Liontrust UK Micro Cap Fund

December 2019 review

The Liontrust UK Micro Cap Fund returned 7.9%* in December. For comparison, the FTSE Small Cap (excluding investment trusts) Index returned 7.9%, the FTSE AIM All-Share Index returned 4.0% and the average return of funds in the IA UK Smaller Companies sector was 6.9%.


Signs of a ‘phase one’ deal between the US and China to de-escalate trade tensions helped drive global equities higher. In the UK, the positive mood was further enhanced by a convincing election result, with the scale of the Conservative majority serving to reduce the level of political uncertainty priced into markets.


The impact of improved investor sentiment was amplified at the small and micro cap end of the UK market, which outstripped the FTSE All Share’s 3.3% gain. The Fund participated strongly in this positive market environment. Of the Fund’s 66 holdings, 25 registered double-digit percentage gains for the month. Of these, K3 Capital Group (+63.2%) was the largest riser. An upbeat trading update gave details of a 30% year-on-year increase in completed transactions during the first half of its financial year. The growth was primarily driven by the private company mergers and acquisitions specialist’s ‘volume’ brands, but revenue nevertheless rose 10% while EBITDA (earnings before interest, tax, depreciation and amortisation) margins were maintained above 40%. Having last year blamed the uncertain economic and political backdrop for delays in completing deals, the company states that the recent election result should bring some political stability. It remains confident in achieving its financial guidance for the full year.


The December release of interims also helped Solid State (+34.5%) finish the year on a high note. The company manufactures ruggedised electronic components for use by industrial and military customers in harsh environments. Its recent acquisition of Pacer Technologies boosted reported revenues in the six months to 30 September, helping them rise 43% to £33.6m. On a like-for-like basis, revenues rose 11%. Favourable currency movements helped boost gross profit margins by 100bps to 30.1%. The company noted that market expectations for its full-year performance had increased recently but stated that it was confident of achieving these higher levels.


Beeks Financial Cloud Group (+28.3%) jumped after announcing two large contract wins. The first involves provision of private cloud infrastructure for integration into a fintech company’s data and voice communications product. The software-as-a-service contract starts in January 2020 and is committed to grow to over US$1m a year, Beeks’ first contract of this scale. The second contract involves provision of private network services to a cloud-based payments provider. It is worth £1.1m over a three-year term.


Over the last 10 years, Cohort (+25.4%) has acquired five defence technology businesses. it completed the purchase of detection and tracking specialist Chess Technologies in December 2018. The inclusion of Chess’s contribution in interim results boosted group revenue by 50% to £60m. Stripping out the acquired revenues, like-for-like growth was still very strong at 17%. Adjusted operating profit also rose substantially, up fourfold to £4m. The company’s order book stands at £207m following intake of £77.2m during the period. This order book gives Cohort visibility on over 80% of this year’s full-year revenue guidance, which the company states it is on track to meet. On the same day as its interim results release, Cohort announced its sixth acquisition – a €11.3m purchase of Wärtsilä ELAC Nautik, a German provider of submarine and surface ship sonar systems.

Only 12 holdings lost ground over the month, with Sopheon (-19.0%) being the poorest performer. In June, the company had warned of delays in some customers signing deals for its enterprise innovation management software, citing a shift in demand for software-as-a-service (which results in lower immediate revenue recognition, in return for higher revenues in future periods). It had expected to recover the lost ground in the second half of 2019, but its latest statement reveals that the timeline on these contracts has slipped further. A number of contracts expected to complete in Q4 of 2019 have now shifted to 2020. Although Sopheon made a point of stating that the size of its 2019/2020 pipeline is unchanged, shares in the company sold off heavily on news of the latest delay.


Harwood Wealth Management (-6.5%) offered a rare instance of a share price drop on receipt of a takeover offer. Shares in the company had risen from a 2019 low of 115p in the summer to reach over 130p in October and then jumped to 160p in November. On 23 December, a vehicle controlled by private equity group Carlyle announced a cash bid at 145p which had been recommended by Harwood’s board. Shares in the company traded down to the offer level.


The Fund’s small holding in recruitment software provider Oleeo – formerly World Careers Network – was sold following the company’s decision to delist from AIM. The Fund took part in a tender offer at 160p a share which facilitated an exit for investors not wishing to own shares in an unquoted business.


The Fund added new positions in MJ Hudson and Mercia Asset Management.


MJ Hudson is a provider of consultancy services to the asset management industry, specialising on the fast-growing sub sector of alternative investments. Across its three divisions, the company advises asset management clients in the areas of legal, investment advisory and fund administration services, reporting, regulatory compliance and risk, and benchmarking and analytics. The Fund owns the shares under the third key intangible asset category of the Economic Advantage process, recurring income, thanks to MJ Hudson’s high levels of contracted revenues and multi-year client relationships.


Mercia Asset Management is a specialist venture capital and private equity investment company. It focuses on investing in regional high-growth SMEs, which often face a struggle to access investment capital compared to the relatively saturated London market. The majority of Mercia’s ongoing revenues are generated from its third party asset management business, which provides high levels of recurring revenue. However, the company also invests its own balance sheet capital in selected holdings, providing potentially material (if lumpy) upside for investors. The Fund bought its holding in a £30m equity placing which was used to acquire three Venture Capital Trust (VCT) contracts from NVM Private Equity, as well as to boost capital on its own balance sheet for further investments.


Positive contributors included:

K3 Capital Group (+63.2%), Solid State (+34.5%), Nucleus Financial Group (+28.7%), Beeks Financial Cloud Group (+28.3%) and Cohort (+25.4%).


Negative contributors included:

Sopheon (-19.0%), Eckoh (-9.8%), James Cropper (-7.8%), Surgical Innovations Group (-6.8%) and Harwood Wealth Management (-6.5%).


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






Liontrust UK Micro Cap I Acc




FTSE Small Cap ex ITs




FTSE AIM All Share




IA UK Smaller Companies









*Source: Financial Express, as at 31.12.2019, 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 31.12.2019, 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.

Friday, January 10, 2020, 10:50 AM