Liontrust UK Smaller Companies Fund

May 2019 review

The Liontrust UK Smaller Companies Fund returned 2.9%* in May, compared with the -1.2% return from the FTSE Small Cap (excluding investment trusts) Index.


A deterioration in US-China trade relations and ongoing political turmoil in the UK provided an unhelpful backdrop for equity investors in May. The FTSE 100 lost 2.9% while the FTSE All-Share declined by 3.0%. The small cap end of the market showed some resilience, restricting losses to 1.2%, but it was nevertheless a month characterised by risk aversion.

 

Within this environment it was once again encouraging that movements in portfolio holdings were driven mostly by company specifics, allowing the Fund to offset some weak spots – such as Netcall, down 28% – with as many areas of strength.

 

Kainos Group (+16.7%) was one such highlight, growing revnues by more than 50% to £151m in the year to 31 March 2019. Notwithstanding the large increase in activity over the year, Kainos Group still finished with a sizeable contracted order backlog of £122m. Sales orders rose almost a third to £172m.  As an outsourced provider of IT design and support services to the public sector, Kainos stands to benefit from the UK government’s agenda to digitise public services. The company stated that while Brexit uncertainty has affected the wider UK economy, it has had minimal impact on Kainos’s existing projects. The company does expect some deferral of new programme decisions if Brexit, a general election and/or a spending review occur within a similar timeframe. However, it also anticipates that an exit from the EU will trigger significant growth opportunities with over 300 public sector IT systems potentially affected.

 

CareTech (+12.6%) also made gains after confirmed that trading in the six months to 31 March had been in line with its expectations, with the business making like-for-like progress versus last year. The blended occupancy rate across its care homes was 87%, up from 86% six months ago. It also updated on its new Cambian unit, which was acquired in a £370m deal last year. Cambian provides specialist children’s education services which complement CareTech’s care homes for “high acuity” patients. Profit margins at Cambian have shown a considerable improvement since the acquisition, before taking into account any integration benefits. CareTech has confirmed that the £3m of synergies expected at the profit before tax level are also on track.

 

Shares in Netcall (-27.5%) tumbled at the end of the month after warning that product sales have been hit by NHS purchasing delays. As a result, adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) for the year to 30 June 2019 is now expected to be around £3.4m, compared with analyst forecasts of £4.5m. Netcall’s cloud-based services saw better trends, with year-on-year sales growing 160% to £6.5m

 

The Fund added a position in Attraqt Group, a provider of site search, visual merchandising and personalised product recommendation software to internet retailers such as Asos, Superdry and JD. The company possesses all three of the primary intangible strengths the Economic Advantage process seeks to identify. It has intellectual property in the software code, enjoys an embedded distribution network strength as customers come to rely increasingly on the product to drive improved conversion of ‘clicks’ to sales, and also sells its products on a monthly recurring SaaS subscription basis, meaning around 90% of revenues are recurring.

 

The Fund was able to invest via a £17m placing, which Attraqt undertook in order to finance an acquisition of Early Birds. The target company is a provider of an artificial intelligence based software-as-a-service platform that allows intent retailers to personalise their eCommerce offerings, and bolsters Attraqt’s existing intellectual property in a key area customers are increasingly demanding of their suppliers. This is the second transformational acquisition in as many years after last year’s reverse acquisition of Fredhopper, also funded by a placing.

 

Positive contributors included:

SimplyBiz Group (+18.8%), YouGov (+17.1%), Kainos Group (+16.7%), Craneware (+14.4%) and Caretech (+12.6%)

 

Negative contributors included:

Netcall (-27.5%), Plexus Holdings (-14.8%), Bango (-13.3%), Eco Animal Health Group (-12.2%) and Tatton Asset Management (-10.4%).

 

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

 

 

Mar-19

Mar-18

Mar-17

Mar-16

Mar-15

Liontrust UK Smaller Companies I Inc

1.9

17.1

26.3

18.1

-3.0

FTSE Small Cap ex ITs

-3.1

2.2

19.7

5.9

1.2

IA UK Smaller Companies

-2.6

14.9

18.7

8.2

-2.1

Quartile

1

2

1

1

3

 

*Source: Financial Express, as at 31.05.2019, 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 31.03.2019, 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.

Tuesday, June 11, 2019, 1:42 PM