Liontrust Special Situations Fund

• Portfolio M&A activity continues, with Spectris joining GlobalData, Craneware and Alpha Group International as bid targets.
• Encouraging return of momentum to UK small caps, which have led the recovery from the market’s April lows.
• In addition to significant small company re-rating potential, we expect returns to be supported by ongoing M&A, buyback activity and – most importantly – resilient earnings growth compounding from our companies.

The Liontrust Special Situations Fund returned 0.9%* in June. The FTSE All-Share Index comparator benchmark returned 0.5% and the average return in the IA UK All Companies sector, also a comparator benchmark, was 1.3%.

Despite ongoing US trade policy uncertainty and a spike in geopolitical tensions as Israel launched attacks on Iran, investment markets showed little signs of risk-off or flight-to-safety behaviour, even after the US became directly involved by targeted Iranian nuclear facilities.

Global equity markets largely registered modest gains, taking several to fresh all-time highs, while a spike in oil and gold prices were short-lived.

On a number of previous occasions, we have highlighted the extent to which the generational low valuation opportunity in high-quality UK companies has attracted takeover activity. The Economic Advantage investment process has always experienced a lot of inbound M&A interest, as corporate and private equity acquirers recognise the appeal of the barriers to competition these companies possess. Since 2022, the fund range has had 18 takeovers of companies at an average premium of 44% – clearly illustrating the level of value acquirers are seeing.

In addition to these completed deals, there are also several holdings currently subject to bid interest. While GlobalData (-18%) and Craneware (+5.5%) had already received M&A approaches and both rebuffed their suitors this month, Alpha Group International remains in an offer period, with a Takeover Panel put-up-or-shut-up (PUSU) deadline towards the end of July. Spectris (+92%) also joined the list in June. The specialist in precision instrumentation received a conditional proposal from private equity group Advent at £37.63 a share, an 85% premium and a level at which Spectris indicated it would recommend a firm offer.

However, shares in Spectris jumped even higher by the end of the month as it became clear that private equity peer KKR is also an interested party. Spectris announced that it had received and rejected a conditional proposal from KKR (without disclosing an indicative value) before going on to announce agreed terms on Advent’s offer. KKR’s response – reiterating its ongoing interest and urging shareholders not to accept the Advent offer – ensured that Spectris shares finished the month at a modest premium to the recommended deal price. In early July, KKR subsequently submitted a £40 cash offer which was recommended by Spectris’s board.

Amid an uncertain macroeconomic outlook, some of the Fund’s IP-rich engineers have experienced share price weakness over the last year due to the inherent cyclicality of their businesses. The scale of the Spectris bid premium really serves to illustrate the extent to which short-term sentiment driven weakness can generate a fundamental disconnect from the true, intrinsic longer-term value of these businesses. The read across from the bid interest helped lift shares in fellow engineers Renishaw (+11%), and IMI (+5.3%).

Additionally, Renishaw’s gains were supported by the announcement at a capital markets day of a new £20m annualised savings target for labour costs. Last month the company released a Q3 trading update showing a 5% year-on-year revenue increase as consumer electronics and semiconductor sales picked up but also noting its exposure to tariff policy volatility through the 20% of sales into the US. Moonpig (-9.3%) had performed well earlier this year, helped by a new share buyback scheme announced at its April trading update as it cited exceptional levels of cash generation. The shares gave back some of these gains in June after a full-year results statement included the surprise resignation of CEO Nickyl Raithatha after seven years in the role. Raithatha will stay in the role as a successor is sought out. In the year to 30 April, Moonpig grew revenue by 2.6% to £350 million, with free cash flow rising 8.4% to £66 million.

Turning to portfolio activity, RWS was sold from the Fund in June. RWS has been a long-standing holding (>15 years) and for much of this time was a strong organic growth compounder, with particular intellectual property strengths in patent and complex technical translations for industries such as life sciences, a global footprint (enabling it to serve large enterprise clients) and long-term, embedded customer relationships.

However, in more recent years it has suffered not only from the extreme valuation compression associated with AIM-listed small cap businesses and from short term cyclical demand pressures on end customer budgets, but critically also from significant longer-term structural questions over its relevance (and importantly its business model and pricing power) in a world where translation is increasingly AI-enabled, if not AI-executed. Our prevailing team view had been that the extreme low valuation (>25% free cash flow yield for much of the past few years) already reflected a substantial amount of this longer-term uncertainty, and that such structural concerns would take years to play out and were over-done in the short term.

However, a trading update in April catalysed a re-appraisal of the pace at which the company’s competitive advantage might be under threat. References to “specific challenges with two large clients in relation to changes to delivery models and content types”, with associated gross margin impact, led to a substantial profit downgrade for the year, and strengthened the case against continuing to hold on to the shares. In addition, the team had conducted several due diligence meetings with an expert network provider and an industry contact which reinforced our concerns. We therefore completed a full exit in June.

Aside from trading and takeover bid-related share price moves, sentiment weighed on the pharmaceutical holdings GSK (-7.8%) and AstraZeneca (-5.6%), with the sector facing uncertainty over tariffs and increasing political scrutiny on drug pricing from the Trump administration in the US. Conversely, it was again cheering to see some of our small cap AIM-listed holdings extending their recent strong run of share price performance, a dynamic upon which we commented last month. YouGov (+13%) and Mortgage Advice Bureau (+7.8%) joined a number of other small company holdings in registering solid monthly share price gains.

We are encouraged to see that momentum appears to be turning for UK small caps, which have led the market recovery since the April lows. Anecdotally, we are seeing signs of capital returning to the market with a growing volume and size of buying interest in the small cap shares we own.

While these moves so far represent but a fractional reversal of the extreme de-rating across the smaller company segment of the portfolio over the past few years, it is nevertheless cheering to see significant signs of life emerging. We have consistently sought to emphasise that despite the brutal underperformance of mid and small caps since the end of 2021 relative to their large cap peers, the Fund remains resolute in its conviction that such companies retain their highly attractive growth compounding potential over the longer term. It has maintained its exposure so that our investors may benefit when the cycle finally turns again in favour of smaller companies.

In the meantime, we feel strongly that returns will continue to be supported by ongoing M&A, buyback activity and – most importantly – resilient earnings growth compounding from our companies.

Positive contributors included:

Spectris (+92%), YouGov (+13%), Renishaw (+11%), Mortgage Advice Bureau (+7.8%) and Craneware (+5.5%).

Negative contributors included:

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

*Source: Financial Express, as at 30.06.25, total return (net of fees and income reinvested), bid-to-bid, institutional class. **Source: Financial Express, as at 30.06.25, total return (net of fees and income reinvested), bid-to-bid, primary class.

KEY RISKS

Past performance does not predict future returns. You may get back less than you originally invested.

We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.

The Funds managed by the Economic Advantage team:

• May invest in smaller companies and may invest a small proportion (less than 10%) in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, a fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause a fund to defer or suspend redemptions of its shares. May invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing.
• May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
• May invest in companies predominantly in a single country which maybe subject to greater political, social and economic risks which could result in greater volatility than investments in more broadly diversified funds.
• Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash.

The risks detailed above are reflective of the full range of Funds managed by the Economic Advantage team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.

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