Liontrust UK Micro Cap Fund

October 2020 review

The Liontrust UK Micro Cap Fund returned -1.8%* in October. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned 1.9% and -1.1% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 0.4%.


The Covid-19 infection rate continued to accelerate in the UK and elsewhere, dampening investor sentiment. Even more worryingly, hospitalisation rates also climbed higher, resulting in tighter social restrictions. In parts of Europe, including France and Germany, lockdowns were reinstated and the UK followed suit on the final day in October.           


Investors also had one eye on the US, where hopes of a stimulus announcement before the presidential election fizzled out. Talks have been ongoing for months and, as the pandemic continues to erode economic activity, a new fiscal package is a high priority to support the US economy through the crisis.


Within the UK stockmarket, large caps underperformed, with the FTSE 100 falling 4.8% compared to the FTSE 250’s marginal decline of 0.5% and the FTSE Small Cap (ex IT)’s 1.9% gain.


There were a number of trading updates from the Fund’s technology companies, largely showing robust trading through the pandemic. Customer engagement software group Netcall (+30%) said it continued to see strong demand for its products despite the disruption from Covid-19. In its full year results to 30 June 2020, the company recorded a 10% increase in revenue and 29% increase in adjusted earnings before interest, taxes, depreciation and amortisation. Management stated that trading during the first three months of the current financial year is strong and ahead of the previous year. 


Vianet Group (-21%) is a provider of data and analysis to pubs and vending machine operators via its connected ‘internet-of-things’ (IoT) platform and its shares were hit following new restrictions announced in the UK for the hospitality sector. The company’s shares recovered some lost ground after it noted that trading in the first half of its financial year had been ahead of management’s forecasts, with improvements in both operating profit and cash.


Attraqt Group (+19%), an online shopping software company, saw revenue improve by 13% in the first half of 2020, and its pre-tax loss narrow to £1.3m from £1.9m in the previous year. The pandemic restricted new business wins during the period, but the company said momentum has improved in the third quarter, with bookings in excess of £1.1m. Attraqt also announced the purchase of Aleph Search, an AI-powered search technology company, which it said will add a “Google-like” search experience for its eCommerce customers. To help fund the deal, the company raised £4m through an equity placing, which the Fund participated in.


Medical device group Inspiration Healthcare Group (+27%) expects to materially exceed market expectations for its full financial year after posting impressive results for the six months to 31 July 2020. The company recorded a 77% increase in total revenue, while adjusted operating profit nearly quadrupled to £2.1m. The group benefitted from capital equipment orders from the NHS being brought forward and some pent-up demand in its order book from the previous financial year. It also saw £2.9m worth of one-off orders from the NHS for ventilators and ancillary products to support the pandemic response. The excellent interim performance allowed the group to commence a progressive dividend policy.


It was also the first set of results since the integration of neonatal medical equipment business SLE. SLE is a transformative acquisition which was part-funded by a £17m over-subscribed placing earlier this year – a fund-raise equivalent to well over half the company’s market capitalisation at the time.


Molecular diagnostics group Yourgene (-20%) saw trading deteriorate in its core international markets which were heavily impacted by Covid-19 restrictions. The 25% decline in international revenue was offset by 40% and 80% respective rises in UK and European revenue, meaning group revenue rose 5% in the six months to 30 September. The full year outlook was reassuring, with core laboratory customers returning to normal patterns. The company has also increased its Covid-19 testing capacity to 10,000 tests a month, which is expected to result in £1m of monthly revenue.


Nucleus Financial Group’s (-12%) shares declined despite seeing a 2.6% year-on-year increase in assets under management (AuM) to £16.1bn in the third quarter. Net inflows were down 26% as a consequence of the ongoing pandemic but were up 45% year-to-date compared with the same period in 2019.


Mind Gym (-12%) was another faller after its interim trading update for the six months to 30 September highlighted the severity of the pandemic’s impact on the business. Revenue is expected to be 40% below the previous year and, despite cost cutting measures, the group anticipates an adjusted pre-tax loss of between £1.0m-£1.5m. More positively, trading in October has been markedly better. Revenue has increased materially and the reduction in costs meant the group has been operating profitably. The corporate training company therefore expects to see significant growth in both revenue and profit in the second half of the financial year compared to the first.


The Fund made two sales during October: Sumo Group and Pennant International Group. Sumo Group was sold after its market cap exceeded the £275m level at which this Fund begins a managed exit from positions. Pennant exited after management equity ownership fell below the 3% level required by the Economic Advantage investment process to hold a small cap company.


Two new holdings were also added: Eagle Eye Solutions Group and Fonix Mobile. Eagle Eye provides a B2B software platform which allows large retail clients to manage customer loyalty schemes, offers and promotions. We believe it possesses all three of the key Economic Advantage intangible assets under our investment process: intellectual property in the software itself, a strong data-driven distribution network because the platform sits at the very heart of the customer’s marketing technology stack, and a high percentage of recurring revenues from SaaS licence fees and ongoing high-volume, low-value transaction fees.


Fonix Mobile is a carrier and SMS billing company focused on niche vertical markets such as media and broadcast, gaming and charities. The company’s competitive advantage stems from its proprietary technology, which is able to process, analyse and efficiently route high-frequency transactions very quickly, and also a distribution advantage thanks to a network of direct connections to all the key mobile operators in the UK.


Positive contributors included:

Netcall (+30%), EKF Diagnostics (+27%), Inspiration Healthcare Group (+27%), Attraqt Group (+19%) and Sumo Group (+14%).


Negative contributors included:

Vianet Group (-21%), Yourgene Health (-20%), Belvoir Group (-14%), Mind Gym (-12%) and Nucleus Financial Group (-12%).

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 31.10.20, 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.
Friday, November 13, 2020, 3:46 PM