Liontrust UK Micro Cap Fund

February 2020 review

The Liontrust UK Micro Cap Fund returned -6.7%* in February. For comparison, the FTSE Small Cap (excluding investment trusts) Index returned -9.1%, the FTSE AIM All-Share Index returned -9.9% and the average return of funds in the IA UK Smaller Companies sector was -10.1%.


Global stock markets sold off heavily in February amid the continued spread of coronavirus, with cases outside of China jumping. Investors pre-empted the economic impact of containment measures from governments around the world, sending equities and other asset classes lower with only ‘safe-havens’ such as government bonds or gold registering positive returns.


There remains a large amount of uncertainty surrounding the duration and size of the impact of coronavirus both in human and economic terms. The Economic Advantage investment process does not attempt to predict events which are notoriously difficult to forecast, and we will continue to focus on companies’ fundamentals.


Given the negative impact on consumer behaviour and heavy disruption to supply chains, some small-cap companies are likely to find their funding positions under scrutiny. Even a temporary hit to sales or production can cause significant working capital demands as fixed costs still need fulfilling. In this respect, we take confidence from our disciplined approach to investing at the smaller end of the market; we only consider investing in companies which generate profits and have solid balance sheets. Over 70% of the Fund’s holdings have a net cash position, and a similar proportion pay a consistent dividend – often a sign of a well-managed company with a sensible strategy for generating returns for its investors.


In addition, a number of the Fund’s holdings have significant (>70%) recurring income, which is one of the three core intangible assets our investment process is designed to identify. A high proportion of repeat business can provide some measure of insulation from short-term dips in demand. Our portfolio of profitable companies with robust balance sheets should – we believe – have more resilient funding than the average UK micro cap.


The market sell-off appeared to be fairly indiscriminate. At the portfolio level, some of the largest detractors were penalised disproportionally to newsflow or business activity. For example, Dotdigital (-23.4%) was one of the heaviest fallers despite issuing interim results that were in-line with January’s trading update; the company has low exposure to affected parts of Asia and has around 90% recurring income.


Company announcements were more of an explanatory factor on the handful of holdings that registered share price gains. Haynes Publishing (+63.5%) rose sharply on the receipt of a 700p a share takeover offer from Infopro Digital Group. The Fund initiated a position in the company in the second half of last year, shortly before Haynes announced a formal sale process. Traditionally known for its automotive instruction manuals, Haynes has expanded into content, data and innovative solutions for the automotive aftermarket and motorists. The decision to sell up was motivated by the cash requirements of Haynes’ future growth plans rather than any current operational or financial difficulties. The absence of any balance sheet distress allowed Haynes to attract an offer at a 70%+ premium to its share price when the sale process was announced.


A short trading update from Inspiration Healthcare (+7.0%) revealed that trading had been ahead of its expectations, with revenues on course for a 15% rise, including 12% like-for-like growth. The company is a specialist in medical devices for use in critical care and operating theatres. In September of last year it acquired Viomedix, a supplier of respiratory products and sterile medical consumables, for £3m. Its integration and subsequent trading have been in-line with Inspiration Healthcare’s expectations.


Essensys Group (+4.3%) issued an in-line trading update guiding to a 19% increase in interim revenue (for the six months to 31 January) to £11.4m. Recurring revenue rose 29% and now accounts for 85% of the total, well above the 70% threshold at which we consider repeat business to form a key intangible barrier to competition. Essensys provides software-as-a-service (SaaS) platforms and on-demand cloud services to the flexible workspace industry.


Takeover talks between two of the Fund’s holdings – Frenkel Topping (-18.5%) and Harwood Capital (0%) – came to an end, resulting in Frenkel giving up the gains in had made in January as bid interest emerged.


Two new positions were added to the portfolio: Inspecs and Churchill China

Inspecs is a designer, manufacturer and distributor of eyewear frames, selling both ‘branded’ and unbranded products into the mid-market segment. The Fund owns the shares on the strength of a physical distribution network: although Inspecs currently has only a relatively small market share, it is nonetheless one of only a few companies globally that can offer a “one-stop shop” to global retail chains, as a vertically-integrated supplier. The company has offices in the UK, Portugal, Scandinavia, the US and China, and manufacturing facilities in China, Vietnam, London and Italy. Inspecs currently supplies over 30,000 points of sale across 80 countries, delivering tens of thousands of individual product stock keeping units (SKUs) to customers every year.

The Fund also took advantage of the recent market sell off to initiate a position in Churchill China, which temporarily dipped below the upper size threshold of £175m market cap that the Fund applies to new holdings. Churchill China was founded in 1795 and is a supplier of ultra-durable ceramic tableware to the hospitality industry. The company, which remains 30% owned by its founding family, enjoys an IP advantage in the deep know-how within its manufacturing processes, which give it both product quality and cost leadership advantages. It is also owned on the strength of its distribution network, with a high market share in the UK (25%), and a broad network of domestic and international distribution partners built up over many years. While it does not have ‘true’ contracted recurring income, the business does also benefit from a very high proportion of ‘replacement’ sales (70-80% of turnover), making its revenue more repeatable and reliable.

Positive contributors included:

Haynes Publishing (+63.5%), Instem (+9.8%), Inspiration Healthcare (+7.0%), Imimobile (+6.3%) and Essensys Group (+4.3%).


Negative contributors included:

Dotdigital (-23.4%), Mind Gym (-20.3%), Solid State (-20.0%), Belvoir Group (-18.8%) and Frenkel Topping (-18.5%).

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 29.02.20, 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 31.12.19, 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.


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.

Thursday, March 5, 2020, 1:02 PM