Manager’s short Final report For the year ended 30 april 2008
FunD proFiLe
investment objective and policy
the liontrust intellectual Capital trust seeks to achieve long-term capital growth by investing primarily in smaller UK companies displaying a high degree of intellectual Capital and employee motivation through equity ownership in their business model. to achieve this aim the Fund will invest in a portfolio of UK smaller companies’ shares, the majority of which are contained within the Ftse small Cap., the Ftse Fledgling and aiM indices. Companies within the Fund that graduate into the Ftse Mid 250 index will be held until a suitable replacement can be found. the Fund is benchmarked against the Ftse small Cap. (excluding investment trusts) total return index.
investment approach
With over 2,000 smaller companies quoted on the london stock exchange, investing in smaller companies requires a disciplined investment approach to identify companies with good long-term potential and avoid the remainder. the Fund’s investment approach is to invest exclusively in companies demonstrating two criteria which we believe are the key to what makes some companies successful and others less so. these are: the strength, sustainability and exploitation of a company’s intellectual Capital (its intangible strengths), and how key employees (who create this intellectual Capital) are motivated and retained, preferably through direct ownership of the company’s equity. the Fund will only invest in those smaller companies that can demonstrate that they have met these two criteria.
risk profile
the Fund is invested exclusively in UK securities. it invests exclusively in smaller companies, which may be less liquid than larger companies. the price swings may therefore be greater than in those portfolios comprising shares of larger companies. Furthermore, the Fund has a significant proportion of its assets in companies which are traded on the alternative investment Market (aiM). the nature of aiM investments is such that prices can be volatile and realisations may not achieve current book value, especially when such sales represent a significant proportion of that company’s market capital.
Total expense ratio: 1.58% (30th april 2007: 1.58%)
Fund calendar
ex-dividend date 1st May
income payment date 30th June
accounting period ends 31st october (interim) 30th april (final)
notice of change to the registrar’s fees
With effect from 1st september 2008, the registration fees on the Fund will increase from 0.0267% to 0.0385% per annum, due to an increase in the underlying dealing and ancillary costs. it is expected that the effect of this change will be an increase in the Fund’s total expense ratio of 0.01%.
perForMance net asset Values
naV as at
30th april 2008 30th april 2007naV as at % change
income units 294.54 pence per unit
375.71 pence per unit
-21.60%
Distributions
the Fund distributes income once per annum, on 30th June. the ex-dividend date is 1st May each year. income can be reinvested to purchase units at no initial charge.
on 30th June 2008, the Fund paid a distribution for the year ended 30th april 2008 of 1.92 pence per unit (2007: 0.74 pence per unit).
Total return 1 year to 30.4.08 % since launch (8.1.98) to 30.4.08 %
The Liontrust intellectual capital Trust -23.4 +157.5
Ftse small Cap. (ex. it) total return index -28.4 +55.7
Discrete years performance
1 year to 31.3.04 % 1 year to 31.3.05 % 1 year to 31.3.06 % 1 year to 31.3.07 % 1 year to 31.3.08 %
The Liontrust intellectual
capital Trust +68.2 +18.9 +19.0 +9.4 -21.8 Ftse small Cap. total return index
(excluding investment trusts) +66.4 +11.4 +23.5 +15.1 -29.0
Up-to-date past performance information (to the last calendar quarter end) may be obtained from the Fund’s most recent fact sheet, available on our website (www.liontrust.co.uk) or by calling our Broker services team on
020-7412 1766.
past performance is not a guide to future performance. the value of investments and the income from them can fall as well as rise and are not guaranteed. investors may not get back the amount originally subscribed. the issue of units in the Fund may be subject to an initial charge, which is likely to have an impact on the realisable value of the investment, particularly in the short term. equity investment should always be considered as long-term.
Performance data source: Financial Express, bid to bid basis, net income reinvested at ex-dividend date, to 30.4.08.
