Julian Fosh

Five small & mid-cap picks

Julian Fosh

A version of this blog was first published by Citywire Wealth Manager on 21 June 2017.

The Liontrust UK Growth Fund invests in companies with Economic Advantage characteristics across the UK market cap spectrum. We currently have over a third of the Fund invested in small and mid-cap stocks and here I highlight five of the best: 


Julian Fosh: Five small & mid-cap picks - Renishaw


Renishaw provides products designed to enhance precision and efficiency in areas such as medical diagnostics, machine calibration and neurosurgery. It has excellent levels of intellectual property (IP) resulting from decades of accumulated investment in research & development and also has a high proportion of recurring business. As with any company, Renishaw is subject to macroeconomic conditions which are outside of its control – for example, the cyclicality of the industries it serves and the impact of exchange rate moves on exports (which most recently has been a tailwind due to sterling’s post-Brexit referendum fall). However, the company has a proven record of generating significant long-term secular growth through these cycles.

In the six months to 31 December 2016, the company registered 21% sales growth, of which 9% was the effect of currency translation gains. Sales grew in all regions and were particularly strong in its Far East division, up 27%, and the UK, rising 20%, while its encoder and laser calibration products lines were highlights.


Julian Fosh: Five small & mid-cap picks - Fidessa


Fidessa supplies financial software to asset managers and brokers. Its tools and services include market data, portfolio analysis and compliance work-flow management. As well as substantial intellectual property and a strong distribution network, we believe that Fidessa has a substantial barrier to competition in the form of its high level of recurring business. In 2016, recurring revenues accounted for 87% of its total sales. Fidessa generates revenues through recurring licence and support fees and its products are effectively embedded in many of its clients’ businesses and services. This builds strong customer relationships and gives Fidessa a high degree of visibility over the future growth of the business. In 2016, it also receive a boost from the post-referendum weakness in sterling. The company derives 73% of its revenues in non-sterling currency, which boosted growth to 12% from 3% in constant currency terms.


Julian Fosh: Five small & mid-cap picks - Rightmove


Rightmove possesses all of the core Economic Advantage intangible assets which we look for, but perhaps the strongest of these is its distribution network, which puts it in an incredibly strong competitive position. This market-leading position has proven resilient to competition from the likes of Zoopla and OnTheMarket. In 2016, Rightmove’s property portal attracted an average 120m visits per month, giving it desktop and mobile market share of 77% and 81% respectively. Rightmove shares have now fully recovered from initial post-EU referendum nervousness as investors increasingly appreciate the durability of its competitive advantage. Due to its dominant position, the company can actually benefit from tough property market conditions as online and traditional estate agents compete for business by spending more on advertising. 

Julian Fosh: Five small & mid-cap picks - RWS Holdings


RWS Holdings is the largest patent and specialist translation business in the world with a strong distribution network covering Europe, the US and the Far East. The company's translators possess considerable know-how, which represents a strong barrier to completion. They need to combine a language with a science based skill. The intellectual property market that RWS serves continues to show steady growth which reflects the worldwide growth in scientific development and patent protection. RWS enjoys strong margins, high returns on capital and great cash generation. This has allowed it to acquire businesses as well as increase its dividend every year since coming to the market. This year it has bought LUZ, a US life science sector specialist, for a cash price of US$83m. For the six months to 31 March 2017, RWS expects to report 34% growth in revenues to £76m, driven by strong growth in its patent translations business.

Julian Fosh: Five small & mid-cap picks - StatPro


StatPro provides cloud-based portfolio analysis, performance measurement and asset pricing for fund managers. Its approach to delivering software via the cloud means the offering is vastly scalable, and it can compete with much larger software groups without being constrained by the requirement to build out ever more physical server infrastructure. It recently acquired UBS Delta for a cash consideration of €13m. UBS Delta’s risk and performance analytics should broaden StatPro’s product offering, allowing it to serve both front and middle office functions.  StatPro expects an EBITDA contribution from UBS Delta of £2.0m - £3.5m in 2017, which would result in the deal being immediately earnings enhancing. The new functionality will be incorporated into StatPro’s core Revolution product, while existing UBS Delta users will be encouraged to upgrade to the full Revolution package.

Disclaimer:

• Past performance is not a guide to future performance. • Do remember that the value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.  • Some of the Funds managed by the Economic Advantage Team invest in smaller companies and companies traded on the Alternative Investment Market.  These stocks may be less liquid and the price swings greater than those in, for example, larger companies. • The performance of the Liontrust GF UK Growth Fund may differ from the performance of the Liontrust UK Growth Fund and will be lower than its corresponding Master Fund due to additional fees and expenses.

• The information and opinions provided should not be construed as advice for investment in any product or security mentioned.  • Always research your own investments and consult with a regulated investment adviser before investing.

Tuesday, June 27, 2017, 9:52 AM