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

bowlhead99

aroominyork wrote: »

Below is a note Liontrust sent to its institutional clients in June 2019. What do people make of it?

Seems reasonable to me and wouldn't put me off investing. It is the sort of thing you would hope they would say.

May help assure some people who fear that the illiquidity problems at Woodford will be replicated here, but doesn't change the obvious fact that serious money can be lost in open ended small cap funds in a recession or equities crash, nor that UK-focused investee companies may turn out to be a relative bargain if Brexit is less hard than feared by the market. Those are the things I might consider if thinking about upping my allocation.

londoninvestor

aroominyork wrote: »

• 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.

This part suggests that a crude estimate of "7 months to offload 20% of the portfolio" would not be very representative if (as I suggested in June) it's based on daily exchange volumes, because most of the volume in such companies doesn't take place through standard exchange trades.

Liontrust's point seems reasonable here in that sense. Of course it doesn't change the fact that if you need to sell a largeish stake quickly, the price you receive will suffer, as we all know from Woodford.

aroominyork

What is ADV, please? Google isn't helping so my best guess is average daily volume, suggesting they can successfully trade (ie demonstrating liquidity) ten times the average amount of stock in a company which is generally traded.

londoninvestor

aroominyork wrote: »

What is ADV, please? Google isn't helping so my best guess is average daily volume, suggesting they can successfully trade (ie demonstrating liquidity) ten times the average amount of stock in a company which is generally traded.

Yes - average daily volume.

Thrugelmir

aroominyork wrote: »

What is ADV, please? Google isn't helping so my best guess is average daily volume, suggesting they can successfully trade (ie demonstrating liquidity) ten times the average amount of stock in a company which is generally traded.

Average Daily Volume is how I would read it. Large lines of stock tend to get placed off book rather than traded through the exchange. At what price is another matter. Certainly at a discount to quoted prices though. Afterwards there maybe a period of indigestion while the stock is sold on to the wider market.

bowlhead99

aroominyork wrote: »

What is ADV, please? Google isn't helping so my best guess is average daily volume, suggesting they can successfully trade (ie demonstrating liquidity) ten times the average amount of stock in a company which is generally traded.

Yes, they will be referring to average daily volume, a measure of liquidity.

The London stock exchange publishes a 'normal market size' (NMS) for each stock which is a function of historic daily volume. The quoted bid-offer spread reflects the minimum you would have to offer, or the maximum amount someone would need to bid, to complete an on-market transaction of normal market size.

If they are talking about doing a transaction which necessitates buying or selling as much stock as more typically goes through the market in several days, and each day's total volume represents a multiple of normal market size, you can imagine the overall price they have to pay may be in excess of (or the amount they are bid by a buyer may fall short of) the standard bid-offer published price range. Although it depends on the position of the selling or buying counterparty of course, and they might strike a very good deal sometimes.

Really the purpose of that part of their note is to illustrate that they are conversant with placements, off market trades or working large blocks of stock, as they are very familiar with buying or selling outsize positions and are not intimidated by a requirement to build or exit an (e.g.) 3-5% position in a company (or greater) as they develop the portfolio.