Liontrust UK Smaller Companies Fund

The Liontrust UK Smaller Companies Fund returned -0.2%* in February. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned 7.2% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 3.9%.

There was a firmer focus on a post-Covid world in February’s markets as the breakneck pace of the global vaccination effort saw the number of people vaccinated exceed the number of Covid cases. Specifically, investors began to price in a potential rise in inflation from pent-up demand being unleashed as lockdown restrictions ease. Further stoking inflationary concerns was the anticipation of a huge US fiscal stimulus bill, as President Biden’s US$1.9 trillion plan passed through the House of Representatives late in the month.

In the UK, where the vaccine roll-out has been particularly impressive, Prime Minister Johnson outlined the path out of lockdown and towards an economy without any Covid restrictions. This supported the share price of online beach holiday retailer On The Beach (+20%) as restrictions on foreign travel had weighed on holiday bookings. Prior to the announcement, the group had stated that lockdowns in the UK mean that demand for holidays had been very weak, with activity 85% lower in January 2021 compared to the previous year. The company added that it expects to take market share from struggling competitors, with its capital light and fixed cost base model being advantageous against traditional travel operators.

On the flipside, the opening up of the economy weighed on the share prices of video gaming companies Sumo Group (-14%), Team17 Group (-9.0%) and Keywords Studios (-7.8%). Lockdown measures have resulted in greater demand for video games as restrictions changed leisure habits. While it is unsurprising to see these companies’ shares come off slightly on the prospect of a fully open economy, they have made strong gains since the pandemic started, both operationally and in terms of stock price.

Enterprise resource planning (ERP) software provider K3 Business Tech (+54%) announced the sale of its managed services unit Starcom Technologies for £14.7m. The sale will generate a profit of £10m, which will be booked in the company’s current financial year. The proceeds will significantly strengthen K3’s balance sheet, eliminating its net debt which stood at £2.3m on 30 November 2020.

Customer engagement software group Netcall (+21%) also reported strong interim results, with revenue rising 9% in the six months to 31 December 2020, and pre-tax profit rising to £960,000 from £140,000. The performance was led by strong growth in cloud software revenues, which rose 28% as the company saw higher sales in key market segments of financial services, healthcare and government. Management stated the overall revenue growth rate achieved in the first half had continued into the second and now that there is improved visibility of forward revenue, earnings before interest, taxes, depreciation and amortisation (EBITDA) will be ahead of expectations for the full-year.

Having performed very well year-to-date, dotdigital’s (-6.4%) shares reflected some profit taking following its half year results. The company, which provides software-as-a-service for omnichannel marketing automation, confirmed the details it reported in its January trading statement: organic revenue rising 22%, recurring revenues from enhanced product functionality growing by 20% to £8.9m. dotdigital reiterated that full-year revenue and adjusted EBITDA will be in line with recently upgraded market expectations.

Leeds-based specialist in e-retail and returns management logistics Clipper Logistics (+10%) won major contracts with River Island and Mountain Warehouse. The two contracts are expected to increase revenue by over £40m and enhance earnings in the company’s next financial year starting on 1 May 2021. It therefore expects to outperform the market’s expectations for its next financial year and beyond.

There were a handful of changes to the portfolio in February. IMImobile exited following the completion of its £543m takeover by Cisco Systems. Gamma Communications meanwhile left the fund due to management ownership falling below the required 3% minimum.

The Fund participated in the IPO of Foresight Group. Foresight is an alternative asset management business focused on infrastructure, real assets and private equity, with a specialism in sustainable assets. It was co-founded in 1984 by current executive chairman Bernard Fairman, who retains a large shareholding in the business. The company was added to the Fund on the basis of its strong recurring revenues, which are generated from management fees levied on Foresight’s funds and represent around 85% of turnover.

Positive contributors included:

K3 Business Technology Group (+54%), accesso Technology Group (+31%), Netcall (+21%), On The Beach (+20%) and Animalcare Group (+17%).

Negative contributors included:

Sumo Group (-14%), Alpha FX (-10%), Team17 Group (-9.0%), GlobalData (-8.5%) and Impax Asset Management (-8.2%).

Discrete years' performance** (%), to previous quarter-end:

*Source: Financial Express, as at 28.02.21, total return (net of fees and income reinvested), bid-to-bid, institutional class. Non fund-related return data sourced from Bloomberg.

**Source: Financial Express, as at 31.12.20, total return (net of fees and income reinvested), bid-to-bid, primary class.

KEY RISKS

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Some of the Funds managed by the Economic Advantage team invest primarily 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 GF UK Growth Fund may differ from the performance of the UK Growth Fund and will be lower than its corresponding Master Fund due to additional fees and expenses.

DISCLAIMER

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.