Liontrust UK Smaller Companies Fund

October 2019 review

The Liontrust UK Smaller Companies Fund returned 0.9%* in October. For comparison the FTSE Small Cap (excluding investment trusts) Index returned 0.5% and the average return of funds in the IA UK Smaller Companies sector was 1.3%.

 

Although the FTSE All-Share lost 1.4%, this was primarily the result of weakness in the large stocks which dominate the capitalisation-weighted index; the FTSE100 dropped 1.9%. The environment at the smaller end of the market was more benign: the FTSE 250, FTSE Small Cap and FTSE AIM All-Share rose 0.6%, 0.1% and 2.1% respectively.

 

There were signs of some rare Brexit progress as Boris Johnson secured parliament’s approval for his latest deal. But he failed in attempts to have it implemented by 31 October – instead being forced to request a three month extension from the EU. In response, he called a general election for 12 December.

 

Sterling rallied 3.4% (trade-weighted basis). This presented a translation headwind for companies with international footprints but is also indicative of optimism regarding the domestic economy which is likely to have helped lift shares in smaller companies.

 

This environment allowed for some outsized moves in shares that lacked any specific fundamental catalyst – GlobalData (+27.7%) and Smart Metering Systems (+18.8%) being two examples in the portfolio.

A Q3 update from Arbuthnot Banking Group (+19.1%) drove its shares higher. In August the company had acquired two residential mortgage portfolios worth £265m at a 2.7% discount to par, which helped drive their loan balances +33% to over £1.6bn. This was part funded by £85m of deposit inflows into their Arbuthnot Direct platform and helped make up for the fact that growth in the core loan book has been slower than expectations. The company expects this to be just a timing issue rather than an indication of a fundamental slowdown, despite some macroeconomic uncertainties. These portfolios of mortgages are also performing better than assumed in its models at the time of the purchase. At the end of September, Arbuthnot’s surplus liquidity above regulatory reserve requirements was £300m so they continue to have plenty of capital for similar opportunistic purchases.

CareTech (+10.7%) announced that trading in the year to 30 September has been in line with its expectations and gave an encouraging update on the integration of its Cambian unit. The social care and education provider acquired Cambian in a £370m deal last year. Integration of the unit is on track, with operational improvements and synergies in line with CareTech’s expectations at the time of the purchase. While CareTech’s existing business had 87% capacity as at 30 September, Cambian’s was 73% (partly suppressed by some non-residential schools which are on break in September). CareTech expects profit margins at Cambian to improve as the integration progresses.

 

The portfolio’s most notable faller, Accesso Technology (-33.0%), is in a bid situation. Following July’s sharp gains on the commencement of a formal sale process, shares in the company have eased back on a lack of subsequent newsflow. The decision to sell the business came on the back of a number of operational difficulties that had pushed the shares down in late 2018 and early 2019.

 

The next two largest detractors - K3 Business Technology (-18.7%) and Trifast (-16.5%) – dropped as a result of profit warnings.

 

K3 Business Technology stated that results for the financial year to 30 November are forecast to be significantly below the market’s expectations. Trading in the second half of the year was thrown off course, partly as a result of individual setbacks: a large customer has entered into administration while a major new contract that was in the final stages of discussion has now been put on hold.

 

In July, Trifast had warned of the negative impact of macroeconomic uncertainties and its shares took another leg lower in October after an interim trading update warned that end market conditions remain weak, particularly in the automotive sector. The industrial fastening manufacturer now expects underlying profit before tax of £22m this year, below consensus expectations of more than £24m.

 

Total assets under administration at AJ Bell (-10.4%) rose £6.2bn, or 13%, to £52.3bn in the year to 30 September, while client numbers increased 17% to over 232,000. The assets increase was the result of £3.9m in net inflows and £2.3m investment performance (+5%) – ahead of the 2% fall in the FTSE All-Share over the period.

 

Positive contributors included:

GlobalData (+27.7%), Arbuthnot Banking Group (+19.1%), Smart Metering Systems (+18.8%), Simplybiz Group (+15.0%) and Kainos Group (+12.4%).

 

Negative contributors included:

Accesso Technology (-33.0%), K3 Business Technology (-18.7%), Trifast (-16.5%), AJ Bell (-10.4%) and Quartix Holdings (-9.6%).

 

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

 

 

Sep-19

Sep-18

Sep-17

Sep-16

Sep-15

Liontrust UK Smaller Companies I Inc

-5.0

19.7

23.8

19.0

16.5

FTSE Small Cap ex ITs

-7.8

0.6

17.8

10.5

9.0

IA UK Smaller Companies

-7.1

10.8

25.0

7.8

11.7

Quartile

2

1

3

1

2

 

*Source: Financial Express, as at 31.10.2019, 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 30.09.2019, 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.

Monday, November 18, 2019, 10:58 AM