Liontrust UK Smaller Companies Fund

October 2020 review

The Liontrust UK Smaller Companies Fund returned 0.7%* in October. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned 1.9% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 0.4%.

 

The Covid-19 infection rate continued to accelerate in the UK and elsewhere, dampening investor sentiment. Even more worryingly, hospitalisation rates also climbed higher, resulting in tighter social restrictions. In parts of Europe, including France and Germany, lockdowns were reinstated and the UK followed suit on the final day in October.           

 

Investors also had one eye on the US, where hopes of a stimulus announcement before the presidential election fizzled out. Talks have been ongoing for months and, as the pandemic continues to erode economic activity, a new fiscal package is a high priority to support the US economy through the crisis.

 

Within the UK stockmarket, large caps underperformed, with the FTSE 100 falling 4.8% compared to the FTSE 250’s marginal decline of 0.5% and the FTSE Small Cap (ex IT)’s 1.9% gain.

 

There were a number of trading updates from the Fund’s technology companies, largely showing robust trading through the pandemic. Customer engagement software group Netcall (+30%) said it continued to see strong demand for its products despite the disruption from Covid-19. In its full year results to 30 June 2020, the company recorded a 10% increase in revenue and 29% increase in adjusted earnings before interest, taxes, depreciation and amortisation. Management stated that trading during the first three months of the current financial year is strong and ahead of the previous year. 

 

Kainos Group (+24%) reported on a “very strong” trading performance since April. The outsourced provider of IT design and support services said the ongoing structural shift towards digital adoption has seen very high customer demand, with new contracts won in all its operating regions. As a result, Kainos said its results for the year to 31 March 2021 are likely to be materially ahead of consensus estimates. The update led analysts to upgrade their forecasts by 40%, which came on the back of a 35% upgrade in July.

 

Cloud computing company iomart (-12%) anticipates a dip in earnings in the first half of its financial year, but a 2% increase in revenue, which it attributes to greater demand for its lower margin managed private cloud service. Cash generation has been ahead of management expectations, and the company remains confident that it can withstand the ongoing economic pressures of the crisis.

 

Away from technology, research and analytics group YouGov (+15%) saw revenue increase by 12% and adjusted operating profit grow 18%. This was the result of a higher proportion of its sales coming from higher margin products. Management stated that current trading is in line with expectations, but noted that while there has been no impact from the pandemic thus far, the marketing budgets of its customers may come under pressure going forward.

 

Nucleus Financial Group’s (-12%) shares declined despite seeing a 2.6% year-on-year increase in assets under management (AuM) to £16.1bn in the third quarter. Net inflows were down 26% as a consequence of the ongoing pandemic but were up 45% year-to-date compared with the same period in 2019.

 

Mind Gym (-12%) was another faller, after its interim trading update for the six months to 30 September highlighted the severity of the pandemic’s impact on the business. Revenue is expected to be 40% below the previous year and, despite cost cutting measures, the group anticipates an adjusted pre-tax loss of between £1.0m-£1.5m. More positively, trading in October has been markedly better. Revenue has increased materially and the reduction in costs meant the group has been operating profitably. The corporate training company therefore expects to see significant growth in both revenue and profit in the second half of the financial year compared to the first.

 

During October, the managers exited positions in Pennant International and Eco Animal Health Group after both companies’ management equity ownership fell below the 3% level required by the Economic Advantage investment process to hold a small cap company.

 

Positive contributors included:

Netcall (+30%), EKF Diagnostics (+27%), Kainos Group (+24%), YouGov (+15%) and Ideagen (+13%).

 

Negative contributors included:

Arbuthnot Banking Group (-15%), Next Fifteen Communications (-12%), Nucleus Financial Group (-12%), SimplyBiz Group (-12%) and Medica Group (-12%).

Discrete years' performance** (%), to previous quarter-end:

 

 

Sep-20

Sep-19

Sep-18

Sep-17

Sep-16

Liontrust UK Smaller Companies I Inc

12.8

-5.0

19.7

23.8

19.0

FTSE Small Cap ex ITs

-12.7

-7.8

0.6

17.8

10.5

IA UK Smaller Companies

-0.4

-7.1

10.8

25.0

7.8

Quartile

1

2

1

3

1

 

*Source: Financial Express, as at 31.10.20, 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.

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.
Friday, November 13, 2020, 3:46 PM