Liontrust UK Smaller Companies Fund

February 2020 review

The Liontrust UK Smaller Companies Fund returned -7.8%* in February. For comparison the FTSE Small Cap (excluding investment trusts) Index returned -9.1% and the average return of funds in the IA UK Smaller Companies sector was -10.1%.

 

Global stock markets sold off heavily in February amid the continued spread of coronavirus, with cases outside of China jumping. Investors pre-empted the economic impact of containment measures from governments around the world, sending equities and other asset classes lower with only ‘safe-havens’ such as government bonds or gold registering positive returns.

 

There remains a large amount of uncertainty surrounding the duration and size of the impact of coronavirus both in human and economic terms. The Economic Advantage investment process does not attempt to predict events which are notoriously difficult to forecast, and we will continue to focus on companies’ fundamentals.

 

Given the negative impact on consumer behaviour and heavy disruption to supply chains, some small-cap companies are likely to find their funding positions under scrutiny. Even a temporary hit to sales or production can cause significant working capital demands as fixed costs still need fulfilling. In this respect, we take confidence from our disciplined approach to investing at the smaller end of the market; we only consider investing in companies which generate profits and have solid balance sheets. Around two-thirds of the Fund’s holdings have net cash on their balance sheets, and 80% pay a consistent dividend – often a sign of a well-managed company with a sensible strategy for generating returns for its investors.

 

In addition, a number of the Fund’s holdings have significant (>70%) recurring income, which is one of the three core intangible assets our investment process is designed to identify. A high proportion of repeat business can provide some measure of insulation from short-term dips in demand. Our portfolio of profitable companies with robust balance sheets should – we believe – have more resilient funding than the average UK small cap.

 

February’s market sell-off was broad based, but some stocks were still earmarked by investors as being particularly exposed to coronavirus disruption. As a supplier of advanced testing systems into the heavily disrupted auto market, AB Dynamics (-23.0%) is an obvious instance within the Fund.

 

Trifast (-33.0%) manufactures industrial fastenings used by global assembly industries, so is another that could be heavily affected by a short-term downturn in global industrial activity. The company issued a trading statement warning that, since its most recent update in November, market conditions have become more challenging with a slow start to the final quarter of its year to 31 March – typically its strongest period. The direct impact of coronavirus has included the closure of its Chinese sites, but there is clearly a risk that the manufacturing slowdown extends beyond Asia.

Gateley Holdings (-17.8%) susceptibility to the stock market slide was not helped by a placing of 4.1% of the company’s shares (owned by directors and other employees) at 200p. The placing price was 3% lower than the prevailing market share price and accelerated its slide to well below 200p by month end.

Other stock moves were harder to reconcile to fundamentals. Dotdigital (-23.4%) for example was the heaviest faller despite issuing interim results that were in-line with January’s trading update.

 

Shares in Accesso Technology (+26.0%) bounced off their lows, as did Keywords Studios (+24.4%) following last month’s harsh sell-off which followed a 2019 trading statement. Keywords Studios also hosted a capital markets event for investors in February, which may have helped restore confidence.

 

Positive contributors included:

Accesso Technology (+26.0%), Keywords Studios (+24.4%), Instem (+9.8%), Imimobile (+6.3%) and JTC (+3.7%).

Negative contributors included:

Trifast (-33.0%), Focusrite (-26.3%), DotDigitial (-23.4%), AB Dynamics (-23.0%) and Gateley Holdings (-17.8%).

 

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 29.02.20, 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 31.12.19, 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.

Thursday, March 5, 2020, 1:08 PM