Liontrust UK Smaller Companies Fund

October 2018 review

The Liontrust UK Smaller Companies Fund returned -10.5%* in October, compared with the -7.1% return from the FTSE Small Cap (excluding investment trusts) Index.


The sharp swing in investor sentiment in October appeared to be the culmination of mounting concerns over factors such as trade tariffs and monetary tightening, which have been part of the investment landscape for some time.


These ‘top-down’ considerations dominated returns from UK equities in October, with signs of risk aversion apparent through both the market’s sector and market-cap return profile. For example, the FTSE 100 Index’s monthly loss of 4.9% was not inconsiderable, but it was less severe than the 7.1% drop in the FTSE Small-Cap ex-IT Index and less than half the 11.1% loss for the FTSE AIM All-Share Index. AIM stocks are widely held by this Fund and others within the IA sector; the average return from the IA UK Smaller Companies average return was -10.0%.


To give a flavour of the extent to which sentiment rather than company newsflow drove returns, 59 out of the Fund’s 64 holdings were in negative territory for October. 32 suffered double-digit percentage falls. Less than half of this number issued newsflow of any significance. Of these, we would consider only a handful of announcements as likely to have generated a negative investor reaction in a more sedate environment.


Learning Technologies (-32.6%) was worst hit of the Fund’s holdings, losing almost a third of its value. The scale of this drop is accentuated by the large gains it made in September after releasing interim results. Viewed in wider context, shares in the company finished October at similar levels to which they started September. The retracement from the recent high was catalysed by news of a placing at 130p of around 5% of the company’s shares by company executives and associated persons.


None of the four remaining largest negative Fund contributors listed at the bottom of this review released any corporate updates. Delving deeper into the portfolio, the likes of YouGov (-15.4%), DotDigital (-16.4%) and Mattioli Woods (-19.0%) dropped despite issuing full year results and AGM statements respectively which confirmed trading as in-line with expectations. Tracsis’ (-22.6%) share price fell by almost a quarter even though the only updates it gave the market were its intention to release full year results on 8 November and the signing of a two year renewal and extension deal worth more than £2m for data hosting services and software licences for a major rail client.


These examples have been chosen not to bemoan the share price reactions, but to illustrate the disconnect between returns and fundamentals. Such bouts of investor sentiment are by no means unusual. While the managers of the Fund cannot predict with any confidence how long such an episode may persist, they do believe that the long-term fundamental prospects for the portfolio of holdings are no less attractive than in September. Periods of indiscriminate market weakness should be viewed as an opportunity to identify stocks whose long-term fundamentals are undervalued. Indeed, over the course of the month the Fund added to positions in 26 stocks. Although it is not known how long market weakness may persist, in the long run buying into quality companies when others are selling can prove a fruitful strategy.


In other portfolio news, Caretech (+5.3%) completed the £370m acquisition of Cambian in a cash and shares deal. The Cambian business will operate as a separate entity until the Competition and Markets Authority completes a review due in early 2019. The combined business will be one of the largest UK social care providers, with Cambian specialist children’s education services complementing Caretech’s care homes for “high acuity” patients which are run on behalf of local authority and health services commissioners. Caretech also provided an update for the year to 30 September, in which it confirmed that trading had been in line with market expectations. Net capacity increased by 88 to 2,622 places, while occupancy in the mature estate remained high at 93%.


Proactis (+2.1%) was another stock to buck the wide-spread market falls. Its final results revealed a doubling in revenues over the year to 31 July 2018 – boosted by last year’s acquisition of Perfect Commerce. Adjusted profit before tax rose from £4.2m to £12.0m. The company commented on a strong new business performance – 64 new relationships were established, up 19% year-on-year – and an improved business retention record. This contributed to a 75% increase in total contract value signed of £12.1m. The integration of Perfect Commerce is complete, with over £5m in net annualised cost savings realised. Next year’s growth is also likely to be driven by acquisitions as it integrates the August 2018 purchase of Esize.


A residual Fund position in IDE Group was sold as it continued to be unable to convert its theoretical competitive advantage (recurring income) into any meaningful cash generation – leading eventually to high levels of debt and a rescue fund raise in August (in which the fund did not participate). The Fund began to exit its position earlier this year and was able to complete the sale during October.


Finally the Fund chose to exit its position in First Derivatives. The Fund had already exited half its position earlier in the year as aspects of the accounting had caused a reassessment of the risks of the position, and additional investor concerns raised during October led the managers to accelerate the position’s closure. The company undoubtedly remains one of the more exciting growth companies listed on the market, with very strong intellectual property and a track record of delivery. Ultimately, however, it was decided that the associated risks were too great and the managers chose to redeploy capital elsewhere.


Positive contributors included:

Caretech (+5.3%), Plexus Holdings (+5.1%), Proactis Holdings (+2.1%), Cropper (+1.4%) and Mortgage Advice Bureau (+0.3%).


Negative contributors included:

Learning Technologies Group (-32.6%), Accesso Technology Group (-30.7%), Keywords Studios (-29.7%), Tracsis (-22.6%) and Simplybiz Group (-20.9%).


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 31.10.2018, 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 30.09.2018, total return (net of fees and income reinvested), bid-to-bid, primary class.

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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, November 14, 2018, 11:59 AM