Liontrust UK Smaller Companies Fund

May 2020 review

The Liontrust UK Smaller Companies Fund returned 3.2%* in May. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned 3.4% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 4.1%.


The market’s recovery from February and March’s Covid-triggered losses continued in May. Despite further dire data on the economic impact of the virus response and the prospect of revised tensions between the US and China, investors again chose to look towards the recovery anticipated as lockdown measures begin to ease and massive monetary and fiscal stimulus kicks in.


Economic impact estimates released during May included the Bank of England’s prediction of a 14% fall in UK output this year and the ECB forecast of an 8-12% eurozone contraction. Meanwhile, US unemployment jumped to 14.7% in April, its highest since the second world war.


At the lower end of the market cap spectrum in particular, the focus remained on the extent to which companies have been affected by lockdown measures and the implications for liquidity. This explains the substantial rally in shares of Accesso Technology (+57.1%), the provider of queuing and ticketing technology to the leisure industry. Faced with the prospect of heavily reduced trading through its typically busiest summer months, the company moved to boost short-term liquidity through a £32m placing and £6m open offer. The funds should ensure it avoids breaching debt covenants at June or September milestones. It also renegotiated its banking facilities to remove or modify a number of covenants and to secure an extra £6m headroom. An update on current trading illustrated the scale of the Covid-19 impact on its business: venue closures and event postponements had led to an 80% year-on-year drop in sales for April. It is now exploring new ticketing solutions such as virtual queuing with some of its clients that are planning to reopen. 


A number of the Fund’s holdings were able to move higher on evidence that their trading may prove more resilient to lockdown measures than most.


Logistics, e-fulfilment and returns management specialist Clipper Logistics (+36.2%) is a clear example of this. It announced that, as part of its PPE supply chain for NHS Hospital Trusts announced in April, it has developed an e-fulfilment service allowing GP surgeries and social care providers to order PPE online. The company has opened a new distribution centre to support the service. Shares in Clipper rose strongly through the second half of May, and on 2 June the company released a trading statement showing that it is one of the few companies for which the pandemic has not been a barrier to normal business operations. In fact, in light of the increased demand for online retail logistics, it now expects profits in the year to 30 April 2021 to be comfortably ahead of analysts’ forecasts.


Focusrite (+24.1%) develops hardware and software for the high-quality production of recorded and live sound. It released interim results to 29 February 2020 and also commented on subsequent trading during the pandemic.

Martin Audio, a specialist in live/tour sound which Focusrite acquired in December 2019, has seen demand affected by the cancellation of live music events due to Covid-19. However, Focusrite’s other five branded businesses have performed well during the pandemic, with high ecommerce consumer demand for Focusrite and ADAM Audio products. Despite the resilience shown by the business so far, a decision on any interim dividend was deferred until later in the year.


As an outsourced provider of IT design and support services primarily to the public sector and healthcare industry, Kainos (+19.4%) is another company which may find some insulation from the economic impact of Covid-19. Its results covered the year to 31 March – only overlapping with the start of the Covid-19 crisis. It grew revenues by 18% to £179m while pre-tax profits increased by 9% to £26m and orders saw a hefty 42% jump to £244m – leaving an end-year order backlog of £180m. Commenting on the worsening of the Covid-19 impact since 31 March, Kainos highlighted its cash balance of £41m, its success in shifting to work-from-home delivery of services, and some cost containment measures such as temporary salary reductions. It also decided not to declare a final dividend, but to review the dividend position later in the year when there is more clarity of the pandemic’s impact.


Likewise, Ideagen (+19.7%) provides software to highly regulated industries such as healthcare, life sciences and finance, so may see robust demand. An update in May outlined that trading in the year to 30 April was in line with market expectations; the company also stated that it expects to meet consensus forecasts for the new year and to maintain its dividend. Ideagen reiterated that its software is often seen as ‘mission critical’ and – despite some weakness in aviation and manufacturing – demand has been robust from most of its clients. Annual recurring revenues have now increased to 76% of total revenues, up from 67% last year and above the level at which we consider it to represent an intangible asset.


Cello Health (-9.6%) is another company whose business has been less affected by lockdown measures, although its share price failed to take any impetus from a May AGM statement given much of its detail had been covered in an April trading statement. The pharmaceutical marketing specialist commented that overall bookings visibility and the new project win rate have been maintained while the performance of its US business has been notably robust.


Quartix Holdings (+32.3%) is one of those companies whose operations have been hit quite heavily by recent restrictions. However, shares in the company rallied strongly in May ahead of a 2 June trading update which detailed the rate of recovery for vehicles in the UK and France using its tracking systems. Vehicle mileage in both markets troughed in late March at more than half the normal rate. French mileage had recovered to 9% below baseline levels by 22 May, but UK mileage remained 40% lower than normal. While Quartix is reluctant to give further guidance, it believes the pandemic is unlikely to have a material impact on profit or cash flow in the first half of 2020. Its subscriber base has yet to be significantly affected – rates of attrition have remained at around 12% per annum and it has only had to provide payment relief or deferral to 6% of its subscriber base by value.


A trading statement from Arbuthnot Banking Group (-19.7%) outlined 35% customer loan book growth in the year to 31 March, including 4% in the first quarter of 2020, but noted the difficulty in lending during lockdown – particularly in property, where valuations are uncertain. In line with government guidance, Arbuthnot has offered payment holidays that have been accepted by 25% of mortgage borrowers and 67% of customers for its asset finance business RAF.


The Fund established a position in Mind Gym, an existing holding in the Liontrust UK Micro Cap Fund. It is a corporate training business which applies the principles of behavioural science to effect change within the corporate environment. It possesses strong intellectual property within a suite of bite-sized tutorials, or “workouts”, it has created and it is able to deliver them via a global network of trainers.

Positive contributors included:

Accesso Technology (+57.1%), Clipper Logistics (+36.2%), Quartix Holdings (+32.3%), Focusrite (+24.1%) and RWS Holdings (+20.6%).


Negative contributors included:

Arbuthnot Banking Group (-19.7%), Robert Walters (-17.9%), Eco Animal Health Group (-14.1%), Cello Health (-9.6%) and Gamma Communications (-7.3%).


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 31.05.20, 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 31.03.20, 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.


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, June 12, 2020, 4:02 PM