One of the best performing UK equity funds in recent years has been Liontrust Special Situations. The fund flew under the radar for a long time, perhaps hampered by the boutique nature of the company and managers Anthony Cross and Julian Fosh’s lack of star status. However, recently the fund’s success has made it hard to ignore and it has become a stalwart of many investors’ portfolios.

Cross graduated from Exeter University in 1990 with a degree in politics and began his investment career at Schroders, going on to assist Andy Brough on the Schroder UK Smaller Companies fund. He joined Liontrust in 1997 and took on its UK Smaller Companies fund in 1998. Following the success of the small cap offering Cross launched the multi-cap Special Situations fund in 2005.

Since 2008 he has worked with Julian Fosh, a successful fund manager in his own right at Scottish Amicable, Scottish Friendly and boutique Saracen. The duo work from their respective homes in Scotland. Following the departure of star fund manager Jeremy Lang in 2009 they also took on his Liontrust First Growth fund, subsequently renamed UK Growth. This differs from their other mandates in having a large and mid-cap focus, but follows the same process.

Cross and Fosh look for companies with what they call “Economic Advantage” – characteristics their competitors will struggle to replicate. Often this will consist of intellectual property – the fund consequently has a high weighting to technology stocks. However, the managers also like companies with significant repeat business or strong distribution channels. These strengths should enable them to sustain high profits for longer than the market expects.

The focus on technology is unusual for a UK fund. This is a tiny part of the UK stockmarket, but at the end of August 19 per cent of the fund was invested in tech companies. Typically these are domestically focused software companies rather than high risk enterprises looking to go global. EMIS Group, a provider of software and services to doctors’ surgeries and hospitals, is currently in the fund’s top 10 holdings.

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By contrast the managers avoid industries they don’t believe offer sustainable growth – the fund has consistently had little or no exposure to miners, retailers and banks.

The fund’s style has typically led to lower volatility performance and a degree of protection from falling markets. Relative returns over the last two years have moderated in what has generally been a steadily rising market with value stocks and particularly financials to the fore. However, over time Cross and Fosh have generated substantial outperformance.

Given the focused on sustainability it’s not surprising that stock turnover is low, and the managers often take substantial holdings in companies that they like. The fund holds up to 10 per cent of the capital of the likes of mobile payment company Bango and wealth manager Brooks MacDonald

One potential headwind for the fund is its size – as a result of its success it has grown to £1.3bn and might struggle to access smaller companies to the same extent going forward. However, we continue to have confidence in the managers and their process.

The fund’s more cautious profile makes it suitable for core UK equity exposure, whilst its’ slightly unusual style also means it can serve as a diversifier to more mainstream UK funds.

Tom White is senior research analyst at Tilney Bestinvest.

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