Liontrust UK Micro Cap Fund

October 2018 review

The Liontrust UK Micro Cap Fund returned -8.7%* in October. The Fund does not have a formal benchmark, but for reference, the FTSE Small Cap (excluding investment trusts) Index returned -7.1%, the FTSE AIM All-Share Index returned -11.1% and the average return of funds in the IA UK Smaller Companies sector was -10.0%.


As a provider of online conveyancing platforms ULS Technology (-28.4%) is exposed to a slowing UK housing market. An interim trading update showed the company was able to deliver 3% revenue growth to £15.8m despite a 4% contraction in the volume of housing transactions in the UK. With the market having slowed further in the autumn, revenue growth in the second half of the company’s year may prove too optimistic. ULS Technology believes this effect is likely to be temporary in nature, as it stems largely from Brexit uncertainty. Secular trends for the company still look positive; it has increased its market share, signed new ‘introducers’ and has a pipeline of prospects it describe as extensive.


The scale of share price weakness at ULS – which compares with a fairly small moderation of growth expectations – is indicative of an environment of risk aversion which prevailed in October. Mounting concerns over factors such as trade tariffs and monetary tightening, which have been part of the investment landscape for some time, culminated in a sharp drop in equity markets which was amplified at the smaller cap end of the market. The FTSE 100 Index’s monthly loss of 4.9% was not inconsiderable, but it was less severe than the 7.1% drop in the FTSE Small-Cap ex-IT Index and less than half the 11.1% loss for the FTSE AIM All-Share Index. AIM stocks are widely held by this Fund and others within the IA sector; the average return from the IA UK Smaller Companies sector was -10.0%.


This risk-off sentiment dominated company fundamentals. 56 of the Fund’s 63 stocks ended the month in negative territory, 27 of them suffering double-digit percentage falls. There was a clear detachment of valuations from fundamentals in the month as top-down factors took hold. After ULS, the next biggest Fund detractor was Tracsis (-22.6%). Its share price fell by almost a quarter even though the only updates it gave the market were its intention to release full year results on 8 November and the signing of a two year renewal and extension deal worth more than £2m for data hosting services and software licences with a major rail client.


The only announcement from Lighthouse Group (-20.0%) was news that it had won a new three year contract to provide financial advice to the 450,000-strong National Education Union. Acquisitive testing specialist Marlowe (-22.2%) announced two more small bolt-on deals.


Bouts of soft investor sentiment are by no means unusual. While the managers of the Fund cannot predict with any confidence how long such an episode may persist, they do believe that the long-term fundamental prospects for the portfolio of holdings are no less attractive than in September. Periods of indiscriminate market weakness should be viewed as an opportunity to identify stocks whose long-term fundamentals are undervalued. Indeed, the Fund took to opportunity to add to positions in just under half its holdings at lower prices than had been prevailing a month earlier.


The Fund was also able to add a new position in Beeks Financial Cloud Group (+5.3%) thanks to a 40% retreat from recent highs in September and then benefit from a small recovery between purchase and month end. The group rents space on its servers to financial institutions, allowing them to trade predominantly foreign exchange at high speed (what’s known as “low latency Infrastructure-As-A-Service”). It has high recurring income and is benefitting from the growth of automated trading and cloud computing.


Inspiration Healthcare (+5.2%) was another positive contributor after interim results revealed that first half revenues grew 3% year-on-year to £7.4m, despite delays in receiving product approvals leading to a drop (from £3.5m to £3.2m) in its Own Brand Product revenues. The company is a specialist in medical devices for use in critical care and operating theatres. It commented that the last 18 months have been characterised by industry-wide delays in regulatory approvals. [Surgical Innovations – another Fund holding – had also experienced these delays earlier in 2018.] Happily, good news came in June when it belatedly received approval for its new Patient Warming System Product and recorded the first sales prior to the interim accounting date of 31 July 2018. Given the typical second-half weighting of its activity levels, the company is confident that it can now meet full year targets despite the delays at the start of the year. Inspiration Healthcare also holds a 10% stake in Neuroprotexeon Limited, which – as of June – is seeking to complete an initial public offering on AIM before the end of 2018.


Sopheon (+4.9%), the provider of enterprise innovation management software, issued a Q3 trading update raising full year guidance. A number of transactions, including two large contracts signed in the final days of the quarter, lead to a record performance in Q3 – traditionally its quietest period. Revenue visibility for 2018 now exceeds US$30m (which compares with US$28.5 achieved in 2017) with further pipeline potential in Q4. As a result, it expects to beat prior market consensus expectations for 2018.


D4t4 Solutions (+3.6%) gave a slightly softer indication of an earnings beat, commenting that interim adjusted profit is expected to be “comfortably in line with management expectations”. In the six months to 30 September 2018 revenue also tripled year-on-year to £14.0m as trading returned to “a more normal” cycle following the client spending patterns experienced year. D4t4 Solutions provides cloud data platform services.


Proactis (+2.1%) issued final results revealed a doubling in revenues over the year to 31 July 2018 – boosted by last year’s acquisition of Perfect Commerce. Adjusted profit before tax rose from £4.2m to £12.0m. The company commented on a strong new business performance – 64 new relationships were established, up 19% year-on-year – and an improved business retention record. This contributed to a 75% increase in total contract value signed of £12.1m. The integration of Perfect Commerce is complete, with over £5m in net annualised cost savings realised. Next year’s growth is also likely to be driven by acquisitions as it integrates the August 2018 purchase of Esize.


Finally a residual Fund position in IDE Group was sold as it continued to be unable to convert its theoretical competitive advantage (recurring income) into any meaningful cash generation – leading eventually to high levels of debt and a rescue fund raise in August (in which the Fund did not participate). The Fund began to exit its position earlier this year, and was able to complete the sale during October.


Positive contributors included:

Beeks Financial Cloud Group (+5.3%), Inspiration Healthcare (+5.2%), Sopheon (+4.9%), D4t4 Solutions (+3.6%) and Proactis Holdings (+2.1%).


Negative contributors included:

ULS Technology (-28.4%), Tracsis (-22.6%), Marlowe (-22.2%), SimplyBiz Group (-20.9%) and Lighthouse Group (-20.0%)


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 31.10.2018, 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 30.09.2018, 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. 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, November 14, 2018, 11:54 AM