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

aroominyork

I’m picking up this thread after The Times (paywall) wrote today about fund liquidity with a focus on smaller companies. The article says Liontrust UK Smaller Companies “would take investors nearly seven months to get their money back if one in five redeemed at the same time.” What would that estimate be based on?

Since I started this thread in March, the fund has grown 25% from £800 to £1bn. It seems the soft close (3% bid/offer spread) and 1.40% OCF are not putting people off! I bought it when I started DIYing in 2017; it was the low volatility – FE of 94 – combined with good performance that attracted me and seems to attract others.

Obviously investment trusts are a way around liquidity issues though UK smaller companies ITs with equivalent 10 year performance to the Liontrust fund are in the 140-150 FE range.

Liontrust holds an average 5.5% of the market cap of its top ten holdings, which is starting to make me nervous. The Times’ article point out that over 9% is held in cash which is prudent assuming it is to support redemptions rather than waiting for investment opportunities, but will hold back performance.

Any thoughts?

londoninvestor

aroominyork wrote: »

I’m picking up this thread after The Times (paywall) wrote today about fund liquidity with a focus on smaller companies. The article says Liontrust UK Smaller Companies “would take investors nearly seven months to get their money back if one in five redeemed at the same time.” What would that estimate be based on?

I have no idea what the Times actually did, so this is pure guessing: but you could get a finger-in-the-air estimate by looking at the actual daily trading volume in each of the stocks it holds, and working out how many days it would take for the fund to offload 20% of its holding at that rate.

Not very exact, because trading volumes fluctuate over time, and you can generally sell more than the "usual" amount - as long as you're prepared to accept a lower price!

dividendhero

Can see how the Woodford scandal has made investors nervous, but Liontrust smaller Cos looks well managed and a different kettle of fish to Woodford's dodgy funds

aroominyork

dividendhero wrote: »

Can see how the Woodford scandal has made investors nervous, but Liontrust smaller Cos looks well managed and a different kettle of fish to Woodford's dodgy funds

Sure, they are just using Woodford (as you say, a completely different kettle of fish) as a tag, but that doesn’t mean there isn’t justification to write about the liquidity of smaller companies funds that refuse to stop growing.

tg99

Also need to factor in how much such managers are running in institutional segregated mandates (e.g, for pension funds, charities) that mirror the strategy employed by the open ended fund. Would typically expect this money to be ‘stickier’ than retail money but redemption of such mandates at the same time as in the open ended fund would exacerbate liquidity issues when trying to meet redemptions.

dividendhero

londoninvestor wrote: »

I have no idea what the Times actually did, so this is pure guessing: but you could get a finger-in-the-air estimate by looking at the actual daily trading volume in each of the stocks it holds, and working out how many days it would take for the fund to offload 20% of its holding at that rate.

Not very exact, because trading volumes fluctuate over time, and you can generally sell more than the "usual" amount - as long as you're prepared to accept a lower price!

As I understand it, the majority of professional broking is done via dark pools. The published trades you see are only the tip of the iceberg...

Jim23k

So what's the consensus with buying this fund at present (and holding for the long term)? It's a top quartile performer over 3m/6m/1y/3y/5y, all managers Citywire AAA rated and often tipped as a 'buy' in financial press sites.

The spread is currently sitting at around 2.6% and it's one of the more expensive funds when it comes to charges...but the performance continues to impress...

aroominyork

I'll hold what I have but given the spread, charges and the issue I've raised about the rising level of AUM I won't buy more. I'll probably go with Standard Life next time I want to buy UK smaller companies.

Jim23k

Interesting...so SLI UK smaller companies has no spread, lower ongoing charges and AUM of a mighty £1.6 billion but by contrast invests in fewer small/nano companies and more towards the mid cap size.

aroominyork

Below is a note Liontrust sent to its institutional clients in June 2019. What do people make of it? To me it just says they try to avoid holding illiquid positions and they have a cash buffer of 9%. That doesn’t really alter my concerns and while I won’t rush to sell what remains a good fund I won’t buy any more of it.

