Liontrust UK Smaller Companies Fund

August 2020 review

The Liontrust UK Smaller Companies Fund returned 6.3%* in August. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned 4.2% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 5.5%.


ONS data statistically confirmed what was already common knowledge: the UK has suffered its largest recession on record. Q2’s 20% contraction added to the 2.2% decline in Q1 to meet the technical parameters of a recession, i.e. two or more consecutive quarters of negative growth. The Bank of England is now forecasting the economy to shrink by 9.5% in 2020, less than its prior forecast of a 14% contraction. Counteracting this forecast of a shallower fall is a prediction of a slower recovery in 2021 and 2022 – of 9% and 3.5% respectively rather than 15% and 3%. However, economic forecasting is notoriously tricky, let alone under such unique circumstances, and the Bank’s underlying assumptions of no second wave of coronavirus and a smooth transition to an EU trade agreement by the start of 2021 shows how hard it is to attach much value to such estimates.


After July’s dip, the UK stockmarket resumed its recovery from the coronavirus crisis sell-off. In the US, the recovery seems complete for the S&P 500 and Nasdaq Composite indices, with both touching new all-time highs during the month. 


Within the portfolio, companies releasing reports in August included instances both of those that have enjoyed remarkably resilient trading and those whose businesses are painfully exposed to the impact of Covid-19.


In the former group is digital marketing specialist Next Fifteen Communications (+27%), which commented that trading in the first half of the year was “well ahead” of the expectations it outlined in a March update, meaning that full-year results are on track to materially exceed market forecasts. While revenues fell 6% on an organic basis, they were up 6.5% to £126m overall, resulting in a 16% increase in adjusted operating profit to over £20m.


Final results from Clipper Logistics (+25%) also confirmed the extent to which its logistics, e-fulfilment and returns management services have been insulated from Covid-19 disruption. Although many of its retail clients have been heavily affected by restrictions imposed during lockdown, Clipper Logistics is exposed primarily to online consumption and has therefore benefitted from the shift in spending from the high street to online. In the year to 30 April 2020, revenues rose by 8.8% to over £500m while operating profit increased 19% to £24m.  In a bullish outlook statement, management predicted that next year’s results will “comfortably” exceed market forecasts after the first few months saw exceptionally high demand for e-fulfilment and returns management services.


The Fund’s weakest share price return in August came from one of its smallest position sizes: Pennant International Group (-18%). In contrast to Clipper Logistics, Pennant has found itself in a far tougher operating environment as a result of social and economic measures introduced to combat the pandemic. It again warned that these restrictions are having a negative impact on its business, impeding its ability to meet key customer personnel to deliver training programmes or to install training aids in certain locations. The company provides technology-based training solutions – such as operational simulators – for sectors such as defence or regulated industries. Pennant now expects revenue in the first half of 2020 to fall to £6.3m with an EBITA (earning before interest, tax and amortisation) loss. While Pennant forecasts point to a recovery in the second half, such that it can target £14m revenue and an EBITA profit, it expects its operations to remain substantially constrained by Covid-19 restrictions.


In a Q1 update, Ideagen (+26%) outlined trading which is in line with market expectations. Customer retention has been consistent with normal business conditions. Financial services, pharmaceuticals and the US federal sector have performed particularly well, while Ideagen is also seeing increased business activity and pipeline within manufacturing. It also announced the £16m acquisition of Qualsys, whose cloud-based software will be integrated to the quality management component of Ideagen’s quality, health, safety and environment (QHSE) cloud platform.


Iron casting and machinery group Castings (-4.4%) issued an AGM statement. Around 70% of its sales are to heavy truck manufacturers; due to economic shutdown of the industry, Castings’ April and May output was only around 20% of prior levels. Truck sector demand has since steadily increased to around 60% of normal levels and is on schedule to soon reach 85%. However, the company cautions that there is no guarantee this scheduled work materialises and also highlights the difficulty in differentiating whether current demand is to satisfy pre-lockdown truck orders or represents true underlying post-lockdown demand.


Pharmaceutical marketing consultant Cello Health exited the Fund upon the completion of a takeover by private equity group Arsenal Capital Partners. The deal – which was announced in July – valued Cello at £175m, with investors receiving 161p per share, a 40% premium to its share price prior to the announcement and also modestly above the February peak which represented the highest share price for a decade.


A new portfolio position was added in EKF Diagnostics, an existing holding in the UK Micro Cap Fund. The company provides ‘point of care’ diagnostics such as blood analysers and tests for conditions such as diabetes and anaemia.


Positive contributors included:

Next Fifteen Communications (+27%), Ideagen (+26%), Clipper Logistics (+25%), YouGov (+25%) and Dotdigital Group (+24%).


Negative contributors included:

Pennant International Group (-18%), IG Design Group (-13%), Brooks Macdonald (-6.1%), Castings (-4.4%) and Trifast (-4.2%).


Discrete years' performance** (%), to previous quarter-end:








Liontrust UK Smaller Companies I Inc






FTSE Small Cap ex ITs






IA UK Smaller Companies













*Source: Financial Express, as at 31.08.20, 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 30.06.20, total return (net of fees and income reinvested), bid-to-bid, primary class.


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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.

Thursday, September 17, 2020, 3:18 PM