Liontrust UK Micro Cap Fund

August 2019 review

The Liontrust UK Micro Cap Fund returned -4.0%* in August. For comparison, the FTSE Small Cap (excluding investment trusts) Index returned -2.2%, the FTSE AIM All-Share Index returned -6.4% and the average return of funds in the IA UK Smaller Companies sector was -3.2%.


Investor sentiment soured in August as trade hostilities between the US and China escalated once again. Donald Trump stated, in a series of tweets, that tariffs would be placed on an additional US$300bn worth of Chinese imports from 1 September. He later announced that this tariff rate would be raised to 15% from 10%, but carved out a list of goods for which implementation would be delayed until December. 


On the UK political scene, the prospect of a ‘no deal’ Brexit cast a shadow over the country’s outlook. The rhetoric from Prime Minister Johnson had many adopting ‘no deal’ as the base case scenario and the pound took a knock as a result, touching its lowest level since late 2016 in trade weighted terms.


The negative developments in the political world soured investor sentiment and resulted in a number of holdings seeing share price declines without releasing any significant newsflow. Share price moves may also have been accentuated by the low trading volumes typical of the London market during the summer months.


Pennant International Group’s (-28.3%) shares declined after it warned that results for 2019 as a whole are expected to be materially lower than current market expectations. This was mainly due to slower than expected progress in its contract to supply electro-mechanical trainers for the Ajax armoured fighting vehicle, as the customer has made some adjustments and extensions to the functional design. The net result of these changes is that revenue is now not expected to ramp up until FY2020. Additionally an extension to the timetable for growing the recently acquired Aviation Skills Partnership was reported; the latter was affected by Brexit uncertainty which caused delays in the allocation of public funding.


Shares in Jaywing (-51.7%) took another leg lower. The company warned in July that trading had been very weak due to the effect of heightened political and economic uncertainty on clients’ discretionary spend. In August, the data science consultancy said that while trading has improved, conditions are still challenging and it is in negotiations with its bank and two major shareholders to bolster its balance sheet. The stock had the smallest weighting among all Fund holdings, reflecting its risk rating, and although it is disappointing to see its shares de-rate so sharply, the overall negative effect on the Fund was marginal. The position was later sold.


Sanderson Group (+9.8%) experienced a more positive share price move after it accepted a takeover offer which valued the company at £90m. The bid of 140p per share by Aptean Limited represented a premium of 9.8% to the company’s share price and was fully recommended by the board of directors. This represents a 60% return the Fund’s original investment price, and Sanderson joins Sepura, Bioquell and Lighthouse as companies the Fund has lost to acquisition by a competitor in the three years since launch.


Takeovers are a relatively frequent phenomenon in the Economic Advantage process, as the barriers to competition we look for in our investments are often easier for a competitor to acquire than build themselves. Of note, both Bioquell and Sanderson have been acquired by US businesses, which may well continue to be a theme in the short term thanks to the weakness of sterling.


The Fund participated in the initial public offering (IPO) of brick and tiles speciality distributor Brickability Group. The company’s Economic Advantage rests in the strength of its distribution network, manifesting itself in a 40% market share of the UK brick factoring market and genuine national coverage. As an example the company has 130 sales people in the UK, whereas the brick manufacturing businesses combined only have 90 – providing an advantage in a market which has also seen procurement departments at the housebuilders shrinking to a fraction of their former size. Additionally, it enjoys sole supplier status into the UK for several kilns located in mainland Europe.


Brickability also benefits from ‘second tier’ Economic Advantage intangible assets in the form of long-standing customer relationships (e.g. a 20-year relationship with Bellway, its largest customer) and a strong owner manager culture as CEO Alan Simpson remains the largest shareholder.


Positive contributors included:

Inspired Energy (+27.1%), Synnovia (+10.1%), Sanderson Group (+9.8%), Harwood Wealth Management (+6.1%) and Brickability Group (+5.0%).


Negative contributors included:

Pennant International Group (-28.3%), Surgical Innovations Group (-21.2%), Marlowe (-16.1%), EKF Diagnostics Holdings (-13.5%) and dotdigital Group (-13.1%).


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






Liontrust UK Micro Cap I Acc




FTSE Small Cap ex Its




IA UK Smaller Companies









*Source: Financial Express, as at 31.08.2019, 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 30.06.2019, 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.


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, September 17, 2019, 3:57 PM