Liontrust UK Smaller Companies Fund

November 2020 review

The Liontrust UK Smaller Companies Fund returned 7.5%* in November. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned 20.2% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 12.5%.


Having nursed heavy year-to-date losses since the Covid-19 pandemic sparked a steep drop in February and March, the UK stockmarket bounced back in November. The catalyst for a global equity market rally was positive vaccine news. Early in the month, trial results for a Pfizer/BioNTech vaccine against Covid-19 showed over 90% efficacy. This was followed by positive news on vaccine trials from both Moderna and AstraZeneca/University of Oxford.


As investors looked with optimism to a return to social and economic normality in 2021, the upward adjustment in share prices was sharp; the FTSE 100 recorded its largest monthly gain since 1989. All major market capitalisation segments of the UK market registered double-digit percentage gains but the risk-on mood had the biggest impact on small and micro cap stocks: the FTSE Small Cap ex-IT index rose 20%.


There was a lot of newsflow from the Fund’s companies in November. However, while a number of the portfolio’s largest risers issued statements, the most important factor in propelling share prices higher was the surge in investor sentiment. In this respect, the Fund participated in the rally, but not to the same degree as the small cap averages. The Fund has outperformed during the tough market conditions so far this year but gave up some of this relative strength in November.


This return profile is entirely consistent with the manner in which the Fund is managed. Funds run under the Economic Advantage process have a tendency to generate good relative performance during market sell-offs or steady market conditions, which can be partially offset by a lag during short, sharp, sentiment-driven rallies. We believe this may be due to the investment process’s focus on dependable businesses with high barriers to competition and strong cash flow returns on capital, which we think can prove to be more defensive in times of market stress and reliably deliver on expectations in more normalised market conditions. We believe that – on average – the degree of downside protection afforded by the Fund’s portfolio of companies exceeds the lag during rallies, enabling us to target outperformance over the long term.


Starting the review of notable portfolio newsflow with trading updates, an AGM statement from Craneware (+42%) outlined sales growth between July and October that was significantly ahead of the prior year comparable. This underpins its expectations of year-on-year growth for the interim period and a return to double-digit growth in future periods. The company, which supplies software solutions to US healthcare providers, had recorded a flat revenue performance in the year to 30 June 2020 as Covid-19 impeded the final quarter’s sales.


A trading update from Pebble Group (+50%) provided a reassuring update on guidance by saying it is firmly on track to deliver 2020 results in-line with market expectations. Its bespoke promotional material business, Brand Addition, continues to recover from a sharp drop-off in activity, with activity levels now up to over 70% of the 2019 comparable. Its software business, Facilisgroup, has continued to perform strongly by adding new customers and maintaining a 100% retention rate.


Commercial law firm Gateley Holdings (+29%) generated revenues of at least £50m in the six months to 31 October, only slightly down on the prior year’s £51.8m, while swift cost-cutting measures allowed it to record a rise in pre-tax profit to £7.0m, up from £6.6m.


Accesso Technology (+36%) provides queuing and ticketing technology to the leisure and entertainment industries and has been heavily affected by Covid-19 lockdown measures. However, it has seen increased activity in late summer and early autumn as customers reopen venues, albeit with reduced capacity. Due to this faster-than-anticipated reopening, Accesso now believes 2020 revenues will be comfortably ahead of its prior guidance of US$48m.


A trading statement from EKF Diagnostics (-12%) saw its shares fall despite including an upgrade to full-year guidance. However, the company had already upgraded financial guidance several times this year and with the shares having already quadrupled from their March lows, investors paused for breath. EKF Diagnostics has seen rocketing demand during the pandemic for the Primestore MTM device that it contract manufactures. This is due to its ability to safely store and transport contaminated blood samples for testing by deactivating the virus or pathogen within the sample. Data analytics and consulting company GlobalData (-4.8%) also slid despite issuing a solid looking trading update which maintained its 2020 earnings guidance.


Moving on to financial results releases, construction materials business Brickability (+36%) issued interims that contained upbeat comments – referring to a V-shaped recovery. Although revenues fell 25% year-on-year to £75m in the six months to 30 September, this reflects a sharp fall in April and May; since June, Brickability has seen earnings levels around the same as the 2019 comparable.


As flagged in an October trading update, revenues at training provider Mind Gym (+39%) have been hard hit by Covid-19 restrictions, falling 40% in the six months to 30 September. It made an adjusted pre-tax loss of £1.3m. One bright spot is the growth in delivery of virtual services, with digital revenues rising 43% to account for around two-thirds of the reduced group total. Trends are improving, with October’s revenue up to 85% of the prior year comparable; Mind Gym now forecasts a 20% - 30% revenue decline for the full year but a return to profitability in the second half.


Gift packaging specialist IG Design (+38%) had already released a trading statement in October outlining better-than-expected sales growth of 41%, but at that point it refrained from taking a bullish tone on the full-year outcome due to ongoing Covid-19 uncertainty. However, in November’s interim results, IG Design was comfortable stating that its full year performance was on track to exceed market expectations. 


Revenues at AB Dynamics (-14%) in the year to 31 August were up 6% to £61.5m – in-line with guidance given in a trading statement – but adjusted operating profits fell 12% to £11.3m as investments in growth and senior hires pushed margins down. Having roughly doubled from their March lows, the shares may also have weakened on this announcement due to some cautious outlook comments; AB Dynamics is wary of the impact of a second wave of the pandemic on order intake patterns.


In July, dotdigital (-5.8%) stated that results for the year to 30 June 2020 would comfortably exceed market expectations, before going on to release an October update on Q1 of its new financial year in which it stated that trading for the year to 30 June 2021 would also exceed consensus forecasts. In November, it released full results covering the year to 30 June 2020 and it once again upgraded its guidance for the 2021 outcome. But shares in the company appeared to be fully up with events after the spate of upgrades, and they traded a little lower on the month.


The Fund sold out of PayPoint after the company’s senior management equity ownership slipped below the 3% level required of all holdings.


The Fund added a position in Inspecs, a designer, manufacturer and distributor of eyewear frames that sells both branded and unbranded products into the mid-market segment. The stock is an existing position in the UK Micro Cap Fund which, following strong performance, now has a market cap of almost £190m – placing it firmly in the UK Smaller Companies Fund’s addressable universe. The Fund was able to initiate its position via a share placing of £64m that was conducted to part-finance the £85m acquisition of Eschenbach, a market-leading eyewear manufacturer in Germany that also owns the brand Tura, which is prominent in the US market.

The Fund owns Inspecs on the strength of a physical distribution network: although Inspecs currently has only a relatively small market share, it is nonetheless one of only a few companies globally that can offer a “one-stop shop” to global retail chains, as a vertically integrated supplier. The company has offices in the UK, Portugal, Scandinavia, the US and China, and manufacturing facilities in China, Vietnam, London and Italy. Inspecs currently supplies over 30,000 points of sale across 80 countries, delivering tens of thousands of individual product stock keeping units (SKUs) to customers every year.

Positive contributors included:

Pebble Group (+50%), Craneware (+42%), Simplybiz (+41%), Mind Gym (+39%) and IG Design (+38%)


Negative contributors included:

AB Dynamics (-14%), EKF Diagnostics (-12%), YouGov (-7.7%), Hilton Food Group (-6.6%) and Dotdigital (-5.8%).

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 30.11.20, 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 30.09.20, 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.

Wednesday, December 16, 2020, 4:16 PM