Liontrust UK Smaller Companies Fund

September 2020 review

The Liontrust UK Smaller Companies Fund returned -1.5%* in September. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned -3.3% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was -1.2%.


While the first half of 2020 included a spike in volatility as the stockmarket suffered a correction before staging a partial recovery, the third quarter saw much more subdued conditions as investors became used to monitoring the path of the pandemic and assessing the economic costs as well as the various policy responses.


In September, there was gathering evidence of an uptick in Covid-19 infections towards a second wave in developed economies, while the US Federal Reserve gave further details of its latest ultra-dovish move: to adopt a flexible approach to inflation that allows it to run above 2% for some time without raising interest rates. But there was nothing to shift the prevailing mood decidedly into more bullish or fearful territory.


A number of the Funds’ holdings provided investor updates in September, many of them commenting on trading in the period to 30 June. Sumo Group (+24%) was one of these. It outlined an “extremely positive” video gaming market backdrop, due to increased demand during Covid-19 lockdowns. The company, which provides industry support services from pre-production through to marketing, grew revenue by 27% to £26m in the first half of 2020 and nudged up full-year guidance by predicting results will be “at least in line” with consensus forecasts. It also announced the acquisition of Pipeworks for a sizeable initial cash-and-shares consideration of US$60m, with further contingent ‘earn-out’ payments of up to US$40m. The acquisition gives Sumo a footprint in the key US West Coast, brings in intellectual property on owned games such as Prominence Poker, and opens up a new avenue in the use of game science and technology in non-gaming markets. 


Alpha FX (+19%), the specialist in currency risk management, issued interim results that included upbeat outlook comments. Revenue over the first half of 2020 was up 16% to £18m, the result of a strong Q1 followed by a coronavirus-affected Q2. Importantly, Alpha FX indicated that group performance in July an August has returned to the levels experienced during Q1. Client numbers increased from 648 to 671 over the six months; its customer base is also diverse, with the largest client accounting for less than 3% of the forward book.


Mobile payments company Bango (+15%) rose as it released interim results confirming the rapid pace of growth previewed in a July trading update. Revenue grew by 50% to £4.8m off the back of £743m in end user spend (EUS). Bango forecasts EUS to reach £2bn before the end of the year. Notably, Bango commented that this growth is the result of contracts secured in prior periods and is yet to include the positive effect from the recent surge in online spending during the pandemic.


Trends in the first half of 2020 were less positive at Pebble Group (-26%). Revenues fell almost 25% in the first half of 2020 as its bespoke promotional material business, Brand Addition, suffered during the pandemic. The company commented that order intake for Brand Addition is starting to recover, now running at about 60% of prior year levels. Pebble’s @ease procurement software for the promotions industry – operated by its facilisgroup business unit – experienced a better six months, generating revenue growth, albeit from a much lower base. Pebble Group also experienced a £7.2m adjusted operating cash outflow over the six months (compared with £1.2m adjusted operating profit) due to changes in working capital. However, it reiterated its confidence in its balance sheet strength and commented that a lot of the working capital accumulation related to a £4m trade debt that has been paid down to the agreed schedule during July and August.


Following August’s share rally on the back of a Q1 trading update (covering May to July), Ideagen (-16%) lost much of this ground in September after releasing results for the year to 30 April. The supplier of integrated risk management tools to highly regulated industries grew revenues by 21% to £57m, with recurring revenues (one of its core intangible assets identified by the Economic Advantage investment process) now accounting for 76% of the total, up from 67% a year ago. Ideagen reiterated that trading so far in its new financial year has been robust, with strong demand for its products


In other corporate updates in the portfolio, audio products specialist Focusrite (+12%) announced in a trading update that revenue for the year to 31 August was ahead of market expectations at around £129m. EBITDA is also expected to exceed forecasts. Demand for its products used in live sound events has fallen, for obvious reasons, but sales of its audio engineering products have grown at a higher rate than prior to lockdown.


We’ve written before about a number of the Fund’s stocks that have raised money during the pandemic to fund expansion (as opposed to shoring up liquidity). Digital training provider Learning Technologies (-14%) is prominent amongst this group. In May, it placed shares equivalent to 10% of its share capital in order to take advantage of the growth opportunity provided by the accelerated shift to digital learning as large numbers of people work from home. It has completed nine deals over the last seven years and in September announced another bolt-on addition: eCreators. The company is Australia’s leading provider of Moodle, an open-source learning management system. The deal will cost an initial £3.1m with further contingent payments up to a maximum of £3.7m. Learning Technologies also released in-line interim results during the month, which maintained full-year guidance.


Positive contributors included:

Sumo Group (+24%), Alpha FX (+19%), Clipper Logistics (+18%), Bango (+15%) and Focusrite (+12%).


Negative contributors included:

Pebble Group (-26%), Ideagen (-16%), YouGov (-15%), Learning Technologies (-14%) and Tatton Asset Management(-13%).

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 30.09.20, 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.

Friday, October 9, 2020, 2:48 PM