Liontrust UK Smaller Companies Fund

June 2018 review

The Liontrust UK Smaller Companies Fund returned 2.0%* in June, compared with the -1.2% return from the FTSE Small Cap (excluding investment trusts) Index.

 

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 handful of the Fund’s holdings posted double-digit percentage gains in June, helping the Fund post a solid monthly performance against a somewhat tepid market backdrop. Foremost among these stocks was Sumo Group (+29.1%), which pushed higher on an upbeat AGM statement, adding to the share price 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.

 

Having sold off in April on a trading statement, RWS Holdings (+19.9%) staged a strong recovery after the June release of interim results. It had previously warned on lower-than-expected initial activity from certain Moravia clients, so investors were encouraged that the recently acquired business has seen an “excellent start” to the second half of its financial year. Headline numbers were as pre-announced: revenue up more than 80% to £140m in the six months to 31 March and adjusted operating profit expanding by 60% to £30.5m. Underlying growth on a constant currency basis was a modest 5%, but outlook comments suggest an acceleration is expected in the second half. With respect to Moravia, RWS has observed an “accelerating revenue performance” since the trading update as well as improved synergies.

 

Automotive testing and measurement systems specialist AB Dynamics (+21.5%) announced its first contract win for an advanced vehicle driving simulator (AVDS). The product, developed with Williams Advanced Engineering, allows automotive manufacturers to realistically test their cars in a virtual environment which should speed up research and development while reducing costs. The order has come from a Chinese test house and is expected to have a value of over £2m, the majority of which will accrue during the 2019 financial year.

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.

 

The Fund detractors also saw a couple of double-digit fallers in the form of Plexus Holdings(-16.3%) and Medica Group (-11.9%), but neither was the result of corporate news. Cloud computing company Iomart (-5.7%) did issue a statement covering the year to 31 March 2018. As flagged in its trading update, the company generated 9% revenue growth to £97.7m, while adjusted earnings before interest, tax, depreciation and amortisation was £39.8m – also 9% higher year-on-year. The top-line growth reflects a combination of organic growth and the impact of three acquisitions: Dediserve, Simple Servers and Sonassi. Trading in its new financial year is described as progressing in a “similarly positive vein”.

 

The Fund sold its position in marketing consultancy business System1 which had unfortunately become a de-minimis position following a series of profit warnings over the last year.

 

The Fund also has a small holding in World Careers Network which changed its name to Oleeoduring the month.

 

Positive contributors included:

Sumo Group (+29.1%), AB Dynamics (+21.5%), RWS Holdings (+19.9%), Bioquell (+19.1%) and K3 Business Technology (+18.8%).

 

Negative contributors included:

Plexus Holdings (-16.3%), Medica Group (-11.9%), Smart Metering Systems (-6.3%), Imimobile (-5.8%) and Iomart (-5.7%).

 

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

 

Jun-18

Jun-17

Jun-16

Jun-15

Jun-14

Liontrust UK Smaller Companies I Inc

18.7

39.9

5.4

7.3

29.6

FTSE Small Cap ex ITs

6.4

28.4

-3.7

8.4

25.3

IA UK Smaller Companies

17.2

36.3

-6.1

9.8

22.3

Quartile

2

2

1

4

1

 

*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, 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. 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, 11:52 AM