Liontrust UK Smaller Companies Fund

December 2019 review

The Liontrust UK Smaller Companies Fund returned 7.7%* in December. For comparison the FTSE Small Cap (excluding investment trusts) Index returned 7.9% and the average return of funds in the IA UK Smaller Companies sector was 6.9%.

 

Signs of a ‘phase one’ deal between the US and China to de-escalate trade tensions helped drive global equities higher. In the UK, the positive mood was further enhanced by a convincing election result, with the scale of the Conservative majority serving to reduce the level of political uncertainty priced into markets.

 

The impact of improved investor sentiment was amplified at the small cap end of the UK market, which outstripped the FTSE All Share’s 3.3% gain.

 

The Fund participated in this strong rally, as several of its holdings experienced rating expansion. With risk appetite being the driving force behind share price moves in December, fundamental stock specific newsflow largely took a back seat.

 

Cohort (+25.4%) was an exception. Over the last 10 years, Cohort has acquired five defence technology businesses. it completed the purchase of detection and tracking specialist Chess Technologies in December 2018. The inclusion of Chess’s contribution in interim results boosted group revenue by 50% to £60m. Stripping out the acquired revenues, like-for-like growth was still very strong at 17%. Adjusted operating profit also rose substantially, up fourfold to £4m. The company’s order book stands at £207m following intake of £77.2m during the period. This order book gives Cohort visibility on over 80% of this year’s full-year revenue guidance, which the company states it is on track to meet. On the same day as its interim results release, Cohort announced its sixth acquisition – a €11.3m purchase of Wärtsilä ELAC Nautik, a German provider of submarine and surface ship sonar systems.

Having rallied ahead of the release of full-year results on 27 November, shares in AB Dynamics (-15.3%) subsequently gave up their gains at the the start of December. The earlier share price strength stemmed from an October trading update stating that profits for the year to 31 August had exceeded market expectations. Both adjusted revenues and adjusted profit before tax rose by more than 50%, to £58m and £13.7m respectively. In its forward-looking comments the company strived for an upbeat tone, highlighting the extent of its order book and prospects for future growth, but as a supplier (of advanced testing systems) into the global automotive market it is exposed to a fragile near-term demand outlook.

 

Shares in Clipper Logistics (-1.9%) were buoyed in November by the confirmation of a takeover approach, but slipped slightly from these levels in December as investors picked up on slightly soft company guidance that full year earnings are expected to be “broadly in line” with its previous forecasts. Interim results from the specialist in e-retail and returns management logistics were otherwise solid, outlining a 12% increase in revenue to £255m and 14% rise in operating profit to £12.1m. Talks between Clipper and its potential acquirer continue; the Panel on Takeovers and Mergers granted an extension of the deadline for a firm offer to be made from 18 December to 15 January.

 

The Fund’s small holding in recruitment software provider Oleeo – formerly World Careers Network – was sold following the company’s decision to delist from AIM. The Fund took part in a tender offer at 160p a share which facilitated an exit for investors not wishing to own shares in an unquoted business.

 

A position in The Pebble Group was initiated after the Fund participated in a share placing which accompanied the company’s admission to London’s junior AIM stockmarket. The Pebble Group is comprised of two divisions, with their own separate corporate identities. The first, Brand Addition, supplies ethically-sourced bespoke promotional material to large global brands under long-term, typically 3-5 year contracts. As one of very few large promotional product services providers focussed on this sector, customers benefit from its distribution strength and wealth of creative services, underpinned by technology and their international infrastructure. The second, facilisgroup, via their @ease proprietary software (delivered as a service) help support over 150 SMEs working in the US promotions industry, not only with a technology solution to underpin their business, but by providing access to a group of preferred suppliers which allows their customers to gain the benefits of bulk purchasing. Facilis also run community events for customers to share best practice learning.

 

Positive contributors included:

Cohort (+25.4%), Kainos Group (+25.3%), Curtis Banks (+22.2%), GlobalData (+20.0%) and Sumo Group (+17.7%).

Negative contributors included:

AB Dynamics (-15.3%), James Cropper (-7.8%), RWS Holdings (-7.2%), K3 Business Technology (-6.1%) and Bioventix (-6.1%).

 

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

 

 

Dec-19

Dec-18

Dec-17

Dec-16

Dec-15

Liontrust UK Smaller Companies I Inc

31.0

-6.0

27.2

13.3

23.8

FTSE Small Cap ex ITs

17.7

-13.8

15.6

12.5

13.0

IA UK Smaller Companies

25.3

-11.7

27.2

8.1

14.9

Quartile

2

1

3

1

1

 

*Source: Financial Express, as at 31.12.2019, 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 31.12.2019, total return (net of fees and income reinvested), bid-to-bid, primary class.

 

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.

Disclaimer

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, January 10, 2020, 10:53 AM