Liontrust UK Smaller Companies Fund

December 2017 review

The Liontrust UK Smaller Companies Fund returned 1.9%* in December, compared with the 2.8% return from the FTSE Small Cap (excluding investment trusts) Index.

 

Although the Fund experienced more newsflow on the detractors board in December, it was still a positive month overall as the Fund participated in UK equity market strength but lagged the FTSE Small-Cap Index. Global equity markets rallied into year-end, many of them hitting new all-time highs, perhaps boosted by the Trump’s much-vaunted tax reform bill finally being passed.

 

In the UK, market trends were affected by a retracement in sterling as EU Brexit divorce bill talks stretched out. This, together with strong returns for large-cap dominated basic materials and oil & gas sectors, contributed to the FTSE 100 Index registering the biggest gain, up more than 5%.

 

Within the Fund, the contributors largely benefitted from a re-rating which was more the result of positive investor sentiment than additional fundamental developments. AB Dynamics (+21.4%), for example, built on last month’s share price gains despite not having issued any corporate newsflow of significance since its mid-November final results. The rise took the Q4 rally to 74%. F W Thorpe (+12.0%), which had seen its shares sell-off on the back of November AGM outlook comments, managed to reverse the trend as it announced the acquisition of Dutch emergency lighting specialist Famostar for an initial consideration of £6.8m.

 

By contrast, the share price falls experienced by some holdings can be attributed to corporate updates. Starting with IDOX (-37.6%), there was a heavy sell-off as investors reacted to a second profit warning in as many months. Having last month flagged the negative impact of contract delays, IDOX caused more concern with the revelation that its review of end-year accounts (for the period to 31 October 2017) had uncovered certain revenue items which should not have been included in FY2017 forecasts. The resolution of this issue was not helped by its CEO taking sudden sick leave, with non-exec director and former-CEO Richard Kellett-Clarke stepping in as interim CEO. The earnings before interest, taxes, depreciation and amortisation (EBITDA) impact of the revision is estimated to be a £3m reduction to the £23m figure which was given in last month’s update.

 

Omega Diagnostics (-23.2%) released interim results which included the prediction of slower revenue growth than it had previously expected over the next couple of years. Revenue growth for the interim period to 30 September 2017 was 4% while gross profit was flat after some margin contraction. The company has reiterated its conviction in the long-term market opportunity in food intolerance testing but admits that it is facing short-term headwinds which are hampering growth initiatives. With investor expectations rebased, Omega Diagnostics also took the opportunity to implement management changes. It announced that CEO and founder Andrew Shepherd would be stepping down from the role with immediate effect to be replaced by Colin King, the current COO, who joined the company in 2015 with a view to a planned succession.

 

Following the completion of a review of its operating systems, which was triggered by its acquisition of Suffolk Life, Curtis Banks Group (-7.3%) has decided to implement an upgrade of its back office. Having capitalised costs of just over £2m as it investigated alternative systems, it will now be required to incur an impairment charge as this asset is written-off. This non-cash charge will affect reported profits for its 2017 results. The shares were initially marked down heavily on the news, but quickly staged a recovery given that the decision should actually be positive for the company in the medium term.

 

The Fund participated in a fund-raising for Sumo Group, which was admitted to dealing on AIM on 21 December. The shares debuted strongly, finishing December at 116p compared with the purchase price of 100p. Sumo Group provides a range of services to video game publishers and developers, ranging from visual concept design and pre-production through to marketing and post-release support. As one of the few independent studios in the UK with the scale to provide full turnkey development of a game, it often becomes embedded within successful franchises, becoming ‘spiritual owners’ of the publisher’s intellectual property. This creates a very large barrier to competition and also allows it to benefit as the industry moves increasingly to a digital distribution model, enhancing the longevity and monetisation of titles.

 

It also bought into Focusrite, a provider of high tech audio hardware and software used by both hobbyist and professional musicians to capture analogue signals and convert them to digital, as well as create music. Founded in 1985 by ex-Led Zeppelin sound engineer Phil Dudderidge, who remains the largest shareholder, the company floated in 2014 and has enjoyed a strong start to life as a listed company. A great number of the company’s young workforce are musicians, leading them to create market-leading products with strong industrial design. The company now has a well-known and trusted brand, while in addition possessing a strong distribution network with its products sold in around 160 territories globally.

 

Positive contributors included:

AB Dynamics (+21.4%), Next Fifteen Communications (+16.1%), F W Thorpe (+12.0%), Learning Technologies (+11.9%) and Smart Metering Systems (+11.6%).

 

Negative contributors included:

IDOX (-37.6%), Omega Diagnostics Group (-23.2%), Empresaria Group (-12.2%), Tracsis (-10.1%) and Curtis Banks Group (-7.3%).

 

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

 

 

Dec-17

Dec-16

Dec-15

Dec-14

Dec-13

Liontrust UK Smaller Companies I Inc

27.2

13.3

23.8

4.4

30.5

FTSE Small Cap ex ITs

15.6

12.5

13.0

-2.7

43.9

IA UK Smaller Companies

27.2

8.1

14.9

-1.7

37.2

Quartile

3

1

1

1

4

 

*Source: Financial Express, as at 31.12.2017, total return (net of fees and income reinvested), bid-to-bid, institutional class.

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. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

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.

Disclaimer

This content 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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, January 11, 2018, 5:12 PM