Liontrust UK Smaller Companies Fund

The Liontrust UK Smaller Companies Fund returned 4.2%* in July. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned 1.2% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 1.9%.

The FTSE Small Cap Index continued its winning run after recovering from a mid-month dip. The initial decline was caused by growing concerns that the spread of the Delta variant of coronavirus would weigh on economic growth. These concerns come against a backdrop of rising inflation as data for June showed UK consumer price inflation of 2.5%.

Two of the Fund’s holdings saw takeover offers in July. Investment management company Charles Stanley Group (+50%) agreed to be acquired by US-based investment bank Raymond James Financial in a deal which valued the company at £279m. The 515p per share offer represented a 44% premium to the company’s share price immediately prior to the offer announcement.

Sumo Group (+32%) reached an agreement with Chinese technology conglomerate Tencent on a £919m takeover deal. The 513p per share bid offered a 43% premium to the UK video gaming company’s prior share price. Meanwhile, fellow video gaming holding Team17 Group (+17%) engaged in some M&A of its own by agreeing the takeover of educational apps developer StoryToys for an initial consideration of US$27m. Team17 said the deal established a new educational element to its offering which complements its existing expertise in video gaming.

Away from takeovers, there were a handful of trading updates in July from the Fund’s holdings. Judges Scientific (+15%) saw a strong bounce from 2020’s Covid affected performance, with organic orders up 25% year-on-year for the first half of 2021. This was led by those regions which were the worst affected by the initial onset of the pandemic, such as North America (+41%), Europe ex-UK (+34%) and the UK (+26%). Organic sales were up 5% year-on-year, leaving the board confident that full-year expectations will be met.

Learning Technologies Group (+14%) indicated that it expects to report a 29% year-on-year increase in revenue for the first half of the year. The performance was a mixture of organic growth – the Content & Services division being a highlight – and boosts from recent acquisitions such as Bridge and Reflektive. Adjusted earnings before interest and taxes are set to be 20% ahead of the previous year. LTG also undertook a share placing raising £82m to help fund its acquisition of GP Strategies, a leading provider of learning services and workforce transformation.

Robert Walters (-5.7%) saw its share price slip despite reporting a surge in interim operating profit to £24m from £4.2m in 2020, as recruitment activity accelerated in the first half of 2021. This was also higher than the 2019 level of £23m. Management said that trading is comfortably ahead of market expectations for the full-year and it is cautiously optimistic for the second half.

During the month, the Fund exited its positions in Accesso Technology Group and IG Design. Accesso was sold after its senior management equity ownership level fell below the 3% threshold required of all smaller companies held under the Economic Advantage process. IG Designs was sold after significant disposals of stock by the senior management team.

It also participated in the IPOs of Big Technologies and Microlise Group. Big Technologies is a provider of integrated hardware/software solutions for the electronic monitoring of criminal offenders. The business has strong intellectual property, some of it patented, and a key selling point to customers is its superior product design compared to competitors. It also boasts high levels of revenue visibility, as contracts with its government customers are very long term in nature (averaging 3-5 years, but in some cases up to 12 years in duration).

Big Technologies has multiple avenues of growth ahead of it, including continuing to take market share and expand internationally in its core Criminal Justice market, as well as expanding into adjacent large markets such as health and care, where its products also have a number of existing and potential future applications. CEO and founder Sara Murray is a serial entrepreneur, having previously founded and sold Confused.com, and retains 25% of the equity following the IPO.

Microlise is a provider of telematics software to improve the efficiency of its customers’ logistics operations. The company already enjoys very high market share – its customers include almost 60% of the UK enterprise logistics market (companies with over 500 vehicles in their fleet) and 46% of the medium size logistics providers (those with fleets of 250-500 vehicles).

There is significant breadth and depth in its software intellectual property, with a range of modules developed over many years. These range from solutions to track the location and monitor the performance of customers’ vehicles, through to a complex planning and optimisation module which enables customers to optimise driver routes and asset utilisation. The software is also sold on a recurring, software-as-a-service (SaaS) model and so the business enjoys highly predictable revenues.

Future growth is likely to be driven by cross- and up-selling of additional software products into existing customers, as well as international expansion. Since a management buyout in 2008, Microlise has been led by current chief executive Nadeem Raza, who still holds over 50% of the equity and did not sell any stock at the IPO.

LendInvest was another stock to be added. LendInvest operates a fintech platform which aims to disrupt the mortgage lending market by creating a seamless, technology-enabled experience for both borrower and lender. It acts as a hybrid alternative asset manager, platform and lender – matching retail and institutional investors with property finance opportunities by packaging up loans, enabling this process via an automated technology platform, and investing its own balance sheet capital to help seed new opportunities alongside its investors. The business focuses today on specific high-value niches within the mortgage lending market – bridging loans, development loans and professional buy-to-let – but aims to expand into adjacent, more mainstream segments of the market in time.

There is significant intellectual property in LendInvest’s patent-protected proprietary loan engine and borrower portal, and a growing digital distribution network advantage as the company scales and expands its reach. The revenue model is also recurring in nature, as interest income is earned on loans on a monthly basis. The company also has high levels of management ownership, with co-founders Christian Faes and Ian Thomas owning 29% of the equity apiece.

Positive contributors included:

Big Technologies (+78%), Charles Stanley Group (+50%), Sumo Group (+32%), Keywords Studios (+18%) and Team17 Group (+17%)

Negative contributors included:

AB Dynamics (-8.8%), Eckoh (-8.5%), Next Fifteen Communications (-5.9%), Quartix Technologies (-5.7%) and Robert Walters (-5.7%).

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

*Source: Financial Express, as at 31.07.21, 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 30.06.21, total return (net of fees and income reinvested), bid-to-bid, primary class.

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