‘We’re not interested in Brexit or Jeremy Corbyn’

Nearly all fund managers claim to have a unique methodology for picking stocks that gives them an edge. Many are overselling themselves, and end up tracking their benchmark index closely. But the £3.6bn Liontrust Special Situations fund, which invests in British shares, has beaten the FTSE All Share index consistently – over one, three, five, seven and 10 years. Since its launch in 2005, it has delivered a total return after fees of 416pc, versus the All Share’s 144pc.

Here, the managers, Anthony Cross and Julian Fosh, tell Telegraph Money why intellectual property forms a key part of their stock-picking method, why they don’t care about Brexit, and which areas of the market they avoid.

AC:

Every company we own has to have one of three things: intellectual property – patents and trademarks; a strong distribution network; and/ or at least 70pc of turnover from recurring income. Lots of our businesses have two or even three of these qualities. These advantages give our companies pricing power.

This takes us into engineering, media, software, healthcare and more. Small companies are 20pc to 30pc of the fund, and in these we require directors to own at least 3pc of the shares. We want an owner-manager culture.

We don’t tend to invest in areas such as construction, high-street retail, mining or bricks and mortar property.

We then look to see if these companies are delivering on that advantage. We look at a 20-year profile of return on capital – the ability of a company to earn a return on its activities that’s higher than the cost of raising finance. Our holdings’ average return on capital is 20pc, four times the UK market average.

We do own a range. Online estate agent Rightmove hardly needs any capital, has a dominant market position and makes a return on capital of more than 100pc. Investment shop

JF: CV: Anthony Cross and Julian Fosh

Mr Cross (right) has been on Liontrust’s ust’s UK Smaller maller Companies anies fund since ince 1998. He began to run Special Situations ons in 2005 5 and was joined by Mr Fosh in 2008. They both also run a number of Liontrust’s other funds. Hargreaves Lansdown earns 55pc to 60pc consistently and Domino’s Pizza is in the mid 20s to 30s. Then there are some lower down, such as the oil companies, that are highly cyclical.

This UK fund has tripled the return of its benchmark index. James Connington asks the managers how

JF:

People don’t think oil companies have intellectual property. But there’s a lot of expertise: patents, engineering.

BP has a long history of pioneering, such as very deep water drilling, and has, more recently, used IT advances to cut costs. Shell, after a recent acquisition, is now the global number one in liquid natural gas. It’s a fantastically stable business, all about having fleets of tankers operating on long-term contracts. BP is a recovery play, and Shell has steadily grown dividends, but both are cheap.

JF:

It’s all very well having these great companies but, if you overpay, you won’t make a return. However, many people start with the valuation – we put it last. We use five different measures, including free cash flow yield, the spare cash a company produces that it doesn’t need to spend or reinvest. The larger companies we invest in have to look cheap on at least one measure.