Liontrust UK Micro Cap Fund

January 2019 review

The Liontrust UK Micro Cap Fund returned 3.7%* in January. The Fund does not have a formal benchmark, but for reference, the FTSE Small Cap (excluding investment trusts) Index returned 3.9%, the FTSE AIM All-Share Index returned 7.1% and the average return of funds in the IA UK Smaller Companies sector was 4.6%.

 

Equity markets rebounded from their late-2018 weakness in January. In a reversal of the trend characterising the sell-off, the smaller capitalisation end of the UK market outperformed. Last month’s review commented on a de-rating of many high growth businesses on lofty share price valuations; many of these stocks went on to recover strongly this month.

 

January is typically marked by a swathe of company updates, many of which are trading statements from those with December or June year-ends and the Fund’s portfolio of stocks had its fair share. As patient investors, we are more concerned with the long-term growth paths of our holdings than their short-term surges or decelerations – of which there was evidence of both this month. Pleasingly, none of January’s newsflow gave us any reason to doubt these companies’ possession of Economic Advantage characteristics which first attracted our attention.

 

Solid State (+43.7%) expects trading in the year to 31 March 2019 to “comfortably” exceed consensus forecasts, with revenues above prior guidance and adjusted profits significantly ahead. The manufacturer and distributor of computing products and electronic components had previously cautioned on this year’s prospects back in April 2018. Margin compression in the Manufacturing division has not been as bad as feared, while its value Added Distribution division has experienced strong demand.

 

EKF Diagnostics (+16.9%) also stated that earnings would be comfortably ahead of expectations (for the year to 31 December 2018). In contrast to Solid State, EKF had already upgraded guidance during the year. EKF Diagnostics provides ‘point of care’ diagnostics such as blood analysers and consumables, providing tests for conditions such as diabetes and anaemia. In 2018 it spun out Renalytix, an exciting new business using artificial intelligence to analyse data on kidney disease and, as an existing EKF shareholder, the fund received a share allocation, which it still holds.

 

Similarly, Simplybiz (+15.2%) notified the market that 2018 EBITDA (earnings before interest, tax, depreciation and amortisation) was higher than it had forecast, following strong revenue growth and margin expansion. The company provides a range of support services to a network of financial intermediaries. This network grew 8.5% in 2018 to 3,726 members. Its acquisition of Landmark Surveyors, a complementary service already used by its membership added 8% revenue growth over the year; Simplybiz stated that it is on the look-out for further selective acquisitions within its “highly-fragmented” marketplace.

 

Another notable riser was commercial law firm Gateley Holdings (+33.1%), a holding which was added to the Fund last month. Its half year results showed a 25% increase in adjusted EBITDA. Since its initial public offering in 2015, the company has built out its national distribution network of legal and professional services (chartered surveyors, tax consultants, etc.) firms – partly through acquisitions - and this competitive advantage is its primary attraction under our Economic Advantage process. Within the statement, Gateley commented that recent acquisitions have bedded in well with encouraging cross-selling opportunities, giving it confidence to supplement future organic growth with further purchases; it has a number of possible deals in the pipeline

 

Among the companies to fall short of expectations with investor updates, Quixant (-23.7%) was most heavily punished as its explanation of a 2018 revenue miss failed to impress. Revenues for 2018 are expected to be around US$115m, lower than consensus analyst forecasts of US$130m, with profit before tax also expected to miss expectations of US$19.0m. Quixant painted a picture of a robust performance from its ‘core’ gaming platform business – with double-digit growth rates – undermined by a poor showing from its gaming monitors division. The latter is the subject of a refocus, through which the company hopes to improve profitability by turning away some low-margin opportunities. Although the short-term price move is frustrating, moving away from lower margin monitors into products that contain a greater degree of intellectual property and therefore command higher margins chimes clearly with the Economic Advantage investment process; additionally the de-rating of the shares provided an attractive price to top up the Fund’s holding.

A statement from Cello Health (-7.7%) was also penalised by investors despite including ‘in line’ guidance for 2018 trading. It also commented that strong like-for-like growth for specialist healthcare-focused marketing services division Cello Health had been diluted by a poorer performance from the more generalist Cello Signal division.

 

Charles Stanley (-9.6%) derives a proportion of its revenues from fee income, which helped somewhat ameliorate the impact of declining commission and asset management income. Its Financial Planning and Charles Stanley Direct divisions were particular highlights, both experiencing 27% income growth in the quarter to 31 December; overall revenues rose 3.4%. Nevertheless, shares in the company softened after it revealed an 8.8% fall in assets under management to £22.8bn.

 

Assets under administration at wrap platform provider Nucleus Financial Group (+19.0%) rose 2.3% to 13.9bn over 2018. This represents a robust performance in the context of 10%+ falls in UK equity indices. Active adviser numbers rose 6% to 1,396. .

 

Inspection and testing group Marlowe (-9.5%) announced some changes to the portfolio of businesses it owns. It sold two contracts that formed part of its £4.5m acquisition of Suez Water Conditioning Services in August 2018. The contracts generated gross profit of around £0.2m in 2017 and have been sold for a cash consideration of £2.3m. Marlowe then acquired Atana for an initial consideration of £3m. Atana is a provider of commercial wastewater treatment in the UK. In 2017, it generated profit before tax of £0.5m. A further £3m earn-out may be payable, taking the total consideration to £6m, or 12 times profit before tax. The deal is in line with Marlowe’s strategy to consolidate the critical inspection, testing and compliance services markets in fire safety, water and air quality.

 

Lighthouse Group (+18.8%), the network of financial advisers, also engaged in some management of its assets. It announced that it was ceasing efforts to provide a client solution for auto-enrolment compliant workplace pension schemes. Changes to pension regulation that come into force on 1 April will significantly increase the cost and capital required to run such a product, so Lighthouse is transferring these assets to a business owned by Legal & General. Earlier in the month the company had also confirmed that earnings before interest, tax, depreciation and amortisation (EBITDA) for 2018 should be in-line with investor expectations.

 

Proactis Holdings (-9.5%) introduced an unexpected element of uncertainty by replacing its previous CEO, Hamp Wall, with Tim Sykes. Wall will now engage with the company in an advisory capacity, while a new CFO is being sought. Although somewhat of a surprise as Hamp had only been at the company a short time (following its 2017 deal to acquire Perfect Commerce of which Hamp was previously CEO), it should hopefully be business as usual under Tim, who has been CFO of the company since it floated in 2006.

Bioquell left the portfolio following completion of Ecolab’s 590p a share purchase of the company. Plastics Capital changed its name to Synnovia.

 

Positive contributors included:

Solid State (+43.7%), Gateley Holdings (+33.1%), James Cropper (+26.2%), Nucleus Financial Group (+19.0%) and Lighthouse Group (+18.8%).

 

Negative contributors included:

Quixant (-23.7%), Charles Stanley (-9.6%), Proactis Holdings (-9.5%), Marlowe (-9.5%), and Tekmar Group (-8.6%).

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 31.01.2019, 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.

Friday, February 22, 2019, 3:40 PM