UK Micro Cap Fund

Economic Advantage

The UK Micro Cap Fund is managed by the Economic

Advantage team – Anthony Cross, Julian Fosh, Victoria Stevens

and Matt Tonge – and invests in UK headquartered companies

with high managerial ownership and a market capitalisation of

under £150 million.

Why micro caps ?

Micro caps offer the opportunity to capitalise on the fast early

growth phase of dynamic, entrepreneurial companies:


• The smallest listed companies, as measured by the Numis 1000

Index, have outperformed the FTSE All-Share Index by more than

15 times since 1955.

• Micro caps are not as well covered by analysts as the rest of the

UK stock market.

• High levels of management equity ownership are much more

common among the smallest companies on the market, which we

believe acts as a strong motivator.

• Micro caps can take share from incumbents in markets

experiencing disruptive change.


• They can create greenfield opportunities for innovative products

and services.

How the Liontrust UK Micro Cap Fund is differentiated

The award-winning Economic Advantage team manages the Fund. Victoria Stevens and Matt Tonge are AAA rated by Citywire, and

Anthony Cross and Julian Fosh are FE Alpha Managers for 2019.

The Fund is managed using the Economic Advantage investment process. This process has been applied to the management of funds at Liontrust for more than 20 years.

The process seeks to identify companies that possess intangible assets which produce barriers to competition. These provide a durable competitive advantage that allows the companies to defy industry competition and sustain a higher than average level of profitability for longer than expected.

In the fund managers’ experience, the hardest characteristics for competitors to replicate are three classes of intangible assets:

Intellectual property, strong distribution channels and significant recurring business.

Since launch in March 2016, the Fund has returned 58.4% to the end of September 2019 against 40.5% by the average fund in the IA UK Smaller Companies sector, 20.1% by the FTSE Small Cap (ex-Investment Trusts) Index and 31.3% by the FTSE AIM All-Share Index.

Liontrust UK Micro Cap was the top performing Fund in the IA UK Smaller Companies sector in 2018.

Since launch the Fund has the lowest volatility of any fund in the IA UK Smaller Companies sector and the third lowest maximum drawdown.

Meet Victoria Stevens and Matt Tonge

Have more than 60 years of combined investment experience.

Victoria Stevens and Matt Tonge joined the Economic Advantage

team in 2015 to research and analyse investment opportunities

primarily across the small cap universe. In Victoria’s previous role

as deputy head of corporate broking at FinnCap, she built up an

extensive knowledge of the smaller company investment universe.

Matt added trading and analytical expertise to the team, having

spent the previous 12 years on the Liontrust dealing desk, latterly

winning an industry award for his work in mid and small cap stocks.

February 2020 Review

The Liontrust UK Micro Cap Fund returned -6.7%* in February†. For comparison, the FTSE Small Cap (excluding investment trusts) Index returned -9.1%, the FTSE AIM All-Share Index returned -9.9% and the average return of funds in the IA UK Smaller Companies sector was -10.1%.


Global stock markets sold off heavily in February amid the continued spread of coronavirus, with cases outside of China jumping. Investors pre-empted the economic impact of containment measures from governments around the world, sending equities and other asset classes lower with only ‘safe-havens’ such as government bonds or gold registering positive returns.


There remains a large amount of uncertainty surrounding the duration and size of the impact of coronavirus both in human and economic terms. The Economic Advantage investment process does not attempt to predict events which are notoriously difficult to forecast, and we will continue to focus on companies’ fundamentals.


Given the negative impact on consumer behaviour and heavy disruption to supply chains, some small-cap companies are likely to find their funding positions under scrutiny. Even a temporary hit to sales or production can cause significant working capital demands as fixed costs still need fulfilling. In this respect, we take confidence from our disciplined approach to investing at the smaller end of the market; we only consider investing in companies which generate profits and have solid balance sheets. Over 70% of the Fund’s holdings have a net cash position, and a similar proportion pay a consistent dividend – often a sign of a well-managed company with a sensible strategy for generating returns for its investors.


