Liontrust UK Smaller Companies Fund

January 2020 review

The Liontrust UK Smaller Companies Fund returned 1.8%* in January. For comparison the FTSE Small Cap (excluding investment trusts) Index returned 0.1% and the average return of funds in the IA UK Smaller Companies sector was 0.5%.

 

The start of 2020 saw mixed fortunes for the Funds’ holdings in the video gaming industry. Team17 Group (+33.3%), a video games label and creative partner, rallied on the back of a bullish trading update. Its products performed well over the peak Christmas sales period, with a particularly strong showing from its multiplayer games on Nintendo Switch. As a result, the company now expects 2019 sales and earnings to be ahead of market expectations.

 

A Keywords Studios (-17.8%) trading statement triggered share price weakness despite outlining 30% revenue growth in 2019 to €326m, of which half was organic expansion. The company provides support services to video games publishers; much of last year’s growth came from its Functional Testing and Game Development business lines. But Keywords Studios is also investing heavily in this growth, so much so that costs in 2019 rose at a faster rate than revenues. Adjusted profit before tax therefore rose by a more modest 8%, with the company also citing an underperforming fixed price contract in an acquired business as diluting profits growth. The scale of investment came as a surprise to some investors, pushing the share price down towards the end of the month.

 

A busy month for trading statements also saw vehicle tracking system specialist Quartix Holdings (+18.7%) give an update on the period to 31 December 2019. Over the year it generated 29% growth in new installations to 43,827 and a 22% increase in its fleet subscription base to 150,640 units. The company’s shares moved higher on comments that it expects revenue, profit and free cash flow to be slightly ahead of market forecasts. 

 

An update from Quixant (-23.6%) was more concerning. Quixant designs and manufactures technology platforms for the global slot machine and pay-to-play gaming industry. In September 2019 it issued a profit warning due to weaker-than-expected demand for its customers gaming machines. This soft demand has subsequently been more pronounced and lasted longer than it anticipated, meaning that revenue and profits for 2019 are now both likely to fall short of already-reduced expectations. Quixant is reviewing its cost base moving into 2020, to protect against further sales weakness.

 

Craneware (-20.8%) also fell heavily. Year-on-year sales growth in the first half of the financial year to 30 June 2020 was boosted to 30% due to completion on a number of contracts that had been delayed from the prior year. While the healthcare software provider stated that the number of hospitals renewing contracts was significantly higher year-on-year, the loss of a large customer has dragged “customer renewals by dollar value” down to 74%, well below its historic range of 85% - 115%.

 

Eco Animal Health (+27.5%) shares bounced off depressed levels through January after interim results published on 31 December offered some signs that the impact of African Swine Fever may be waning. The producer of animal pharmaceuticals referred to “encouraging signs of early recovery in China” as producers build livestock in response to record high pork prices.

 

An interim trading update from Dotdigital (+19.0%) detailed 15% growth in revenue to £23.1m in the six months to 31 December following a 14% increase in average revenue per user to £999/month. The software-as-a-service provider of omnichannel marketing automation expects profits for the period to be in line with market expectations.

 

Clipper Logistics (-10.2%) rose in November on news of a takeover approach from Sun Capital Partners. In December an extension of the deadline for a firm offer was granted, but the talks between the two companies failed to yield agreement on terms. Shares in the company fell back on confirmation that Sun Capital would not be making an offer, but Clipper Logistics offered encouraging comments on trading: Christmas trading was strong and Clipper experiences Black Friday volumes that were 25% higher year-on-year.

 

While the Clipper talks came to naught, another holding – Nasstar was taken over and exited the Fund as a result. On 17 December Mayfair Equity Partners announced an offer at 12.75p a share which completed during January.

 

Positive contributors included:

Team17 Group (+33.3%), Eco Animal Health (+27.5%), Bioventix (+19.0%), Dotdigital Group (+19.0%) and Quartix Holdings.

Negative contributors included:

Quixant (-23.6%), Craneware (-20.8%), Keywords Studios (-17.8%), Arbuthnot Banking Group (-11.1%) and Clipper Logistics (-10.2%).

 

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 31.01.20, 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.

Monday, February 17, 2020, 2:21 PM