise 15%. That's a £3m gain.

On the entire portfolio of £812m, the £3m gain has an impact of 0.0037%. In effect it doesn't register any materiality.

Your decimal point is in the wrong place. It would lift the fund 0.37%. Two ways to calculate it:
1) Your way: £3m/£812m=0.37%.
2) Stake/fund = £20m/£812m=2.46% of the portfolio. A 15% increase to that is 0.37%.