Liontrust UK Micro Cap Fund

December 2017 review

The Liontrust UK Micro Cap Fund returned 1.3%* in December. The Fund does not have a formal benchmark, but for reference, the FTSE Small Cap (excluding investment trusts) Index returned 2.8%, the FTSE AIM All-Share Index returned 2.3% and the average return of funds in the IA UK Smaller Companies sector was 2.7%.


Global equity markets rallied into year-end, many of them hitting new all-time highs, perhaps boosted by Trump’s much-vaunted tax reform bill finally being passed. In the UK, market trends were affected by a retracement in sterling as EU Brexit divorce bill talks stretched out. This, together with strong returns for large-cap dominated basic materials and oil & gas sectors, contributed to the FTSE 100 Index registering the biggest gain, up more than 5%.


It is worthy of note that 2017 saw a marked divergence in the performance of larger vs smaller ‘small cap’ stocks. While smaller companies of all sizes benefited from a generally benevolent mood among investors, returns were skewed towards the upper end of the small cap market. The effect was demonstrated in particular on the AIM market, which has over 800 constituents. 54 of the 58 stocks in the Fund are listed on the AIM market, and the weighted mean average market cap of those stocks is £99m. To put this in context, the seven largest stocks in the index at the start of 2017 – all of which were capitalised at over £1bn on January 1 – had a median return of over +38% during the year, and together contributed almost 40% of the total positive AIM All-Share Index return. The month of December saw a continuation of these trends, rather than any reversal.


Many stocks within the Fund extended their November trends in the absence of newsflow. For example, AB Dynamics (+21.4%) built on last month’s share price appreciation, taking the Q4 gain to 74%, despite a lack of significant news this month. By contrast, Empresaria Group (-12.2%) and Jaywing (-10.4%) both continued to slide following last month’s warnings that profits would fall short of analysts’ consensus expectations.


Croma Security Solutions (+36.6%) followed up November’s upbeat full year results with details of a new contract win. The contract has an estimated total value of £27m over six years, representing the largest in Croma’s history, and will see it provide a range of security services to a ‘major UK local authority’.


Interim results from Marlowe (+11.7%) showed a doubling in revenue to £36m following four acquisitions during the period. Adjusted profit before tax rose 90% to £2.4m. The majority of its revenues are currently derived from fire protection and security services, but Marlowe has ambitions to provide a wide range of critical asset maintenance services in areas where demand is underpinned by health and safety regulations. To that end it has recently added an air, water and hygiene division with the acquisition of Ductclean UK. The company stated that the integration of the acquired businesses is proceeding to plan and that cross-selling opportunities are expected to feed through. It also announced that its current run-rate of revenues equates to a 12 month total in excess of £80m. Marlowe is expected to continue pursuing an acquisitive growth strategy, with a further two companies bought following the interim period end date of 30 September.


Following the completion of a review of its operating systems, which was triggered by its acquisition of Suffolk

Life, Curtis Banks Group (-7.3%) has decided to implement an upgrade of its back office. Having capitalised costs of just over £2m as it investigated alternative systems, it will now be required to incur an impairment charge as this asset is written-off. This non-cash charge will affect reported profits for its 2017 results. The shares were initially marked down heavily on the news, but quickly staged a recovery given that the decision should actually be positive for the company in the medium term.


The Fund participated in a fund-raising for Sumo Group, which was admitted to dealing on AIM on 21 December. The shares debuted strongly, finishing December at 116p compared with the purchase price of 100p. Sumo Group provides a range of services to video game publishers and developers, ranging from visual concept design and pre-production through to marketing and post-release support. As one of the few independent studios in the UK with the scale to provide full turnkey development of a game, it often becomes embedded within successful franchises, becoming ‘spiritual owners’ of the publisher’s intellectual property. This creates a very large barrier to competition and also allows Sumo Group to benefit as the industry moves increasingly to a digital distribution model, enhancing the longevity and monetisation of titles.


The position in Trifast was sold after steady share price appreciation since purchase took it through the Fund’s £250m market cap barrier at which the managers look to effect a managed exit. Having initiated the position when the fund launched at 125p, the final shares were exited at 242p. The company is now worth near £300m and the valuation looks up with events at least in the short term.


Positive contributors included:

Croma Security Solutions (+36.6%), AB Dynamics (+21.4%), Sumo Group (+14.9%), Pennant International (+11.9%) and Marlowe (+11.7%).


Negative contributors included:

Empresaria Group (-12.2%), Avingtrans (-12.0%), Jaywing (-10.4%) Tracsis (-10.1%) and Curtis Banks (-7.3%).


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




Liontrust UK Micro Cap I Acc


FTSE Small Cap ex ITs


IA UK Smaller Companies




Discrete data is not available for five full 12 month periods due to the launch date of the portfolio.


*Source: Financial Express, as at 31.12.2017, 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.

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.

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.


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.

Thursday, January 11, 2018, 5:08 PM