Liontrust UK Micro Cap Fund

March 2018 review

The Liontrust UK Micro Cap Fund returned 1.8%* in March. The Fund does not have a formal benchmark, but for reference, the FTSE Small Cap (excluding investment trusts) Index returned -1.9%, the FTSE AIM All-Share Index returned -2.2% and the average return of funds in the IA UK Smaller Companies sector was -1.6%.


Equity markets extended their losses in March, with the prospect of a trade war led by the US and China taking up the mantle of investors’ primary focus. Donald Trump announced hefty tariffs on steel and aluminium imports, before outlining a range of tariffs targeted at imports from China. Equity investors globally fretted over the prospect of retaliatory measures and the risk of a downward spiral into a damaging bout of protectionism. As has been widely commented on, the first three months of 2018 represented the weakest quarter for global equities since Q3 2015.


Despite this backdrop, the Fund was able to make a positive monthly return. The portfolio’s biggest gain came from one of its new additions – GRC International (+121%), which was admitted to AIM on 5 March. Its shares experienced an exceptionally strong debut, finishing the first day of trading at 87.5p, up from a 70p placing price at which it had raised £5m. The shares then rallied through the month to close at 154.7p.  GRC provides training and consultancy services which help customers meet IT governance, risk management and compliance requirements. Demand for these services has been boosted by companies seeking to comply with the EU’s General Data Protection Regulation (GDPR) rules, which come into force at the end of May. The company’s Chairman is Andrew Brode, the entrepreneur behind RWS Holdings and Learning Technologies, two of the most notable success stories to date for the AIM market (and the Economic Advantage funds).


Other portfolio additions in March comprise Simplybiz, Lighthouse Group, EKF Diagnostics and World Careers Network. Simplybiz provides a range of services to financial advisers and intermediaries; the Fund participated in Simplybiz’s initial public offering in March. Lighthouse Group partners with ‘affinity groups’, such as trade unions, becoming the preferred provider of financial advice to their members. EKF Diagnostics provides ‘point of care’ diagnostics such as blood analysers and consumables providing tests for conditions such as diabetes and anaemia. World Careers Network is a provider of SaaS (software-as-a-service) recruitment software.


The Fund sold out of Ergomed as analysis of its cash flow return on invested capital raised question marks over the company’s ability to convert its theoretical Economic Advantage into a practical ‘financial advantage’.


Outside of GRC’s sharp initial rally, the biggest riser in the portfolio was private company mergers and acquisitions specialist K3 Capital (+47.0%). It released a trading update lifting its guidance for the year to 31 May 2018. Due partly to a significant private equity transaction completed by its corporate finance division, it now expects to achieve revenue of £16m and EBITDA of £7m – both ahead of consensus expectations.


Instem (+39.0%) was another notable gainer. Ahead of the scheduled release of final results it announced that “one of the world’s largest chemical products companies” would be adopting its Instem Cloud SaaS. Instem is targeting an increased level of SaaS sales as their recurring nature improves revenue visibility and lifts operating margins. Recurring revenues in excess of 70% constitute one of the three core intangible assets of the process. The Fund owns Instem for its current possession of the other two core intangibles – intellectual property and a strong distribution network. Full year results released later in the month showed a 19% increase in revenues to £21.7m with adjusted profit before tax more than doubling to £1.8m. Outlook comments were bullish, referring to the SaaS contract and a large SEND (Standard for the Exchange of Nonclinical Data) outsourced services contract win as underpinning a strong start to 2018.


Among the detractors in March there is a familiar name in that of IDE Group (-36.2%), which was one of the Fund’s weaker stocks last month (on a trademark infringement dispute). Investors marked the shares down heavily in response to the announcement of the sudden departure of its CEO. The cloud and IT managed services provider stated that CEO Andy Ross had resigned as part of a review of operations related to the cost reduction programme discussed in its February trading statement. IDE’s CFO is stepping up to take on operational responsibility.


Sprue Aegis (-26.6%) shares also fell following an unscheduled update. It revealed details of a dispute with BRK Brands, one of its suppliers of smoke detectors and other home safety products. BRK had previously given 12 months’ notice that it would be terminating its existing distribution agreement upon expiry of the three-year contract on 31 March 2018. However, it has now also alleged that Sprue Aegis has been in breach of contract, a matter upon which the company is taking legal advice. Sprue has therefore postponed the release of its final results, originally scheduled for late March.


An upbeat trading update from Focusrite (+30.5%) drove a spike in its share price, meaning that it has now more than doubled over the last year. Focusrite outlined that revenue for the six months to 28 February 2018 is expected to be over £38m, compared with £32m a year earlier. The audio hardware and software specialist cited particularly strong sales of Scarlett and Launchpad ranges over the Christmas period.


By contrast, a trading statement from Plastics Capital (-11.0%) warned that results for the year ending 31 March 2018 would be “marginally” below consensus expectations in terms of sales and EBITDA. While the company describes sales growth for its films division as “exceptional”, sales growth for its industrial division has been weaker than it expected, and the latter division’s higher operational gearing resulted in a proportionately greater impact on profit.


In other news from portfolio holdings, a selection released interim or full-year results.


Bioventix (+16.1%) develops antibodies for use in clinical diagnostics. Interim results released in March showed an unexpected boost from a back-dated royalty on one of these drugs. An internal audit uncovered a royalty £0.77m royalty stream due for the period from July 2014 to June 2017.  This one-off helped push profit before tax up by a third year-on-year to £3.4m. The company’s underlying performance was solid, with revenues rising 13%, helped by good sales of its vitamin D antibodies.


Medica Group (-20.9%) released final results which disappointed the market. In 2017 the provider of outsourced teleradiology services registered 18% growth in revenue to £33.7m. This was driven by 24% and 19% increases for its NightHawk’ and ‘Routine Cross Sectional’ services respectively, reflecting both new client wins and an increase in volumes of CT and MRI scans at existing customers. The company noted a strong start to 2018 for sales and recruitment of radiologists, with the total now standing at 318. However, despite these strong headline growth numbers, shares in the company have been soft since a January trading update flagged some capacity constraints and Q4 demand which was “modestly below expectations”.


Surgical Innovations’ (-12.4%) final results illustrated the transformative impact of the £9.4m August 2017 acquisition of Elemental Healthcare: sales jumped by 44% to £8.75m. On an underlying, organic basis, sales growth was 8%. With gross margins rising substantially from 33.8% to 42.5%, adjusted profit before tax doubled to £1.1m. The company commented that like-for-like revenue growth so far in 2018 has been affected by constraints at NHS hospitals, although there are now signs of a return to more normal activity levels. Notwithstanding this, the tick down in the shares looks to be as much a partial retracement of last month’s gains (on news of a significant contract renewal) as it is disappointment with the outlook.


Positive contributors included:

GRC International Group (+121%), K3 Capital Group (+47.0%), Instem (+39.0%), Focusrite (+30.5%) and Bioventix (+16.1%).


Negative contributors included:

IDE Group (-36.2%), Sprue Aegis (-26.6%), Medica Group (-20.9%), Surgical Innovations Group (-12.4%) and Plastics Capital (-11.0%).



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 31.03.2018, 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 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. 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.
Monday, April 16, 2018, 2:11 PM