As earlier reported, Liontrust Asset Management will launch the Liontrust UK Micro Cap Fund in February or March next year. The fund will have manager of Liontrust Special Situations Anthony Cross as lead, and be co-managed by Bates and Tonge. Tonge recently joined the fund management team from the firm’s trading desk, while Bates joined from finnCap earlier this year.
During a presentation the co-manager pair outlined elements of their strategy, and what they see as the advantages of investing at the low end of the cap scale.
The definition of micro cap used by Bates and Tonge will be companies with up to a £150m market cap, which they intend to hold until they reach a £250m microcap, as a general guideline.
According to Bates smaller companies outperform larger ones by up to 13 times. Bates pointed to the Numis 1000 index, which covers the bottom 2% of the UK main market by capitalisation, as evidence of this. The upper market cap cut-off of the index is £494m.
“The Numis 1000 index has measured the cumulative return of the smallest UK listed companies all the way back to 1955, and shows that £1 invested in the index in 1955 would have been worth £11,161 at the end of 2014, 60 years later”, said Bates. “That compares to £821 over the same time horizon for £1 invested in the FTSE All-Share index – a compelling outperformance of over 13x for the smallest listed companies,” she added.
Bates also pointed to the advantage of having managers ‘on the floor’ in many smaller businesses, and of aligning managers’ goals with those of the business. These elements can be lacking in ‘the distant management structure’ seen in larger companies, according to Bates.
Another key part of the strategy will be sticking to companies that have demonstrated an ability to pay-out cash to shareholders. “We’re only interested in companies already generating dividends – not in blue-sky ideas,” Bates said.
