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‘Fund in the spotlight’ – Has the Lion started to whimper?

Katy Owen takes a closer look at the Liontrust UK Smaller Companies Fund.

As our proactive clients are aware, every three months we vigorously analyse all of the funds in our five model portfolios. It is at this time that we make decisions on whether to remove and replace funds that have started underperforming against their peer group. This does not mean, however, that we are not watching the fund’s performance at any other time within the three months

At Thomas and Thomas we believe our extensive use of quantitative and qualitative research is invaluable to our clients. I would like to share a recent example of how quickly a fund’s performance can change and the importance of all our fund analysis.

Two weeks ago I decided to select a fund for another instalment of our ‘fund in the spotlight’ article series. I chose The Liontrust UK Smaller Companies fund because of its historically good performance. I felt that a closer look at ‘what’s behind the fund’s success’ would be valuable for our clients. This fund will be familiar to our more adventurous clients that hold a level four or five Thomas and Thomas designed portfolio.

At the time of starting my article research, the Liontrust UK Smaller Companies held a coveted ‘bronze’ status from ratings agency Old Broad Street. It also had a very respectable four out of a maximum five morning star ratings and sat within the top quartile –ranked 12th out of its 53 fund peer group over the year. This week, upon returning to my research, I was shocked to see that this fund has slipped to 25th out of 53*.

A look into The Liontrust UK Smaller Companies management style may offer some explanation for the short term slump of performance. Fund managers Anthony Cross and Julian Fosh invest for the long term with low turnover, and do not alter their investment approach due to shifts in market conditions or the economic cycle. They happen to hold some very small companies that did not benefit from last weeks upturn on the FTSE 250 index.

We will be conducting our quarterly Proactive review in the next week and, having already arranged a meeting with Liontrusts fund representative, further analysis of the Liontrust UK Smaller Companies will be carried out.

Although the performance of the Liontrust fund has dipped, that does not mean we will be removing it from our proactive portfolios straight away. It is very important that a ‘knee jerk’ emotional reaction does not occur when considering a long term strong performer. We will collect all of our information firstly for in-depth analysis so that we can code them using our traffic light system. This fund would currently be viewed as amber it would seem, but we will be watching it very carefully in case it should become red.

It is amazing to see just how quickly a portfolio can be damaged if the funds are left unwatched. Close analysis of all the underlying funds is an extremely important part of our process here at Thomas and Thomas and something that I, personally, thoroughly enjoy doing.

Katy Owen

*Investment week 16th February 2015


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