Liontrust UK Micro Cap Fund

July 2019 review

The Liontrust UK Micro Cap Fund returned -0.5%* in July. For comparison, the FTSE Small Cap (excluding investment trusts) Index returned -1.8%, the FTSE AIM All-Share Index returned 1.4% and the average return of funds in the IA UK Smaller Companies sector was 0.1%.


Global equity indices received a boost from the US Federal Reserve’s decision to cut rates, albeit with a rationale that appeared closer to ‘one-and-done’ than the repeated easing that some investors were looking for. However, at the small and micro-cap end of the UK it was domestic developments that dominated: specifically the prospects for Brexit under a Boris Johnson-led government.


Boris Johnson’s victory in the Conservative leadership race was interpreted as significantly raising the chances of a ‘no deal’ Brexit. He promised to take Britain out of the EU by 31 October with “no ifs or buts”, rhetoric which contributed to a 2.4% fall in the pound (in trade-weighted terms). Meanwhile the International Monetary Fund highlighted a no-deal Brexit as a principal risk factor to the global economy along with further US-China tariffs.


The Fund’s portfolio of holdings was not immune from these heightened macro concerns. Data science consultancy Jaywing (-38.3%) issued an unscheduled update warning that trading since 31 March has been very weak. The company blamed heightened political and economic uncertainty for clients reining in their discretionary spend. The shortfall in activity relative to previous years was enough for Jaywing to state that it is unlikely to match last year’s profit despite the financial year having nine months to run.


However, the majority of the portfolio’s largest monthly movers were driven by stock or sector considerations. One such sector trend was in evidence among a couple of the Fund’s software providers, both of which observed a faster than expected shift in customer preferences towards a Software-as-a-Service (SaaS) subscription model rather than a more traditional licence purchase. For Instem (+19.3%), a provider of IT solutions to the life sciences industry, this contributed to an upbeat half year trading update. The company saw revenue growth of around 10% in all three of its divisions (Data Collection, Informatics and Regulatory Solutions) and commented that its outlook is underpinned by a healthy new business pipeline.


At Sopheon (-25.0%), however, the revenue recognition implications of SaaS were a factor in revenues for the first half of 2019 falling short of expectations. While SaaS should lead to higher recurring revenues for future periods (as subscription revenues are spread over multiple years), the short term impact is lower immediate revenue when compared with front-loaded licence sales. Sopheon’s sales are on track for US$13.7m in the first half of 2019 compared to US$15.9m last year while earnings before interest, tax, depreciation and amortisation are also expected to fall to around US$2m from US$4.1m. The failure to convert some sales pipeline opportunities into signed deals also contributed to the revenue shortfall. Sopheon expects these delayed  deals to complete in the second half of the year.


Having disappointed on sales in 2018, investors took encouragement from an interim trading update from Quixant (+32.6%). The company designs and manufactures highly engineered technology platforms for the global slot machine and pay to play gaming industry. Revenue and profit before tax in the first half of this year were in line with management expectations. Quixant also provided some reassurance on expectations for the remainder of the year, commenting that activity levels from some major customers are improving as the company heads into its second half and that it has continued to convert new business opportunities to orders.


Shares in vehicle tracking system specialist Quartix (+15.0%) rose on comments within interim results that it is “confident of at least meeting expectations for revenue, profit and cashflow for the year." Quartix’s core fleet business continues to display strong growth: the subscription base grew 12% to over 138,000 vehicles and the annual value of subscriptions rose £1.2m to £20m. Group financials (revenue down 3% to £12.5m) somewhat obscure the picture, as the business is gradually transitioning away from supplying telematics to the insurance industry (which are more price competitive, and result in only a one-off sale), while investing heavily in growing the fleet business both in the UK and internationally, leading to higher quality revenues overall.


A brief first quarter update from James Cropper (+18.2%) outlined 4% year-on-year sales growth. This is being driven by price increases and a focus on higher value niche markets in its Paper division, alongside continuing momentum within the Technical Fibre Products division. The latter, which accounts for the majority of group profits, utilises James Cropper’s expertise in non-woven materials to create high-performance, technical ‘veils’ which are sold into industries such as defence, aviation and automotive.


Cloud computing and connectivity provider Beeks Financial Cloud Group (+12.3%) announced contracts with two unnamed ‘Tier 1’ financial services clients. It will provide managed connectivity to support the fixed income platform of a global investment management company in a contract worth around £0.5m over two years. It has also contracted with a large bank to provide proof of concept for a fixed income solution. The proof of concept is revenue generating but is expected to lead to more extensive deployment at the bank.


Results for the year to 31 March from Synnovia (-11.7%) showed that profits had been held back by increased investment costs. The company produces various plastic industrial components and consumables such as films, sacks and ball bearings. Investments amounted to £6.1m for the year – more than was anticipated. The costs mainly related to expanded production capacity at its films and bearings divisions. A summary of various Brexit contingencies suggests that a no-deal scenario would disrupt its raw materials supplies and have a negative impact on UK sales, but that this could be offset by an export boost if sterling fell (50% of sales are outside of the UK).


Positive contributors included:

Quixant (+32.6%), Instem (+19.3%), James Cropper (+18.2%), Quartix (+15.0%) and Beeks Financial Cloud Group (+12.3%).


Negative contributors included:

Jaywing (-38.3%), Sopheon (-25.0%), K3 Capital Group (-19.5%), Synnovia (-11.7%) and Oxford Metrics (-8.9%).


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 08.08.2019, 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.

Monday, August 12, 2019, 5:39 PM