* state street global advisors
porTFoLio DeTaiLs Top 10 holdings
as at 30.4.08 % as at 30.4.07 %
1 rWs 4.11 Waterman 3.53
2 Wilmington 4.01 next Fifteen Communications 3.44
3 Concurrent technologies 3.49 Bpp 3.43
4 Murgitroyd 3.24 Maxima 3.41
5 genetix 3.17 Wilmington 3.29
6 Waterman 3.16 nCipher 3.20
7 next Fifteen Communications 2.94 genetix 3.07
8 Brooks Macdonald 2.78 rWs 3.07
9 renishaw 2.77 Murgitroyd 2.86
10 Mama 2.68 Brewin dolphin 2.67
total 32.35 total 31.97
sector weightings
FTse small
cap. index The portfolio 30.4.08 % 30.4.08 % 30.4.07 % united Kingdom
oil & gas 2.11 – –
Basic Materials 4.51 – 0.88 industrials 28.33 24.39 24.04 Consumer goods 5.26 – – health Care 8.50 7.14 4.77 Consumer services 16.06 19.61 17.37 telecoms 2.17 – – Financials 21.28 13.88 18.14 technology 11.78 26.73 27.02 100.00 91.75 92.22
Cash (including ssga* cash deposits) 8.25 7.78
inVesTMenT coMMenTarY The Liontrust Intellectual Capital Trust is managed by Anthony Cross using his investment process for UK Smaller Companies portfolios, the Cross report.
it was a difficult year for the stock market. the ‘credit crisis’ that took hold in august 2007 led to a sharp fall in shares. the sectors that were the hardest hit were those that had previously benefited from the easy availability of credit. the most notable were retailers, property companies and financials.
the poor performance of small companies stood out. as usual when there is stock market uncertainty, their share prices experienced the greatest
falls. this is due to a mixture of illiquidity, selling by private individuals and, on this particular occasion, changes to the capital gains tax regime.
the overall fall in shares disguised significant volatility. the stock market suffered from bouts of optimism and pessimism depending upon the perceived scale of the credit problems, the direction of interest rates, inflation and the health of the Us economy. the continued rise of commodity prices also had a profound affect. it helped soften the decline of the Ftse all-share index because of the strong performance of the resources companies. of late, however, the strength of the oil price has heightened fears about inflation and growth. in line with the resources sector, those companies with strong international sales, particularly into emerging markets, tended to perform better and this continues to be the case.
review of the Fund
the Fund was down 23.4%. it outperformed its benchmark, the Ftse small Cap. index (excluding investment trusts), which fell 28.4%.
the Fund’s investment philosophy continued to be applied. it is my strong belief that the focus on intellectual Capital and employee equity ownership will continue to drive good investment performance. indeed, in my experience, the pricing power that intellectual Capital affords and the motivation instilled by employee equity ownership come to the fore in tougher economic times.
Anthony Cross, managing the Fund since launch in January 1998.
intellectual Capital assets encompass customer relationships, repeat business, databases, distribution networks, intellectual property and organisational assets such as procedures, formats and culture. these intangible, often people-based, assets are frequently difficult to replicate and not easily exportable. they therefore help protect pricing power in a world where competition is remorseless. the insistence on directors owning a significant portion of equity helps to ensure that they have a strong motivation for the business to succeed. Furthermore, the ‘owner-manager’ culture created by equity ownership instils a greater conservatism towards acquisitions and financial gearing. research by liontrust has found, for example, that interest cover in geared businesses is higher when directors own over 3% of the equity.
i subjectively score the intellectual Capital of each holding. the most successful investments have been those companies which show a real depth and breadth of intellectual Capital. it is these companies that i actively seek. they are by their nature very difficult to replicate, and experience has shown that they tend to be more resilient during periods of economic uncertainty than the knee jerk downward lurch in their share prices would suggest.
i pay a lot of attention to risk. if the economy weakens, this will become even more important. i score risk under the following headings: financial gearing, pricing, regulatory, product and customer dependency, working capital, liabilities, expansion, acquisition, licence dependency and accounting.
Companies are allotted one of four weightings. the least vulnerable are given a portfolio weight of either 3% or 2% (over their Ftse small Cap. index weight, where applicable) whereas the more vulnerable are given a weighting of 0.5% or 1%.
on top of the risk grades, i avoid companies that are not UK-based. i am happy to own companies that have significant overseas operations but i want a UK headquartered company, where the directors are subject to UK law. i also want to be able to visit the companies and speak the same language. as i have said before, too many Funds purport to be UK funds but are actually buying small overseas businesses which happen to be listed on the lightly regulated aiM.