In addition, a number of the Fund’s holdings have significant (>70%) recurring income, which is one of the three core intangible assets our investment process is designed to identify. A high proportion of repeat business can provide some measure of insulation from short-term dips in demand. Our portfolio of profitable companies with robust balance sheets should – we believe – have more resilient funding than the average UK micro cap.


The market sell-off appeared to be fairly indiscriminate. At the portfolio level, some of the largest detractors were penalised disproportionally to newsflow or business activity. For example, Dotdigital (-23.4%) was one of the heaviest fallers despite issuing interim results that were in-line with January’s trading update; the company has low exposure to affected parts of Asia and has around 90% recurring income.


Company announcements were more of an explanatory factor on the handful of holdings that registered share price gains. Haynes Publishing (+63.5%) rose sharply on the receipt of a 700p a share takeover offer from Infopro Digital Group. The Fund initiated a position in the company in the second half of last year, shortly before Haynes announced a formal sale process. Traditionally known for its automotive instruction manuals, Haynes has expanded into content, data and innovative solutions for the automotive aftermarket and motorists. The decision to sell up was motivated by the cash requirements of Haynes’ future growth plans rather than any current operational or financial difficulties. The absence of any balance sheet distress allowed Haynes to attract an offer at a 70%+ premium to its share price when the sale process was announced.


A short trading update from Inspiration Healthcare (+7.0%) revealed that trading had been ahead of its expectations, with revenues on course for a 15% rise, including 12% like-for-like growth. The company is a specialist in medical devices for use in critical care and operating theatres. In September of last year it acquired Viomedix, a supplier of respiratory products and sterile medical consumables, for £3m. Its integration and subsequent trading have been in-line with Inspiration Healthcare’s expectations.


Essensys Group (+4.3%) issued an in-line trading update guiding to a 19% increase in interim revenue (for the six months to 31 January) to £11.4m. Recurring revenue rose 29% and now accounts for 85% of the total, well above the 70% threshold at which we consider repeat business to form a key intangible barrier to competition. Essensys provides software-as-a-service (SaaS) platforms and on-demand cloud services to the flexible workspace industry.


Takeover talks between two of the Fund’s holdings – Frenkel Topping (-18.5%) and Harwood Capital (0%) – came to an end, resulting in Frenkel giving up the gains in had made in January as bid interest emerged.


Two new positions were added to the portfolio: Inspecs and Churchill China

Inspecs is a designer, manufacturer and distributor of eyewear frames, selling both ‘branded’ and unbranded products into the mid-market segment. The Fund owns the shares 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.

The Fund also took advantage of the recent market sell off to initiate a position in Churchill China, which temporarily dipped below the upper size threshold of £175m market cap that the Fund applies to new holdings. Churchill China was founded in 1795 and is a supplier of ultra-durable ceramic tableware to the hospitality industry. The company, which remains 30% owned by its founding family, enjoys an IP advantage in the deep know-how within its manufacturing processes, which give it both product quality and cost leadership advantages. It is also owned on the strength of its distribution network, with a high market share in the UK (25%), and a broad network of domestic and international distribution partners built up over many years. While it does not have ‘true’ contracted recurring income, the business does also benefit from a very high proportion of ‘replacement’ sales (70-80% of turnover), making its revenue more repeatable and reliable.

Positive contributors included:

Haynes Publishing (+63.5%), Instem (+9.8%), Inspiration Healthcare (+7.0%), Imimobile (+6.3%) and Essensys Group (+4.3%).


Negative contributors included:

Dotdigital (-23.4%), Mind Gym (-20.3%), Solid State (-20.0%), Belvoir Group (-18.8%) and Frenkel Topping (-18.5%).

Key risks

Please remember that past performance is not a guide to future performance and the value of an investment and any 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. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term. The portfolio is primarily invested 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.


Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business. This document 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. Citywire information is proprietary and confidential to Citywire Financial Publishers Ltd (‘Citywire’), may not be copied and Citywire excludes any liability arising out of its use. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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.2019.10 


The value of investments can go down as well as up and you may get back less than you invested. 
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ou should seek independent advice.