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.

November 2020 Review

The Liontrust UK Micro Cap Fund returned 11.6%* in November. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned 20.2% and 10.9% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 12.5%.


Having nursed heavy year-to-date losses since the Covid-19 pandemic sparked a steep drop in February and March, the UK stockmarket bounced back in November. The rally in global equity markets was catalysed by positive Covid-19 vaccine news. Early in the month, trial results for a Pfizer/BioNTech vaccine showed over 90% efficacy. This was followed by positive trial results for vaccines being developed by both Moderna and AstraZeneca/University of Oxford.


As investors looked with optimism to a return to social and economic normality in 2021, the upward adjustment in share prices was sharp; the FTSE 100 recorded its largest monthly gain since 1989. All major market capitalisation segments of the UK market registered double-digit percentage gains, but the risk-on mood had the biggest impact on small and micro cap stocks: the FTSE Small Cap ex-IT index rose 20%.


There was a lot of newsflow from the Fund’s companies in November. However, while a number of the portfolio’s largest risers issued statements, the most important factor in propelling share prices higher was the surge in investor sentiment. In this respect, the Fund participated in the rally, but not to the same degree as the small cap average. The Fund has outperformed during the tough market conditions so far this year but gave up some of this relative strength in November.


This return profile is entirely consistent with the manner in which the Fund is managed. Funds run under the Economic Advantage process have a tendency to generate good relative performance during market sell-offs or steady market conditions, which can be partially offset by a lag during short, sharp, sentiment-driven rallies. We believe this may be due to the investment process’s focus on dependable businesses with high barriers to competition and strong cash flow returns on capital, which we think can prove to be more defensive in times of market stress and reliably deliver on expectations in more normalised market conditions. We believe that – on average – the degree of downside protection afforded by the Fund’s portfolio of companies exceeds the lag during rallies, enabling us to target outperformance over the long term.


Over 30 of the Fund’s holdings – around half the portfolio – registered double-digit percentage gains, with 15 of those enjoying 20%+ returns.


One of these was Inspecs (+49%). During November, it announced the £85m acquisition of Eschenbach, a market-leading eyewear manufacturer in Germany that also owns the brand Tura, which is prominent in the US market. A share placing of £64m was conducted to part-finance the deal and the Fund participated in the capital-raise. 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.


A trading update from Pebble Group (+50%) provided a reassuring update on guidance by saying it is firmly on track to deliver 2020 results in-line with market expectations. Its bespoke promotional material business, Brand Addition, continues to recover from a sharp drop-off in activity, with activity levels now up to over 70% of the 2019 comparable. Its software business, Facilisgroup, has continued to perform strongly by adding new customers and maintaining a 100% retention rate.


Other notable risers to issue trading updates included Accesso Technology (+36%), Gateley Holdings (+29%), and Oxford Metrics (+21%)


Accesso Technology provides queuing and ticketing technology to the leisure and entertainment industries and has been heavily affected by Covid-19 lockdown measures. However, it has seen increased activity in late summer and early autumn as customers reopen venues, albeit with reduced capacity. Due to this faster-than-anticipated reopening, Accesso now believes 2020 revenues will be comfortably ahead of its prior guidance of US$48m.


Commercial law firm Gateley Holdings generated revenues of at least £50m in the six months to 31 October, only slightly down on the prior year’s £51.8m, while swift cost-cutting measures allowed it to record a rise in pre-tax profit to £7.0m, up from £6.6m.


Oxford Metrics announced that its Vicon business experienced a pick-up in the second half of its financial year to 30 September, while demand for its Yotta division accelerated in the fourth quarter having been muted earlier in the year. The acceleration stems from local authorities looking to manage assets remotely during lockdown.


Staying with trading updates, shares in EKF Diagnostics (-12%) fell despite it issuing an upgrade to full-year guidance. However, the company had already upgraded financial guidance several times this year and, with the shares having already quadrupled from their March lows, investors paused for breath. EKF Diagnostics has seen rocketing demand during the pandemic for the Primestore MTM device that it contract manufactures. This is due to its ability to safely store and transport contaminated blood samples for testing by deactivating the virus or pathogen within the sample.


Another group of stocks released half-year or full-year results.


As flagged in an October trading update, revenues at training provider Mind Gym (+39%) have been hard hit by Covid-19 restrictions, falling 40% in the six months to 30 September. It made an adjusted pre-tax loss of £1.3m. One bright spot is the growth in delivery of virtual services, with digital revenues rising 43% to account for around two-thirds of the reduced group total. Trends are improving, with October’s revenue up to 85% of the prior year comparable; Mind Gym now forecasts a 20% - 30% revenue decline for the full year but a return to profitability in the second half.


In an upbeat interim results announcement, construction materials business Brickability (+36%) referred to a V-shaped recovery. Although revenues fell 25% year-on-year to £75m in the six months to 30 September, this reflects a sharp fall in April and May; since June, Brickability has seen earnings levels around the same as the 2019 comparable. James Cropper (+25%) and Cerillion (+22%) were among the other largest gainers to release results during the month – for the interim and full-year period respectively.


Among the portfolio’s detractors, Adept Technology (-14%) lost some ground after the release of interims which struck a cautious tone. Revenues in the six months to 30 September fell 8% to £29m while underlying EBITDA fell 15% to £5.2m. The company commented that, with uncertainty regarding the severity of the second wave of Covid-19, it is unable to reinstate financial guidance for the full-year.


Positive contributors included:

K3 Capital Group (+52%), Pebble Group (+50%), Inspecs (+49%), Simplybiz Group (+41%) and Mind Gym (+39%).


Negative contributors included:

Adept Technology (-14%), EKF Diagnostics (-12%), Frenkel Topping (-9.5%), Surgical Innovations Group (-6.5%) and Instem (-5.4%).

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.