Fund manager duos are always intriguing. The intimacy of the relationship mirrors that of a long-term marriage or romantic partnership, with many entangled managers suggesting they spend more time with their co-manager than their spouse – and in many cases claim (jokingly, one hopes) to get along far better.
“I have always been very input-driven,” says Anthony Cross, fund manager at Liontrust. “Tell me why a company is successful. What has it got? What is it about it that has made it a great success? Tell me about the business model, the intellectual capital, of any barriers to competition. That is what was driving my style before Jules joined me.
“Julian was always much more output-driven, so he will say ‘demonstrate to me that this is a good company’.
“He is not necessarily overly interested in why it was a good company but he wants to see the outputs – the cashflow and the returns on invested capital.”
Level pegging
Cross was the forerunner on the £417.7m ($600.46m) Liontrust UK Smaller Companies Fund, instigating the product when he joined in the autumn of 1997.
He ran it single-handedly for 10 years, latterly alongside the £1.62bn Special Situations Fund, for which he was also the launch manager from 2005.
But in 2008, Julian Fosh joined him in running both portfolios, and the pair have been level pegging since.
“I was keen that we had the same title, the same salary and were complete equals. There was not to be any of that ‘sharp elbow’ stuff going on. That was very important,” Cross recalls.
Cross and Fosh were joined last year by Victoria Bates and Matthew Tonge, who will input to the small-cap fund, looking at companies with a market capitalisation of sub-£150m, bolstering the team’s expertise in micro caps with plans to introduce a micro-cap fund to the market in March, subject to regulatory approval.
“Julian and I both take ownership of the process but I am the one worrying day to day about smaller companies.” The process of which he speaks is the ‘economic advantage’, which Cross conceived when he joined the boutique from Schroders.
“Liontrust was, and still is, an investment outfit that believes fund managers should articulate how they want to run money: to define the method by which they will go about choosing their stocks.”
Describing the difference in culture from Schroders, where Cross says managers adopt a more generalist, valuation-based approach, he says: “The way I wanted to do it at Liontrust was to go back a stage and say, ‘Let us see what would be a good business model that can drive strong long-term returns in terms of profitability and margin. Let’s put that at the front end and valuation would then come more at the back end’.”
The raison d’être of the process was to seek out the intangible assets that set companies apart, their intellectual capital that give pricing power and ultimately boost margins. The qualities Cross refers to include things such as intellectual property, distribution networks, recurring income, brands, customer relationships, format skills and culture. “I thought these were important because they were difficult for other people to replicate,” he says.
When Cross began his investing career, he says engineering firms, for example, tended to be UK-focused, doing their own manufacturing – the sites and the raw materials were vital to its commercial success – meaning it was far more tangible.
