Liontrust UK Micro Cap Fund

June 2018 review

The Liontrust UK Micro Cap Fund returned 3.9%* in June. The Fund does not have a formal benchmark, but for reference, the FTSE Small Cap (excluding investment trusts) Index returned -1.2%, the FTSE AIM All-Share Index returned 0.1% and the average return of funds in the IA UK Smaller Companies sector was 1.0%.

 

Equity market volatility has gradually eased since February’s spike on inflation concerns, but in June we saw it pick up again. The FTSE All-Share’s almost flat monthly return belies an eventful period from a macroeconomic perspective. Investor sentiment ebbed and flowed with the twists and turns in the ‘Trade War’ narrative. As the month ended, the US had confirmed tariffs on US$50bn of Chinese goods to be implemented in early July; a move which was met with a retaliatory commitment from the Chinese, which itself then saw the US threatening a further US$200bn in tariffs – a pattern which threatens to develop into the type of damaging protectionism which investors have feared.

 

Another key feature in June was further normalisation of monetary policy following decisions from the US Federal Reserve and the European Central Bank. The Fed raised rates by 25bp to a range of 1.75% - 2.0%, the second increase in 2018 so far, and guided towards two further hikes this year – one more than it had previously indicated. The ECB gave long-awaited details of the termination of its quantitative easing programme, which will finish in December 2018 after another taper in September from €30bn of monthly bond purchases down to €15bn.

 

A number of upbeat statements from portfolio holdings helped lift the Fund in June. In addition, there was a strong market debut for Mind Gym, which was admitted to AIM. The Fund participated in a share placing at 146p which accompanied the company’s admission. Mind Gym is a corporate training business which applies the principles of behavioural science to effect change within the corporate environment. It possesses strong intellectual property within a suite of bite-sized tutorials, or “workouts”, it has created and it is able to deliver them via a global network of trainers. The company has worked with around 60% of the FTSE 100 and S&P 500. Shares in the company finished the month at 180p.

 

The Fund also took part in a fund-raising which accompanied the admission of Tekmar Group to AIM. Tekmar is the world leader in the production of cable protection systems for offshore wind-farms. Its patent protected TekLink© family of products have been installed over 6000 times since 2011 without a single failure; thus enabling it to command a 74% market share. The shares also had a strong debut, issued at 130p, they closed the month at 147.5p.

An upbeat AGM statement from Sumo Group (+29.1%) helped it push higher in June, adding to the gains which followed the release of 2017 final results in April. In those results Sumo had stated that it was trading ahead of consensus expectations at the start of the 2018 financial year. The company used June’s AGM statement to confirm that it is on track to meet this raised guidance. Sumo also commented on the growth prospects for the global video gaming market and described its business development pipeline as “very strong”. Given the fragmented nature of the video gaming support services market, Sumo also stated that acquisitions are likely to form part of its growth strategy; the company currently has positive cash balances.

 

Lighthouse Group (+30.2%) partners with ‘affinity groups’ to provide financial advice to their members. In June, it announced the renewal of a contract with one of these affinity groups, FosterTalk. Under the terms of the agreement, Lighthouse will be preferred financial advice provider to FosterTalk’s 20,000 members for a further three years from 1 May 2018.

 

A rally in the share price of K3 Business Technologies (+18.8%) began with a 30 May AGM statement confirming that trading in the first half of its financial year to 30 November 2018 was in line with management expectations. This gave some encouragement that recent changes implemented after an operational review have put the company back on track following a disappointing 2017. K3 Business Technologies also stated it was “very encouraged” by the outlook for the second half of the year. Share price strength was maintained during the first half of June, helped by the announcement of a significant contract win.

 

The deal involves its ‘ax I is fashion’ software based on the Microsoft Dynamics platform, the seventh contract secured in this financial year – a “significant upturn in sales” compared with the 17 months it took to sign the prior seven contracts. K3 Business Technologies commented that the prospects for this software product remain very encouraging, bolstered by its strategy to sell through a channel partner network of system integrators.

 

Private company mergers and acquisitions specialist K3 Capital Group (-8.5%) released an update commenting that trading was “comfortably in line” with market expectations with regard to revenues and profit in the year to 31 May 2018. Average fee levels have increased as a result of a shift in client mix towards larger more profitable clients. K3 Capital Group was upbeat on pipeline opportunities, commenting on an encouraging level of M&A activity in private markets as a result of an increased number of sellers and record numbers of registered buyers.

 

Shares in EKF Diagnostics (-6.0%) eased back in June having jumped on 31 May 2018 on news that a subsidiary, Renalytix, had signed a license and collaboration agreement with a US healthcare network hospital to develop Artificial Intelligence (AI) solutions for the identification and management of kidney disease. Renalytix will deploy its biomarkers and AI technology against the US network’s 3 million anonymous electronic patient records, as it works towards achieving FDA approval for its products. EKF is currently exploring a potential spin-out and initial public offering of the Renalytix business

 

Full-year results from cloud communications software provider IMImobile (-5.8%) showed the extent of its acquisitive growth, with revenues up almost 50% to £111m and adjusted EBITDA rising 17% to £13.4m. Commenting on the 2019 financial year, the company stated that trading has been in-line with expectations, and cited its recurring revenues and healthy pipeline of new deployments as contributing to good earnings visibility.

 

The Fund sold its position in Mortgage Advice Bureau, which had exceeded the £250m market capitalisation level at which the managers look to effect a managed exit. The Fund also disposed of Castleton Technology which, following Deputy Chairman Ian Smith stepping down from the board last July, no longer meets the 3% management ownership level the Fund requires of its holdings. The Fund effected a managed exit from the position, allowing it to benefit from a re-rating in the shares over the last year.

The Fund has a holding in World Careers Network which changed its name to Oleeo during the month. Sprue Aegis also effected a name change to FireAngel Technology Group.

 

Positive contributors included:
Lighthouse Group (+30.2%), Sumo Group (+29.1%), Mind Gym (+21.6%), GRC International (+19.4%) and Bioqell (+19.1%).

 

Negative contributors included:
Medica Group (-11.9%), K3 Capital Group (-8.5%), Plastics Capital (-6.0%), EKF Diagnostics (-6.0%) and IMImobile (-5.8%).

 

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

 

Jun-18

Jun-17

Liontrust UK Micro Cap I Acc

21.4

33.7

FTSE Small Cap ex ITs

6.4

28.4

IA UK Smaller Companies

17.2

36.3

Quartile

1

3

 

*Source: Financial Express, as at 30.06.2018, total return (net of fees and income reinvested), bid-to-bid, institutional class.


**Source: Financial Express, as at 30.06.2018, 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. 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.

The portfolio is primarily invested 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.

Disclaimer

This content 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.  It contains information and analysis that 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 of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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.

Monday, July 16, 2018, 11:48 AM