Liontrust UK Smaller Companies Fund

January 2019 review

The Liontrust UK Smaller Companies Fund returned 5.0%* in January, compared with the 3.9% return from the FTSE Small Cap (excluding investment trusts) Index.

 

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. The FTSE AIM All-Share was particularly strong, returning 7.1% over the month, almost double the FTSE 100’s 3.6% rise. 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. The Fund’s portfolio of stocks had its fair share, leaving a lot to be covered in this review. The portfolio saw a fairly typical spread of statements from its holdings, ranging in tone from those whose financials were marginally ahead of expectations, or contained particularly upbeat outlooks, to those that missed forecasts or warned of tougher trading conditions. Given the positive market backdrop, the portfolios share price ‘risers’ outnumbered the ‘losers’ by about two to one.

 

As patient investors, we are more concerned with the long-term growth paths of our holdings than their short-term surges or decelerations. Pleasingly, none of January’s newsflow gave us any reason to doubt these companies’ possession of Economic Advantage characteristics which first attracted our attention.

 

Mortgage Advice Bureau (+18.1%) and Simplybiz (+15.2%) provided good examples of upbeat statements. Mortgage Advice Bureau grew revenue by 13% to £123m in 2018, the result of a 12% increase in average adviser numbers (to 1,130) and a 1% uplift in average revenue per adviser. The company quoted research suggesting the new mortgage lending market will be flat in 2018 and 2019, but that growth opportunities should arise from the product transfer market, where mortgage lenders utilise intermediaries to retain existing mortgages. Simplybiz was more forthright in its optimism, stating that 2018 EBITDA (earnings before interest, tax, depreciation and amortisation) growth was above its expectations for 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.

 

Among the companies to fall short of investor expectations, 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 selection of the Fund’s financial sector holdings issued updates, which were met with a mixed response. The trading backdrop to all these stocks was one of weak investor sentiment and falling stock markets in the second half of 2018. Funds under management at Brooks Macdonald Group (+20.3%) fell 4.5% over the second half of 2018 despite net new business of £241m. However, the net new business figures – a 1.6% Q4 inflow and 3.6% for the half-year – were viewed by investors as representing decent underlying trends given a backdrop of weak investor sentiment. The company also announced a series of cost cuts that should save c.£4m a year once fully implemented. These helped somewhat offset the downgrades that occurred due to lower overall assets under management, and were perceived as a positive development as new CEO Caroline Connellan continues to reshape the company for future growth.

 

Wealth manager Mattioli Woods (+10.9%) was able to maintain flat client assets of £8.8bn in the six months to 20 November, another solid performance in the context of market trends – albeit this period does not include December’s falls. The company also stated that it had experienced strong growth in adjusted EBITDA as margins expanded to “substantially ahead” of its 20% target in the six months to 30 November. Given a lower level of investor sentiment and client activity the profitability improvement was driven by administrative cost cutting and other operational efficiencies. Mattioli Woods highlights that its revenues tend to be fee-based rather than a proportional management charge, which means that its revenue stream is less sensitive to market moves than for some other asset managers.

 

Likewise, Charles Stanley (-9.6%) also 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.

 

The Fund’s most notable riser in January was commercial law firm Gateley Holdings (+33.1%), which released half year results showing 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 through bolt-on 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

 

Smart Metering Systems (+25.1%) was another positive portfolio feature. It announced details of a contract win with Octopus Energy for the supply of a minimum of 200,000 new SMETS2 meters. The contract forms part of a UK government requirement that all domestic energy suppliers fit their domestic and small business customers with smart meters by 2020. Shares in Smart Metering Systems had softened in the second half of 2018 on concerns that a shift to the next generation smart meter (SMETS2) would slow installations.  While a December trading update from the company flagged the possibility of operational challenges relating to the transition in the first half of 2019, this large order will assuage some of the concerns.

 

Statements from both JTC (-7.7%) and Cello Health (-7.7%) were penalised by investors despite including ‘in line’ guidance. A short update from Fund administrator JTC commented that it 2018 results are expected to be in line with guidance following a second half of the year in which integration of its Van Doom and Minerva acquisitions had progressed as planned. While Cello Health also confirmed 2018 was in line with market expectations, it stated that strong like-for-like growth for Cello Health had been diluted by a poorer performance from Cello Signal.

 

Gamma Communications’ (+12.3%) recovery from late-2018 weakness was also aided by a trading update. It stated that 2018 EBITDA is expected to be at the “top of the range of market expectations” while revenue and earnings per share will be in-line with forecasts. The company, which provides voice, data and mobile communications to businesses, commented that both its direct and indirect channels experience good growth over the year.

 

Market research and data analytics group YouGov (+12.0%) has a 31 January year-end; on the last day of the month it was able to state that trading during the year had exceeded its expectations. This performance was driven by organic growth in its Data Products & Services division.

 

Ideagen (+14.6%), the risk management software provider, released interims results for the half-year to 31 October showing a 22% revenue increase to £21m. Within this, recurring revenues rose 30% and now represent 67%, almost at the 70% level at which we would consider them to represent a core intangible asset for the business (we currently own the stock for its intellectual property and distribution characteristics). Although only re-affirming that trading is in-line with market expectations, outlook comments from the company took on a distinctly bullish tone.

 

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.

In the only Fund change during January, Bioquell left the portfolio following completion of Ecolab’s 590p a share purchase of the company.

 

Positive contributors included:

Gateley Holdings (+33.1%), James Cropper (+26.2%), Smart Metering Systems (+25.1%), Brooks Macdonald Group (+20.3%) and Mortgage Advice Bureau (+18.1%)

 

Negative contributors included:

Quixant (-23.7%), Charles Stanley Group (-9.6%), Proactis Holdings (-9.5%), JTC (-7.7%) and Cello Health (-7.7%)

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 31.01.2019, 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, primary class.

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, 3:46 PM