Liontrust UK Smaller Companies Fund

June 2020 review

The Liontrust UK Smaller Companies Fund returned -1.2%* in June. 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 0.3%.


The market’s rebound from its Covid-19 losses stretched into the early days of June as investors continued to look beyond the immediate impact of the pandemic towards an economic recovery. This optimism was dented mid-month by a sober assessment of the situation by the US Federal Reserve, which is forecasting a 6.5% contraction in the US economy this year and no scope for interest rate rises until the end of 2022 at the earliest. The IMF added to the economic gloom, downgrading its estimate for 2020 global economic growth from -3.0% to -4.9%.


Investor unease was further deepened by news of spikes in US Covid-19 infection rates and a new outbreak in China. Despite this, the FTSE All-Share was able to retain some of its early-month gains.


Companies have now been operating within the new social and economic parameters presented by Covid-19 for a few months. As such, their updates to the stockmarket – while still characterised by huge uncertainties over the short-term outlook – have been able to provide more detail on the nature of trading during the pandemic than those issued in previous weeks.


Full-year results from Tatton Asset Management (+17.7%) fleshed out performance for the year to 31 March that had already been outlined in an April trading update. As previously announced, discretionary assets under management rose 9.6% to £6.65bn after a £1.13bn inflow was offset by a negative investment performance of £681m as markets tumbled at the end of the accounting period. Paradigm, its IFA support services business, grew revenues by 10% while Paradigm Mortgages increased membership by 11% to 1,544 with gross lending increasing 18% to £9.9bn. Although lockdown measures have negatively impacted engagement of its existing and potential client IFAs, Tatton is confident in its financial position and its outlook; it has proposed a final dividend of 6.4p a share.


Shares in Quartix Holdings (-16.4%) rallied in May ahead of a 2 June trading update before easing back for much of June. Vehicle mileage for its tracking systems in the UK and France troughed in late March at less 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. It had a comfortable net cash position of £9.5m at the beginning of June, up from £8.5m at end-March, and had previously stated that it would not envisage having to dip into those cash reserves even under a reasonable worst-case scenario. Quartix’s 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. However, it believes the true impact on the subscriber base may not become apparent until the autumn, after the government’s financial support packages are withdrawn.


Market expectations for Eco Animal Health Group’s (+20.8%) trading in the year to 31 March 2020 had been depressed by an outbreak of African Swine Fever in 2019 that hit sales to China. However, the market recovered strongly as the disease abated, leading to a robust sales performance for Eco Animal Health in the second half of its year. As a result, both revenues and EBITDA (earnings before interest, tax, depreciation and amortisation) were “significantly” ahead of consensus forecasts for the year, with gross margins boosted by an improvement in pricing in the US market. The impact of Covid-19 on Eco Animal Health has been limited and it commented that the strength seen in Chinese and US markets has carried over into the first two months of its new financial year.


Shares in Brooks Macdonald Group (+9.2%) moved higher over the course of June. Towards the end of the month, it announced the £9.6m acquisition of Lloyds Bank’s Channel Islands wealth management and funds business. The deal is expected to add around £1bn of assets split evenly between private client portfolios and unitised funds, implying a purchase price of only 1% of assets (if they can be fully retained post-acquisition). This deal comes relatively soon after its acquisition of Cornelian Asset Managers that completed in February, as the company looks to bolster growth inorganically in what is a consolidating sector.


The Fund added a position in Eckoh, an existing holding in the UK Micro Cap Fund. Eckoh is a relatively rare case of a stock which possesses all three Economic Advantage intangibles. It is a provider of software solutions used in contact centres with a patented solution that allows the receipt of customer payment information in a secure way. In June it released full-year results in which it cited its high levels of recurring revenue and record order book as providing some insulation from the Covid-19 crisis. In the year to 31 March revenue grew 16% to £33.2m, while its order book of contracted business sat at slightly more than this amount, £35.9m. Recurring revenue has now increased to almost 80% of the total.


Alpha FX was recently added to the Fund on the strength of its intellectual property. The company provides consultancy services and technologies to corporates and institutions looking to manage their currency exposures, with a particular focus on risk management, international payments and collections. The fund managers had been monitoring Alpha FX for over a year, and a recent fund raising provided the opportunity to initiate a position in the stock.


Positive contributors included:

Eco Animal Health Group (+20.8%), Tatton Asset Management (+17.7%), Robert Walters (+15.9%), Nucleus Financial Group (+9.6%) and Brooks Macdonald Group (+9.2%).


Negative contributors included:

Accesso Technology Group (-18.6%), PayPoint (-18.6%), Quartix Holdings (-16.4%), Integrafin (-14.0%) and IG Design Group (-12.8%).


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 30.06.20, 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 30.06.20, 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.

Friday, July 10, 2020, 3:20 PM