Liontrust UK Micro Cap Fund

February 2019 review

The Liontrust UK Micro Cap Fund returned -0.3%* in February. The Fund does not have a formal benchmark, but for reference, the FTSE Small Cap (excluding investment trusts) Index returned 0.5%, the FTSE AIM All-Share Index returned -1.0% and the average return of funds in the IA UK Smaller Companies sector was 0.8%.

 

Micro cap stocks lagged the returns of the large cap FTSE 100 Index (+2.3%) in February. The idiosyncratic nature of the smaller end of the market once again came to the fore after a few months of largely sentiment driven moves.

 

For the Fund’s holdings, it was a mixed bag of company updates. One of the disappointments was Proactis Holdings (-59.9%), which having replaced its chief executive in January, issued a warning about growth in the second half of its financial year. The spend management company cited a lower level of retention and a deterioration in US and European businesses’ pipelines, which meant that it is unlikely that the group will deliver “significant growth” in the financial year ending 31 July 2019. As a result the new CEO, Tim Sykes, launched a review of the European and US divisions.

 

The company is relatively heavily geared thanks to the acquisition of Perfect Commerce which completed in August 2017 (adding the very divisions which are causing the business issues), and the update was doubly disappointing as a trading statement just last month had reported trading was fine. Combinations of trading issues, high gearing, and abrupt changes in messaging never go down well in the market, and the shares swiftly reacted as one would anticipate.

 

There was more positive news from subsea cable and flexible pipe protection systems manufacturer Tekmar Group (+31.3%). The company won a contract for remedial work worth £3m, one of the biggest individual contracts it has won this financial year. This was encouraging improvement from the group’s December released interim results which included a downgrade to guidance as a result of contract delays.

 

dotdigital Group (+14.7%) shares also got a contract related boost. The marketing platform provider announced a three year extension to its Premier Technology Partner status with Magneto. The group’s interim results later in the month added to share price gains, with revenue in the six months to 31 December rising 33% year-on-year – driven by new direct customer wins – and adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation) growing 25%. Following these results, management stated that they are confident of meeting full-year expectations.  

 

CML Microsystems (-30.5%), however, was unable to meet forecasts for new business, with order bookings in the second half falling short of management’s expectations. The company, which designs and manufactures semiconductors, cited geopolitical issues and a slowing Chinese economy as the main factors behind lower customer demand. CML now predicts that revenue in its current financial year will be circa 12% lower than the previous year and pre-tax profit will be “materially lower”.

  

Beeks Financial Cloud Group (-21.2%) also saw a sharp share price decline following a cut in full-year guidance. In its first half results, the company posted a robust 36% increase in revenue and swung to a pre-tax profit during the six months to 31 December 2018. Underlying pre-tax profit is forecast to grow 25% over the full year however, this represents a cut to guidance reflective of investment in platform infrastructure and expansion. Revenue is still expected to be in line with expectations.

 

Shares in Croma Security Solutions (+10.9%) rose as it noted that revenue and profits were ahead of expectations for the six months to end December. Croma said it benefited from high public and private sector demand, helping the Croma Vigilant and Croma Systems maintain their robust performances from the previous year.

 

The Fund initiated a new position in Eckoh, a provider of software solutions used in contact centres with a patented solution that allows the receipt of customer payment information in a secure way. In the managers’ opinion the company possess all three Economic Advantage assets, with its patented Intellectual Property, a sticky customer base affording it an embedded distribution network and boasting contracted recurring revenues over 70% of turnover.

Positive contributors included:

Tekmar Group (+31.3%), Biovetix (+15.2%), dotdigital Group (+14.7%), D4t4 Solutions (+11.4%) and Quixant (+10.1%).

 

Negative contributors included:

Proactis Holdings (-59.9%), CML Microsystems (-30.5%), Beeks Financial Cloud Group (-21.2%), James Cropper (-17.0%), and Attraqt Group (-16.4%).

 

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

 

 

Dec-18

Dec-17

Liontrust UK Micro Cap I Acc

3.0

22.1

FTSE Small Cap ex Its

-13.8

15.6

IA UK Smaller Companies

-11.7

27.2

Quartile

1

4

 

*Source: Financial Express, as at 28.02.2019, 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 31.12.2018, total return (net of fees and income reinvested), bid-to-bid, institutional class. Discrete data is not available for five full 12 month periods due to the launch date of the portfolio. Investment decisions should not be based on short-term performance.

 

For a comprehensive list of common financial words and terms, see our glossary here.

 

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.

Thursday, March 14, 2019, 4:37 PM