amongst the outperformers, i was pleased that IDOX (local government software) and Workplace Systems (workforce planning software) were both up by over 40%. after a difficult 2006, they have experienced improved trading. shares in ASOS (on-line retailing) and Vebnet (flexible benefits software) performed strongly, as did RWS (patent translation).
a large number of shares held up well against a background of falling share prices. others, such as Bond International Software (recruitment software),
Empressaria (international recruitment), Next Fifteen (public relations) and Waterman (engineering consultancy) saw sharp share price declines because of
their perceived exposure to a downturn. their falls ran counter to their strong profits growth and robust outlook statements.
there were some genuine disappointments. Maxima (it services) reported that trading conditions had become more testing and both Brewin Dolphin (private client fund management) and Panmure Gordon (broking) have suffered from more difficult stock markets. Humberts (estate agency) suffered from a sudden change in the fortunes of the housing market, whilst Ransom (healthcare) fell after reporting disappointing trading. the shares in both companies have been sold. Screen FX (screen-based advertising in shopping malls) continued to disappoint. this loss making company has suffered from a weak balance sheet and revenues have been slow to take off. the Fund no longer takes new holdings in early stage loss making companies but it will continue to support, where appropriate, its few remaining early stage companies, such as LiDCO (medical devices), which has performed much more strongly.
the Fund took profits over the year in Bond International, Clarkson (ship broking),
Empressaria, Fidessa (financial software), Maxima (it services), IDOX, Next Fifteen
and YouGov (market research). due to the emerging credit crisis the Fund reduced some of its exposure in the financial sector. holdings in ACP Capital (mezzanine finance), Ambrian (stock broking) and Charles Stanley (private client fund management) were sold.
the Fund purchased and added to holdings in ASOS, Chrysalis (music publishing and recording), Coda (accountancy software), IS Pharma (formerly Maelor) (healthcare),
Penna (human resources services), Statpro (investment performance measurement
software) and Tikit (software and it services for law firms and accountants). the trading performance of these companies has been good and Coda was acquired.
outlook
the credit crisis has led to an economic slow down in the West. emerging markets and those countries with abundant natural resources are continuing to grow strongly. however, inflation is rising due to increasing food and raw material costs. Whilst there are strong arguments for believing that emerging and resource rich countries will be unaffected by the slowdown in the West, there is a danger that they will need to curtail growth to control inflation. Furthermore, their
reliance upon the West for exports is still significant. the overall balance of global growth will govern the health of the stock market over the next year and will determine whether sectors that have been less affected by the credit crunch will remain relatively unscathed or face more difficult conditions.
as i stated in the interim report, despite this backdrop, the Fund continues to find good investment opportunities where the mix of intellectual Capital and employee ownership provides powerful barriers to competition and high levels of motivation. the decline in a large number of smaller companies’ share prices, particularly at the bottom end of the market, has been pretty indiscriminate. their fall has created many attractive buying opportunities in companies that are not overly dependent upon UK economic activity.
since the Fund’s year end, Julian Fosh has joined liontrust. he will work with me on this Fund and on the other funds that i have been running at liontrust. his considerable experience in both small and large companies will add extra resource. as joint managers of the Funds we will strive to continue their good performance.
the investment process has been applied for over 10 years. during this period, the stock market has experienced frequent bouts of optimism and pessimism. the importance of intellectual Capital and employee motivation in the success of smaller companies has been a constant feature and we both have no doubt it will continue to be so over the next 10 years.
anthony cross
director, liontrust investment services limited June 2008
Liontrust asset Management pLc
liontrust asset Management plC is the holding company of a specialist equities fund management group providing process driven portfolio management services to a range of funds which are targeted primarily at professional investors and advisers. the group currently manages approximately £5 billion in segregated and pooled institutional accounts, unit trusts, offshore funds, an absolute return fund and individual savings accounts on behalf of 16,000 investors.
Further information, report & Financial statements
Further information on the Fund and its portfolio, the Manager’s long Final and interim reports & Financial statements and the prospectus and simplified prospectus are available free of charge from the Manager upon request, and from www.liontrust.co.uk.
The Manager
liontrust investment Funds limited, 2 savoy Court, london WC2r 0eZ. administration enquiries: 020-7964 4772 dealing: 020-7964 4774 dealing facsimile: 020-7964 4776 Broker services: 020-7412 1766 e-mail: [email protected] Website: www.liontrust.co.uk
