Liontrust Global Smaller Companies Fund Q4 2021 review | Insights

The Liontrust Global Smaller Companies Fund returned 0.3% over the quarter, versus the MSCI ACWI Small Cap Index and IA Global sector respective returns of 1.7% and 4.7% (both comparator benchmarks)*.

We continue to be very positive on the outlook for high quality smaller companies that are capable of exponential growth over the next year. We are especially positive as the smaller companies area of the market continues to give considerable scope for further outperformance as the world continues to recover from the Covid-19 pandemic. Smaller companies, particularly in the US, enjoy a lower valuation rating than their large and mega cap peers which we believe can be translated into continued strong returns. We believe these companies can future proof a portfolio by using the five drivers of Science, Intellectual Property, New Deep Technology, Positive Social Change and Entrepreneurial Vision. The fast-growing business we invest in are typically capital light and built upon these five key drivers. This leads us to avoid sectors, sub sectors, and stocks that are capital intensive where larger and existing companies have a huge advantage over sectors and companies that don’t further the cause of Positive Social Change. We believe these sectors include traditional real estate, utilities, mining and oil and gas exploration, integrated oil and gas companies, tobacco companies and arms manufacturers. In addition, within the finance sector, we prefer to avoid capital intensive stocks such banks and traditional insurance businesses.

Global Equities had a strong end to the year, blunted modestly by the spread of the latest Covid-19 variant (Omicron) towards the end of December, prompting more restrictions and a push for a vaccine booster. Inflation concerns remain front of mind with central banks now weighing up the number and extent of interest rate raises coming in the next 12 months, sending some jitters through the market, particularly to higher growth stocks.

Among the top performers over the quarter was New Relic, a US-based technology company which develops cloud-based software to help website and application owners track the performances of their services. The company performed strongly off the back of strong second quarter fiscal year results in which revenue increased 18% year-over-year to $196 million. Commenting on the strong results, New Relic’s CEO commented that, ‘Today, New Relic has a strong foundation for the future, as we continue our work to help millions of developers and engineers build better software by making observability a daily part of a data-driven engineering approach, across the entire software lifecycle.’

Another notable strong performer was Silicon Labs. The company is a leader in secure, intelligent wireless technology for a more connected world and released strong financial results for the third quarter ending 2 October. Revenue from continuing operations exceeded expectations, increasing to $185 million, up 9% sequentially and 39% year-on-year.

Trex was a strong performer over the quarter with the manufacturer of wood-alternative composite decking, railing, and other outdoor items posting strong third quarter results. The company cited, ‘strong sales growth coupled with disciplined selling, general and administrative (SG&A) spending resulted in significant operating leverage in the third quarter’.

Continuing the theme of result releases over the three months to December, Verint and Ambarella also performed strongly, both contributing positively to the relative performance of the Fund. Verint, which sells software and hardware products for customer engagement management, security, surveillance, and business intelligence, delivered strong Q3 cloud revenue growth and expects a strong Q4, raising its annual cloud revenue growth guidance. While semiconductor design company Ambarella reported that revenue for the third quarter of fiscal 2022 was $92.2 million, up 64% from $56.1 million in the same period in fiscal 2021, the company also benefited from an increase in chip demand over the quarter.

On the other side of the ledger, despite posting third quarter results that beat the average expectations and raising full-year forecast, security software company Varonis Systems was a notable detractor over the period. Despite the share price fall over the quarter, commenting on the results, the company explained that they ‘believe that the robust customer engagement trends we see leave us well positioned for a strong close to 2021 and beyond’.

Also among the notable detractors over the period was Upwork, after the online-recruitment company reported its third quarter results and gave an outlook that came in below average expectations. Varonis Systems reported third-quarter results that beat expectations and raised its full-year forecast, however despite the positive reaction to the report, the company was a detractor over the quarter.

We continue to be very positive on the outlook for high quality growth stocks over the next year. We are especially positive as the small cap area of the market continues to give considerable scope for further outperformance as the world continues to recover from the Covid-19 pandemic. Our emphasis on the drivers of Science, Intellectual Property, New Deep Technology, Positive Social Change and Entrepreneurial Vision will, we believe, guide the Fund towards those companies that will change the world as we adapt going forward.

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

	Dec-21	Dec-20	Dec-19	Dec-18	Dec-17
Liontrust Global Smaller Companies C Acc GBP	8.0%	48.0%	20.1%	2.2%	25.0%
MSCI ACWI Small Cap	17.2%	12.7%	19.8%	-9.1%	13.1%
IA Global	17.7%	15.3%	21.9%	-5.7%	14.0%
Quartile	4	1	3	1	1

*Source: FE Analytics as at 31.12.21

**Source: FE Analytics as at 31.12.21. Quartiles generated on 12.01.22

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Key Risks

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. 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.

Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

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