Liontrust UK Smaller Companies Fund

December 2018 review

The Liontrust UK Smaller Companies Fund returned -5.7%* in December, compared with the -3.5% return from the FTSE Small Cap (excluding investment trusts) Index.

 

Global equity markets finished 2018 on a sour note. The small and micro-cap end of the UK market was unable to escape the widespread weakness. The Q4 correction dragged the FTSE All-Share Index 2018 total return down to -9.5% while the FTSE Small Cap (ex IT) Index returned -13.8% and the FTSE AIM All-Share lost 17.1%. The MSCI World Index of developed markets lost 3.0% over the year and the MSCI Emerging Markets Index dropped 9.3%.

 

Investors familiar with the Economic Advantage investment process will be well aware that it is unashamedly bottom-up in nature, and makes no attempt to predict macroeconomic events. We believe that our investments’ long-term prospects are driven mostly by their ability to successfully execute growth plans and compound profits. In the shorter-term, investor sentiment and other exogenous factors will impact share prices, so we aim to ride out periods of volatility and treat indiscriminate market weakness as a buying opportunity.

 

Company newsflow took a backseat in December as broad market forces drove much of the movements in share prices. For example, none of Brooks Macdonald (-16.8%), Arbuthnot Banking Group (-23.4%) and Tatton Asset Management (-24.4%) issued significant investor updates in December yet all three Fund holdings suffered due to relatively high beta nature of their businesses – with market falls having knock-on implications for fee and commission income.

 

A feature of Q4 weakness was that high growth businesses on lofty share price valuations suffered some significant compression of their ratings. Craneware (-16.4%) and Gamma Communications (-9.2%) were good examples of this in December. An interim trading update from Craneware pointed towards revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) growth of 15% to 20% respectively and also reassured on funding, highlighting its operating cash conversion ratio of over 100%, ‘healthy’ cash reserves and a further funding facility of US$50m. In addition, it stated its confidence in meeting the market’s expectations for the full year. Nevertheless Craneware’s shares slid as its price/earnings compressed from a November peak of over 60x to closer to 40x. Gamma Communications experienced a similar effect, which was accentuated by an institutional shareholder selling a 4% stake in the company via a placing at 775p, a 5% discount to the previous day’s closing price. Notwithstanding the recent falls, both Craneware and Gamma Communications finished 2018 among the Fund’s largest positive contributors.

 

Among the positive contributors, Quartix Holdings (+10.4%) – a provider of vehicle tracking systems – rose due to the bullish nature of a trading statement covering the 10 months to 31 October. It indicated that profit was on course to exceed market expectations (earnings before interest, tax, depreciation and amortisation of £7.5m) for 2018 as a whole. The upgrade is largely the result of a change of accounting treatment on the recognition of profit and revenues from customer contracts. While the 2018 figures are likely to be boosted, it shouldn’t be at the expense of 2019’s numbers – Quartix states that its expectations for 2019 remain unchanged. It further commented that business changes made since July to tackle a slowing subscription base in the UK – the company’s most mature market – have begun to take effect. 

 

Among the handful of companies to finish in positive territory for the month was IntegraFin (+3.1%), which issued results for the 12 months to 30 September, its first full-year results since joining the London stock market earlier in the year. IntegraFin owns the Transact investment wrap platform, and in our view possesses intangible Economic Advantage assets in the form of its distribution network and high level of recurring revenues. The shares have performed well since their listing and investors welcomed this set of results, which outlined an 18.6% rise in funds under direction to £33.1bn following net inflows of £4.1bn, up 12% on the previous year, and positive market movements of £1.1bn. Adjusted operating profit increased 15% to £43.3m.

 

Plexus Holdings (+4.4%) was able to defy an 8% slide in Brent crude which dragged the rest of the FTSE All Share Oil Equipment Services sector down by 17%. Investors were reassured by the upbeat tone of an AGM statement which outlined its long-term growth vision for the company’s wellhead engineering technology.

 

In a brief statement, audio products specialist Focusrite (+1.6%) commented that the strength of trading in November had pushed revenues in its financial year-to-date (beginning 1 September) ahead of the prior year comparable. At the time of its full year results announcement on 20 November – covered in last month’s Fund review – its commented that recent trading was merely “broadly similar” to the previous year.

 

Clipper Logistics (-23.5%) is well-placed to participate in the long-term secular shift to online consumer spending by helping retailers with logistical fulfilment of orders. However, in 2018 the shares were held back by the nearer-term pressures that are mounting for the retail sector as a whole; solid full year results in July were overshadowed by cautious outlook comments. We can now add Brexit as a short-term concern for investors in Clipper after December’s interim results flagged the negative impact the political uncertainty is having on the availability of seasonal labour. While this perturbed some investors, underlying business progress was still strong - 14% revenue growth to £228m and a 16% uplift in operating profit to £10.7m driven by e-fulfilment and returns management services – and the fund managers maintain their conviction in the long-term opportunity offered by the company.

 

Renishaw was sold out of the Fund in December. This was one of the first stocks bought for the Liontrust UK Small Companies Fund over 20 years ago, yet has now grown to exceed the Fund’s target size range.

 

Positive contributors included:

JTC (+23.8%), Cello Health (+12.7%), Quartix Holdings (+10.4%), Robert Walters (+7.8%) and Quixant (+7.7%).

 

Negative contributors included:

Learning Technologies (-27.7%), Clipper Logistics (-23.5%), Arbuthnot Banking Group (-23.4%), Brooks Macdonald Group (-16.8%) and Craneware (-16.4%).

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

 

 

Dec-18

Dec-17

Dec-16

Dec-15

Dec-14

Liontrust UK Smaller Companies I Inc

-6.0

27.2

13.3

23.8

4.4

FTSE Small Cap ex ITs

-13.8

15.6

12.5

13.0

-2.7

IA UK Smaller Companies

-11.7

27.2

8.1

14.9

-1.7

Quartile

1

3

1

1

1

 

*Source: Financial Express, as at 31.12.2018, 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, primary class.

 

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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.

Tuesday, January 15, 2019, 5:00 PM