Construction and retail companies' business models need to be interrogated properly to ensure they are properly geared towards long-term, not short-term, growth.
‘Where you won’t find us invested is in areas like housebuilding. We don’t have anything in retail and, in the Special Situations fund, we have never owned financial or retail banks,’ he said at a conference in London.
‘There had been a fair amount of ‘tee-heeing’ at the beginning of the year as companies like Carillion hit the wall. An interesting point on that situation was the fact of equity ownership.
‘The way the guys were incentivised was on revenue growth, which is a very strange way of trying to build long-term value.’
With overweights in sectors such as industrials (28%) and consumer services (15.6%), Cross has focused on the mid-cap space, which he said had performed well for the fund over the last year.
'There have been some strong performance figures coming from engineering companies in the mid-cap space. As well as this, some very old friends in the FTSE 100, such as Diageo (4.1%) and Unilever (3.8%), have produced strong performance.
'Growth stocks also did well for us, but we had slightly less allocated to the small-cap space, which meant there was a difference in returns with our funds. Overall we’ve had a solid good level of performance coming through from our larger-cap portfolios over the last year.'
Reoccurring income theme
One reoccurring theme Cross said is useful to have in a portfolio is companies employing sign-up or membership deals in their business models.
'Lots of companies start the year not knowing what turnover is going to be in a months’ time or even 12 months’ time. But if you can find companies where customers can sign up to your business for a long period of time, then they can be hugely valuable.
'Also, from a strategic point of view, if you are running these companies and have a source of reoccurring income, then you have a much clearer idea of what the profit is going to be like.
'This way you get a real understanding of the company’s strategy, how they will grow over the next 5-10 years. We like finding companies with high reoccurring income.'
Over the three years to the end of December 2017 the Liontrust GF Special Situations fund returned 47.10% in sterling terms. This compares with a 33.34% rise by its Citywire-assigned benchmark, the FTSE All-Share TR, over the same time period.