Liontrust UK Micro Cap Fund

November 2020 review

The Liontrust UK Micro Cap Fund returned 11.6%* in November. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned 20.2% and 10.9% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 12.5%.


Having nursed heavy year-to-date losses since the Covid-19 pandemic sparked a steep drop in February and March, the UK stockmarket bounced back in November. The rally in global equity markets was catalysed by positive Covid-19 vaccine news. Early in the month, trial results for a Pfizer/BioNTech vaccine showed over 90% efficacy. This was followed by positive trial results for vaccines being developed by both Moderna and AstraZeneca/University of Oxford.


As investors looked with optimism to a return to social and economic normality in 2021, the upward adjustment in share prices was sharp; the FTSE 100 recorded its largest monthly gain since 1989. All major market capitalisation segments of the UK market registered double-digit percentage gains, but the risk-on mood had the biggest impact on small and micro cap stocks: the FTSE Small Cap ex-IT index rose 20%.


There was a lot of newsflow from the Fund’s companies in November. However, while a number of the portfolio’s largest risers issued statements, the most important factor in propelling share prices higher was the surge in investor sentiment. In this respect, the Fund participated in the rally, but not to the same degree as the small cap average. The Fund has outperformed during the tough market conditions so far this year but gave up some of this relative strength in November.


This return profile is entirely consistent with the manner in which the Fund is managed. Funds run under the Economic Advantage process have a tendency to generate good relative performance during market sell-offs or steady market conditions, which can be partially offset by a lag during short, sharp, sentiment-driven rallies. We believe this may be due to the investment process’s focus on dependable businesses with high barriers to competition and strong cash flow returns on capital, which we think can prove to be more defensive in times of market stress and reliably deliver on expectations in more normalised market conditions. We believe that – on average – the degree of downside protection afforded by the Fund’s portfolio of companies exceeds the lag during rallies, enabling us to target outperformance over the long term.


Over 30 of the Fund’s holdings – around half the portfolio – registered double-digit percentage gains, with 15 of those enjoying 20%+ returns.


One of these was Inspecs (+49%). During November, it announced the £85m acquisition of Eschenbach, a market-leading eyewear manufacturer in Germany that also owns the brand Tura, which is prominent in the US market. A share placing of £64m was conducted to part-finance the deal and the Fund participated in the capital-raise. 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.


A trading update from Pebble Group (+50%) provided a reassuring update on guidance by saying it is firmly on track to deliver 2020 results in-line with market expectations. Its bespoke promotional material business, Brand Addition, continues to recover from a sharp drop-off in activity, with activity levels now up to over 70% of the 2019 comparable. Its software business, Facilisgroup, has continued to perform strongly by adding new customers and maintaining a 100% retention rate.


Other notable risers to issue trading updates included Accesso Technology (+36%), Gateley Holdings (+29%), and Oxford Metrics (+21%)


Accesso Technology provides queuing and ticketing technology to the leisure and entertainment industries and has been heavily affected by Covid-19 lockdown measures. However, it has seen increased activity in late summer and early autumn as customers reopen venues, albeit with reduced capacity. Due to this faster-than-anticipated reopening, Accesso now believes 2020 revenues will be comfortably ahead of its prior guidance of US$48m.


Commercial law firm Gateley Holdings generated revenues of at least £50m in the six months to 31 October, only slightly down on the prior year’s £51.8m, while swift cost-cutting measures allowed it to record a rise in pre-tax profit to £7.0m, up from £6.6m.


Oxford Metrics announced that its Vicon business experienced a pick-up in the second half of its financial year to 30 September, while demand for its Yotta division accelerated in the fourth quarter having been muted earlier in the year. The acceleration stems from local authorities looking to manage assets remotely during lockdown.


Staying with trading updates, shares in EKF Diagnostics (-12%) fell despite it issuing an upgrade to full-year guidance. However, the company had already upgraded financial guidance several times this year and, with the shares having already quadrupled from their March lows, investors paused for breath. EKF Diagnostics has seen rocketing demand during the pandemic for the Primestore MTM device that it contract manufactures. This is due to its ability to safely store and transport contaminated blood samples for testing by deactivating the virus or pathogen within the sample.


Another group of stocks released half-year or full-year results.


As flagged in an October trading update, revenues at training provider Mind Gym (+39%) have been hard hit by Covid-19 restrictions, falling 40% in the six months to 30 September. It made an adjusted pre-tax loss of £1.3m. One bright spot is the growth in delivery of virtual services, with digital revenues rising 43% to account for around two-thirds of the reduced group total. Trends are improving, with October’s revenue up to 85% of the prior year comparable; Mind Gym now forecasts a 20% - 30% revenue decline for the full year but a return to profitability in the second half.


In an upbeat interim results announcement, construction materials business Brickability (+36%) referred to a V-shaped recovery. Although revenues fell 25% year-on-year to £75m in the six months to 30 September, this reflects a sharp fall in April and May; since June, Brickability has seen earnings levels around the same as the 2019 comparable. James Cropper (+25%) and Cerillion (+22%) were among the other largest gainers to release results during the month – for the interim and full-year period respectively.


Among the portfolio’s detractors, Adept Technology (-14%) lost some ground after the release of interims which struck a cautious tone. Revenues in the six months to 30 September fell 8% to £29m while underlying EBITDA fell 15% to £5.2m. The company commented that, with uncertainty regarding the severity of the second wave of Covid-19, it is unable to reinstate financial guidance for the full-year.


Positive contributors included:

K3 Capital Group (+52%), Pebble Group (+50%), Inspecs (+49%), Simplybiz Group (+41%) and Mind Gym (+39%).


Negative contributors included:

Adept Technology (-14%), EKF Diagnostics (-12%), Frenkel Topping (-9.5%), Surgical Innovations Group (-6.5%) and Instem (-5.4%).


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 30.11.20, 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 30.09.20, 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.

Wednesday, December 16, 2020, 4:16 PM