Liontrust UK Micro Cap Fund

April 2020 review

The Liontrust UK Micro Cap Fund returned 16.2%* in April. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator indices returned 9.5% and 18.8% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator index, was 14.1%.

 

Those companies with strong balance sheets were in favour as investors seemingly started looking through the short-term P&L impact of virus-related disruption. A number of Fund holdings were part of this group, issuing statements reassuring the market about their financial positions and providing updates on actions they are taking to mitigate the Covid-19 hit. As mentioned in the March review, the Fund entered the crisis in a strong position in this respect, with around two thirds of its holdings in a position of net cash. Despite the potential for more extreme working capital swings than usual, the managers hope this should stand the Fund’s companies in good stead, relative to the wider market.

 

One of last month’s biggest fallers Tatton Asset Management (+34.7%) issued a statement showing it entered the crisis in a healthy position. It reported net inflow of £1.12bn in the year to 31 March 2020, helping grow assets under management (AUM) to £6.65bn from £6.07bn. The market fallout from Covid-19, however, led to investment performance of -14% but the company maintained that, while it is too early to determine the full extent of the Covid-19 impact, it is well placed to execute its long-term growth strategy.

 

Wealth manager Frenkel Topping Group (+43.1%) released results for 2019 showing AUM rose 15% and revenue grew 12%. During 2020, it has continued to see assets rise and noted that, while Covid-19 has caused significant uncertainty, it remains well placed for further growth.

 

Another company showing strong momentum was billing and customer relationship software company Cerillion (+47.3%). It announced that it has not seen any slowdown in trading resulting from the coronavirus pandemic, given its customers are mainly telecom companies which have seen higher data traffic during lockdown.

 

The benefits of Quartix’s (+32.3%) recurring revenue were evident in its first quarter statement. The vehicle tracking software company stated that its revenue is underpinned by a subscription base of 150,000 vehicles, which has meant there has been minimal initial impact from the crisis. This is likely to be the case for several months, despite a slight uptick in attrition rates. The group believes it would not need to draw on its current cash reserves but nonetheless outlined sensible measures to conserve this cash balance as a contingency.

 

Attraqt Group (-12.5%) was one of the few stocks to end April lower. The company provides site search, visual merchandising and personalised product recommendation software to internet retailers such as ASOS, Superdry and JD. Whilst it has not yet seen a material impact from the coronavirus fallout, it acknowledged the difficulties faced by its customers in the retail space. Additionally, the company’s well-respected CEO Luke McKeever, responsible for the turnaround of the group in recent years, announced he will have to step aside for personal reasons.

 

essensys Group (-11.1%) saw its share price slip after it announced a discounted share placing to raise c.£7m, which it planned to use to increase balance sheet liquidity. The Fund participated in this placing. The company is a provider of software-as-a-service platforms to the flexible workspace sector. In interim results, it stated that it has seen a number of delays in its Connect platform pipeline but the company remains positive about the full-year.

 

A handful of holdings are aiding in the fight against coronavirus, including EKF Diagnostics (+44.3%). The company provides ‘point of care’ diagnostics such as blood analysers and consumables, providing tests for conditions such as diabetes and anaemia. It said there has been a surge in demand of PrimeStore MTM sample collection devices, which allows for safe sample handling and transport, greatly reducing risk of infection. EKF manufactures a component of this device and has ramped up production to meet what it expects to be a total order worth US$3m.

 

Inspiration Healthcare Group (-11.8%) specialises in medical devices for use in critical care and operating theatres. In its full-year results, the company said it aided the government’s efforts to help radically increase ventilator capacity. It added that it expects demand for its products to stay stable or increase during the Covid-19 pandemic.

 

There were a small number of changes to the portfolio in April.

 

Augean is the leading hazardous waste management business in the UK, providing a range of services from landfill disposal to treatment and recovery. It owns the physical sites and the licences for disposing of certain types of hazardous waste, such as the residue from “Energy from Waste” incineration plants, low level radioactive waste, or contaminated waste from construction and demolition activities. The position was initiated on the strength of the company’s distribution network, which revolves around high market shares in its various niches, as well as and ownership of the governmental permits and licences required to operate in this heavily regulated space.

 

Tristel is a manufacturer and developer of infection control and hygiene products, with a proprietary chemistry based on chlorine dioxide disinfection. The company’s products are used to disinfect medical instruments which are made of plastic and therefore cannot be sterilised using heat treatment – such as flexible endoscopes and ultrasound probes used in multiple hospital departments. It is also building strength in the area of surface disinfection, which is likely to see a boost from increased hygiene awareness around the world during the Covid-19 pandemic and beyond. The Fund owns the shares on the basis of intellectual property and also distribution strength, as Tristel has built up a global sales portfolio over many years in an industry with very high barriers to entry and stringent regulatory requirements for product approval in different countries.

 

A position was also opened in The Pebble Group, a company that is held in other Economic Advantage funds. Following the recent market falls, its market cap entered the micro cap range and qualified for inclusion in the Fund. The Pebble Group is comprised of two divisions, with their own separate corporate identities. The first, Brand Addition, supplies ethically-sourced bespoke promotional material to large global brands under long-term, typically 3-5 year contracts. As one of very few large promotional product services providers focussed on this sector, customers benefit from its distribution strength and wealth of creative services, underpinned by technology and their international infrastructure. The second, facilisgroup, via its @ease proprietary software (delivered as a service) helps support over 150 SMEs working in the US promotions industry, not only with a technology solution to underpin their business, but by providing access to a group of preferred suppliers which allows their customers to gain the benefits of bulk purchasing. Facilis also run community events for customers to share best practice learning.

 

Haynes Publishing Group exited the portfolio following the completion of its £114.5m takeover by Infopro Digital Group.

 

Positive contributors included:

FRP Advisory Group (+49.7%), Cerillion (+47.3%), EKF Diagnostics (+44.3%), Frenkel Topping Group (+43.1%) and Intercede Group (+41.9%).

 

Negative contributors included:

Attraqt Group (-12.5%), Inspiration Healthcare Group (-11.8%), essensys Group (-11.1%), K3 Business Technology Group (-7.0%) and Diaceutics (-5.5%).

 

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

 

 

Mar-20

Mar-19

Mar-18

Mar-17

Liontrust UK Micro Cap I Acc

-8.2

5.7

18.4

22.1

FTSE Small Cap ex ITs

-24.4

-3.1

2.2

19.7

FTSE AIM All Share

-24.5

-8.5

10.5

32.9

IA UK Smaller Companies

-17.9

-2.6

14.9

18.7

Quartile

1

1

2

2

 

*Source: Financial Express, as at 30.04.20, 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 31.03.19, total return (net of fees and income reinvested), bid-to-bid, institutional class. Discrete data is not available for five full 12 month periods due to the launch date of the portfolio. Investment decisions should not be based on short-term performance.

 

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, May 15, 2020, 3:05 PM