The Liontrust UK Smaller Companies Fund returned 4.0%* in Q2. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned 9.3% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 7.4%.
Although expectations for interest rate cuts in 2024 continued to moderate on both sides of the Atlantic, investors took heart from a building picture of economic and corporate resilience.
The quarter’s UK inflation releases saw March and April’s readings come in higher than expected at 3.2% and 2.3% respectively, but the May data – released in June – finally showed inflation easing to an annual pace of 2.0%, in line with the Bank of England’s target. Meanwhile, economic growth, while muted, has turned positive, with the 0.6% expansion registered during the first quarter of 2024 the fastest growth in two years.
Encouragingly, sentiment towards UK equities appears to be on an improving trajectory – one which was not derailed by the prospect of a general election on July 4. With polls pointing towards a strong Labour majority, there was little political uncertainty for investors to price into share prices.
The prospect of a stable majority government should provide a supportive market backdrop and allow investors to look towards the likelihood of upcoming policy catalysts for the UK stockmarket.
After the significant underperformance of UK small caps in recent years, there were some signs of an improving trend in Q2: the FTSE Small Cap (ex-ITs) index return of 9.3% outstripping the FTSE 100’s 3.8% rise, but the FTSE AIM All-Share still lagged with a 3.5% return.
Despite this improvement in sentiment towards UK equities, valuations of UK listed companies remain substantially lower than their long run average and their global peers. As the fund managers have highlighted on several occasions in recent months, these low valuations mean many UK companies have proven susceptible to takeover approaches from private equity or corporate acquirers keen to exploit the opportunity.
Mobile payments specialist Bango (+40%) bounced back from the heavy fall it suffered in Q1 after issuing profit warning.
LSL Property Services (+28%) also made good gains after commenting that trading momentum is building in 2024 following subdued market activity levels in 2023, leading it to lift its financial forecasts for the year. The recovery has been particularly sharp at its surveying division, with profits in the first quarter of 2024 exceeding the full-year 2023 total.
The Fund’s two holdings of UK investment platform providers – AJ Bell (+27%) and IntegraFin (+26%) – performed well as they reported asset inflows and growth in revenues and profits. Likewise, Tatton Asset Management (+20%) recorded good asset inflows and solid revenue growth.
Most of our fund commentaries see a spread of short-term ‘winners’ and ‘losers’ as portfolio holdings experience the inevitable short-term successes or headwinds in their pursuit of the longer-term capital growth potential for which we hold them. Q2 was no exception, with YouGov (-59%) one of a handful of portfolio disappointments to consider alongside the areas of strength already mentioned.
Shares of YouGov were punished after the company issued an unscheduled profit warning. When reporting interim results in March, the research data and analytics group had noted Q1 was slower than expected with sales cycles remaining long, but that momentum had accelerated in Q2, giving it confidence in meetings its prior full-year sales guidance. Since then, YouGov has experienced weaker performance than anticipated, with a slowdown in the Data Products division affecting revenue and having an outsized impact on profits given the higher margin profile of the business. Fast turnaround research services also declined, while – although the recently-acquired Consumer Panel Services business is said to be performing well – some revenues have shifted into next year due to alignment of revenue recognition policies. Notwithstanding the broader attractions of YouGov’s business (an extensive and high-quality global panel and proprietary datasets), it will take time to rebuild market confidence.
Next 15 Group (-14%) also slid in the wake of a trading update, although this one maintained full-year financial guidance. The data-driven marketing and digital transformation consultancy commented that the macro environment remains tough, with political uncertainty leading to some delays on government contracts. It also flagged that spending across large US technology clients remains soft. However, Next 15 has reiterated guidance as it approaches the second half of its financial year (running to 31 January) – a period which historically captures a larger proportion of business each year.
Positive contributors included:
Bango (+40%), LSL Property Services (+28%), AJ Bell (+27%), IntegraFin (+26%) and Tatton Asset Management (+20%).
Negative contributors included:
YouGov (-59%), Nexteq (-18%), Impax Asset Management (-17%), On The Beach (-16%) and Next 15 Group (-14%).
Discrete years' performance** (%) to previous quarter-end:
|
|
Jun-24 |
Jun-23 |
Jun-22 |
Jun-21 |
Jun-20 |
|
Liontrust UK Smaller Companies I Inc |
11.0% |
-5.3% |
-18.4% |
46.7% |
1.9% |
|
FTSE Small Cap ex ITs |
18.5% |
-0.3% |
-14.6% |
65.2% |
-12.3% |
|
IA UK Smaller Companies |
14.1% |
-5.5% |
-22.1% |
53.1% |
-6.5% |
|
Quartile |
4 |
2 |
2 |
3 |
1 |
*Source: Financial Express, as at 30.06.24, total return (net of fees and income reinvested), bid-to-bid, institutional class. **Source: Financial Express, as at 30.06.24, total return (net of fees and income reinvested), bid-to-bid, primary class.
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.
The Fund may encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. The Fund may invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing. Outside of normal conditions, the Fund may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.
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