Liontrust UK Smaller Companies liquidity position – June 2019

Liontrust is a PLC and has a main listing on the London Stock Exchange. We take our governance and internal controls obligations seriously and these are detailed in our report and accounts. There are robust and independent controls and monitoring in place with a segregated Risk team overseeing liquidity and other risks across all the funds.

As part of these controls, Liontrust has a Portfolio Risk Committee (“PRC”) chaired by our Chief Risk Officer (“CRO”). Their remit includes; the responsibility for monitoring and oversight of risk within all investment vehicles managed by the Group, the Risk Management Process (“RMP”) employed by the Group, setting appropriate risk limits and controls for each portfolio and any other matters relating to the risk requirements of the Group’s investments. The committee also reviews the performance of the investment management teams within the Group.

There are two parts to calculating Liquidity risk within a fund, a measure of the illiquidity of a Fund’s positions, and a measure of the size of a potential redemption request for a fund. The PRC ensures that for each fund the liquidity profile of the investments is appropriate to the redemption policy laid down in the prospectus / scheme particulars / or other such document. The liquidity of the funds is monitored in line with the calculation methodology as laid out in the Risk Management Process which measures the liquidity of the underlying assets held by the funds and compares the available liquidity to the redemption profiles of the funds under normal market activity and under several stress tests including Fund Manager departures, large single redemptions and stressed market conditions.

Every fund is checked to ensure that they meet our minimum liquidity requirements based on the average daily volume as well as the stressed average daily volume. Funds with significant investor concentrations are considered separately, and appropriate limits and controls put in place.

All our funds meet the required liquidity profiles and are able to liquidate positions to the minimums required as well as within a stressed market environment.

We would also like to take the opportunity to highlight a number of key aspects of the fund which have an impact on its liquidity:

• The Liontrust Smaller Companies Fund does not have any unquoted or unlisted positions. All holdings are transferable securities, they are listed on recognised exchanges (i.e. the London Stock Exchange) and there are no liens or other restrictions on our ability to sell the investments. The Fund has never invested nor intends to invest in these hard to sell companies. The fund is a UK Authorised Unit Trust, and therefore adheres to the UCITS rules.
• The Fund will invest in companies in AIM, the FTSE Small Cap (ex IT) Index and sometimes a company will grow into the FTSE 250 Index. The fund tends to not invest in companies with a market capitalisation below c.£200m. We consider companies below that level to be more suitable for the Liontrust UK Micro Cap Fund.
• The usefulness of average daily volume as a liquidity measure reduces with smaller companies as they trade differently. We believe it is also important to look deeper into the process of a fund to gauge its liquidity and highlight our experience of managing UK smaller companies over the last 22 years which gives us a good insight into liquidity in smaller companies. We have an experienced centralised trading team who specialise in seeking liquidity in smaller companies and we perform regular liquidity analysis of all the smaller companies held to better understand their true liquidity.
• Very often we sell or buy well in excess of 1000% ADV in our small caps – they are often traded in blocks not daily in small increments. We often find the buyer or flush out the seller through our in-house dealing desk, their knowledge of the market and analysis of the shareholder composition.
• We hold a diversified portfolio with no large single positions greater than 5% of the fund and the largest percentage of a company we will hold in any fund is 10%.
• We currently have c.9% cash in the portfolio which is in line with our average.
• We do not own loss makers.
• The CFROC of the portfolio is 15.2%, compared to the market CFROC of 6.8% (p.7 of the presentation).

We believe the Economic Advantage investment process identifies great businesses that are difficult to replicate, have lower gearing, higher CFROC and an owner manager culture. Not all illiquid small caps are the same - it is easier to find a buyer for a good, profitable company that our process leads us to invest in. The team are comfortable with and continually monitor the natural liquidity of our stocks.

A final stabilising factor for the Liontrust UK Smaller Companies Fund is its broad unit holder composition. The largest unit holder has 4.18% and we have a long tail thereafter.