Liontrust UK Smaller Companies Fund

• Encouraging return of momentum to UK small caps, which have led the recovery from the market’s April lows.
• Many of the Fund’s holdings enjoyed double-digit share price rebounds
• Despite this small re-rating, these stocks remain heavily undervalued.

The Liontrust UK Smaller Companies Fund returned 11.8%* in Q2. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned 15.1% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 13.1%.

UK equity markets endured a sharp sell-off in April after sweeping tariffs announced by US President Donald Trump – dubbed "Liberation Day" – sent shockwaves through global markets. However, sentiment gradually improved following a shift in the US administration's approach, including a 90-day delay on tariffs for non-retaliatory countries and the agreement for deals with trade partners including China.

This softening in tone provided reassurance to investors and supported a recovery in stock prices. It was reassuring to see a broadening out of market performance beyond large caps as lower market capitalisation indices outperformed their larger peers during the market rebound, demonstrating stronger recovery momentum and capturing greater upside as market sentiment improved. Since Liberation Day, AIM has been one of the best performing markets globally.

In this more risk-on environment, the Fund benefited from a strong rebound in many of its small cap and AIM-listed holdings, with a number of these positions reporting double digit share price gains.

We have consistently sought to emphasise that despite the brutal underperformance of mid and small caps relative to their large cap peers since the end of 2021, the Fund remains resolute in its conviction that such companies retain their highly attractive growth compounding potential over the longer term.

Corporate foreign exchange specialist Alpha Group International (+27%) rose on confirmation of bid interest from US-based Corpay, with Alpha’s board of directors confirming it had rejected a preliminary cash proposal. However, on 30^th May Alpha Group stated it had subsequently had constructive talks with Corpay which led it to seek an extension (to 7^th July) for the Takeover Panel’s ‘put up or shut up’ deadline for a formal offer to emerge. S&P 500 constituent Corpay provides corporate expense payments systems.

Alpha Group was recently the focus of Victoria’s Stock Exchanges podcast, with founder and former CEO Martin Tilbrook reflecting on how he scaled a consultancy-led startup into a global platform.

Animalcare (+35%) also rose strongly after releasing 2024 financial results. The company reported on a strategically transformational year during which it disposed of its majority shareholding in UK-based pet microchipping company Identicare and reinvested the proceeds in Australia-based Randlab (a deal which completed just after year end). In an investor presentation in May, management made upbeat comments on current trading and prospects, noting that Randlab’s integration is progressing smoothly.

The share price rises for the Fund’s other top quarterly performers – including Tristel (+39%), On The Beach (+33%) and Cohort (+30%) – were driven by a valuation re-rating from low levels as much as by newsflow.

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.

The largest detractor from performance was Eagle Eye Solutions (-46%), which lost a high-margin US contract, leading it to downgrade guidance for the financial year to 30 June 2026. Whilst the loss was disappointing it was an isolated incident and does not diminish the significant opportunity to scale with the recently announced global OEM partnership.

RWS was sold from the Fund in June. RWS has been a long-standing holding 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, a combination of the valuation compression on AIM, cyclical pressures and structural questions as to the impact of AI on the business model led to a re-appraisal by the team. The Fund Managers concluded that the competitive advantage of the business was under threat and thus determined not to continue holding the stock.

Positive contributors included:

Tristel (+39%), Animalcare Group (+35%), On The Beach (+33%), Cohort (+30%) and Alpha Group (+27%).

Negative contributors included:

Eagle Eye Solutions (-46%), RWS Holdings (-23%), Next 15 Group (-16%), Robert Walters (-16%) and JTC (-5.6%) 

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.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

DISCLAIMER

This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.

It 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.

This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.