Liontrust UK Micro Cap Fund

September 2020 review

The Liontrust UK Micro Cap Fund returned -2.4%* in September. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned -3.3% and -0.4% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was -1.2%.


While the first half of 2020 included a spike in volatility as the stockmarket suffered a correction before staging a partial recovery, the third quarter saw much more subdued conditions as investors became used to monitoring the path of the pandemic and assessing the economic costs as well as the various policy responses.


In September, there was gathering evidence of an uptick in Covid-19 infections towards a second wave in developed economies, while the US Federal Reserve gave further details of its latest ultra-dovish move: to adopt a flexible approach to inflation that allows it to run above 2% for some time without raising interest rates. But there was nothing to shift the prevailing mood decidedly into more bullish or fearful territory.


A number of the Funds’ holdings provided investor updates in September, many of them commenting on trading in the period to 30 June. Sumo Group (+24%) was one of these. It outlined an “extremely positive” video gaming market backdrop, due to increased demand during Covid-19 lockdowns. The company, which provides industry support services from pre-production through to marketing, grew revenue by 27% to £26m in the first half of 2020 and nudged up full-year guidance by predicting results will be “at least in line” with consensus forecasts. It also announced the acquisition of Pipeworks for a sizeable initial cash-and-shares consideration of US$60m, with further contingent ‘earn-out’ payments of up to US$40m. The acquisition gives Sumo a footprint in the key US West Coast, brings in intellectual property on owned games such as Prominence Poker, and opens up a new avenue in the use of game science and technology in non-gaming markets. 


Frenkel Topping (+23%) also announced a potential acquisition. We’ve written before about a number of the Fund’s stocks that have raised money during the pandemic to fund expansion (as opposed to shoring up liquidity), and this deal falls firmly in that camp. The investment manager and specialist financial adviser sees an opportunity to consolidate the market for services to personal injury and clinical negligence victims. In July, it raised £13m via a placing in support of this goal, and then announced its first acquisition: Forth Associates Limited. In September, Frenkel Topping then confirmed it had approached NAHL with a view to a takeover, having already acquired 6% of its shares.


Despite Covid-19 leading to a tough operating backdrop for energy procurement consultant Inspired Energy (-13%), it is also on the lookout for acquisitions as it seeks to consolidate the market. In July, it raised £35m through the issue of new shares and an open offer and acquired Ignite Energy. September’s interims show a 5% organic fall in the Corporate division’s sales and an 18% decline in overall profit before tax, a direct result of drops in energy consumption across industrial and corporate clients during the pandemic. The company remains upbeat regarding its longer-term growth prospects and describes its acquisition pipeline as very strong.


Crimson Tide (+24%) was another to update on the first half of the year. It owns a cloud-based mobile workflow solution called mpro5, for which it has had particular success recently selling into the supermarket and rail sectors. This client profile has helped it avoid any negative Covid-19 impact, as highlighted in its June AGM update. Interim results released in September revealed 40% growth in turnover to £1.77m and a 72% rise in EBITDA (earnings before interest, tax, depreciation and amortisation). The company struck a bullish tone in its outlook comment, noting that the main constriction on its ability to exploit the market opportunity is the company’s small current size.


Trends in the first half of 2020 were less positive at Pebble Group (-26%). Revenues fell almost 25% in the first half of 2020 as its bespoke promotional material business, Brand Addition, suffered during the pandemic. The company commented that order intake for Brand Addition is starting to recover, now running at about 60% of prior year levels. Pebble’s @ease procurement software for the promotions industry – operated by its facilisgroup business unit – experienced a better six months, generating revenue growth, albeit from a much lower base. Pebble Group also experienced a £7.2m adjusted operating cash outflow over the six months (compared with £1.2m adjusted operating profit) due to changes in working capital. However, it reiterated its confidence in its balance sheet strength and commented that a lot of the working capital accumulation related to a £4m trade debt that has been paid down to the agreed schedule during July and August.


Molecular diagnostics group Yourgene Health (+19%) had a busy month of corporate releases in September, its first full month in the Fund following its addition in August. Announcements included an upbeat AGM statement, the formation of a new Genomic Services division, the launch of a new non-invasive prenatal test and the appointment of a US distributor for its in-vitro polymerase chain reaction tests.


Avingtrans (+16%) shares moved higher at the end of the month as it released full-year results and announced a new contract worth £36m. The deal, signed by its Booth Industries subsidiary, covers the supply of cross passage doors for the HS2 rail link, with delivery between 2025 and 2030. Avingtrans designs, manufactures and supplies critical components and services to the energy, medical and industrial sectors. In the year to 31 May, the company recorded a 10% revenue increase to £114m, boosted by acquisitions that included Booth Industries. Organic revenue growth was subdued by the impact of Covid-19 but the company commented that trading conditions have been gradually normalising over the last three months.


Concurrent Technologies (-18%) saw a slight year-on-year dip in sales but attributes this to a large non-recurring order last year, rather than any negative Covid-19 impact. It has, however, found that lockdown restrictions on working conditions have impacted its engineering division’s productivity, resulting in a higher amount of R&D costs being expensed rather than capitalised. So while revenues fell only 3.5%, operating profit dropped by 23%. In more positive news, strong order intake pushed its order book to record levels, and the company reconfirmed its confidence in meeting the market’s full-year expectations. Concurrent Technologies manufacturers computer components that are embedded in products for industries such as aerospace & defence, healthcare and telecoms.


Eyewear designer and manufacturer Inspecs Group (-15%) has seen its operations heavily affected by Covid-19, with revenues dropping by almost half to US$16.7m and EBITDA tumbling to US$0.7m from US$6.6m last year. The company is more optimistic regarding the second half of the year, forecasting a steady improvement in business activity, and it recently underlined this confidence with the £2.4m acquisition of lens-maker Norville.


The Fund sold its holding in IMImobile. Shares in the company have generated a good return and its market capitalisation has consequently grown to well over the £275m level at which this Fund begins a managed exit from positions.


Positive contributors included:

Crimson Tide (+24%), Sumo Group (+24%), Frenkel Topping (+23%), Yourgene Health (+19%) and Avingtrans (+16%).


Negative contributors included:

Pebble Group (-26%), Concurrent Technologies (-18%), D4t4 Solutions (-15%), Inspecs Group (-15%) and Inspired Energy (-13%).


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 30.09.20, 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, October 9, 2020, 2:48 PM