Liontrust UK Micro Cap Fund

December 2018 review

The Liontrust UK Micro Cap Fund returned -4.8%* in December. The Fund does not have a formal benchmark, but for reference, the FTSE Small Cap (excluding investment trusts) Index returned -3.5%, the FTSE AIM All-Share Index returned -7.6% and the average return of funds in the IA UK Smaller Companies sector was -5.1%.


Global equity markets finished 2018 on a sour note. The small and micro-cap end of the UK market was unable to escape the widespread weakness. The Q4 correction dragged the FTSE All-Share Index 2018 total return down to -9.5% while the FTSE Small Cap (ex IT) Index returned -13.8% while the FTSE Small Cap (ex IT) Index returned -13.8% and the FTSE AIM All-Share lost 17.1%. The MSCI World Index of developed markets lost 3.0% over the year and the MSCI Emerging Markets Index dropped 9.3%.


Investors familiar with the Economic Advantage investment process will be well aware that it is unashamedly bottom-up in nature, and makes no attempt to predict macroeconomic events. We believe that our investments’ long-term prospects are driven mostly by their ability to successfully execute growth plans and compound profits. In the shorter-term, investor sentiment and other exogenous factors will impact share prices, so we aim to ride out periods of volatility and treat indiscriminate market weakness as a buying opportunity.


This wasn’t a particularly forgiving environment for the release of any negative news, as shown by the share price reaction at Tekmar Group (-31.4%) where interim results included a downgrade to financial guidance. The company, which produces cable protection systems for offshore wind-farms, joined the AIM market in June through an initial public offering in which the Fund participated. In the half-year to 30 September 2018, revenues dropped to £7.1m from £11.4m in last year’s equivalent period. While Tekmar notes that its order book of £12.9m is a record and that the company is preferred bidder on contracts worth a further £18.1m, delays in securing these contract awards mean than associated revenues will not be received in the second half of the year. As a result, profit for the year to 30 March 2019 is now expected to be at a similar level to the prior year, with a return to growth forecast for FY2020. On a more positive note, the company secured a 100% market share of all European offshore wind cable protection system contracts awarded during the half-year. This market dominance gives us confidence that this setback is no more than a temporary blip; our conviction in Tekmar’s possession of Economic Advantage remains undented.


Customer engagement software provider Netcall (-15.8%) indicated in an AGM statement that bookings in the first five months of its financial year had been significantly ahead of the same period last year, driven by sales of its Low-code platform. However, it also stated that the timing of product sales will result in more revenues being recognised in the second half of its year than normal.


We received a more positive update from Quartix Holdings (+10.4%). The provider of vehicle tracking systems issued a trading statement covering the 10 months to 31 October. It indicated that profit was on course to exceed market expectations (earnings before interest, tax, depreciation and amortisation of £7.5m) for 2018 a whole. The upgrade is largely the result of a change of accounting treatment on the recognition of profit and revenues from contracts with customers. While the 2018 figures are likely to be boosted, it shouldn’t be at the expense of 2019’s numbers – Quartix states that its expectations for 2019 remain unchanged. It further commented that business changes made since July to tackle a slowing subscription base in the UK – the company’s most mature market – have begun to take effect. 


Vianet (+9.0%) designs telemetry monitoring systems for devices connected to an ‘internet of things’ platform in the leisure and vending sector. Satisfactory interim results helped it recover from some share price weakness in November. In the six months to 30 September, Vianet registered a 14% uplift in revenues to £7.7m as new Smart Machine unit sales more than doubled year-on-year to 5,427 following last year’s Vendman acquisition.


A share placing contributed to a monthly share price fall for Inspired Energy (-23.4%). The company is an energy procurement consultancy firm that in the managers’ view possesses core Economic Advantage assets through its high recurring revenues and embedded distribution strengths. In December, a share placing of £19m helped fund the acquisition of Inprova Finance, a company that offers similar services with particular strengths in data centres, social housing, education and construction. The acquisition is expected to generate substantial cross-selling opportunities.


During December, the Fund initiated a position in Gateley Holdings, a commercial law firm with national scale which the managers believe gives it an Economic Advantage intangible asset in the form of a strong distribution network. The company is an existing holding in the Liontrust UK Smaller Companies Fund which following Q4 market weakness has seen its market cap contract to £150m – bringing it within this Fund’s investable universe.


Positive contributors included:

Cello Health (+12.7%), Quartix Holdings (+10.4%), Vianet (+9.0%), Oxford Metrics (+8.2%) and Synnovia (+8.1%).


Negative contributors included:

Tekmar Group (-31.4%), Inspired Energy (-23.4%), Murgitroyd Group (-17.1%), Avingtrans (-16.0%) and Tatton Asset Management (-15.8%).


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 31.12.2018, 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 31.12.2018, 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 


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, January 15, 2019, 4:47 PM