The Liontrust UK Smaller Companies Fund returned 2.0%* in July. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned 5.6% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 4.3%.
An eventful month of political developments failed to hold back the UK market, with investors focused on an equally busy period for company reporting and looking forward with increased confidence to upcoming interest rate cuts in the UK and US (the former being delivered in early August).
Enthusiasm around artificial intelligence suffered a moderate setback as earnings updates from some Magnificent Seven constituents underwhelmed, a trend which presented a big headwind to US markets and global indices. The UK, in contrast, was among the world’s best performing major markets in June.
Starting in turn with the Fund’s largest riser and faller for June, Quartix Technologies (+28%) reclaimed a modest amount of the ground lost over the last couple of years – a tough period during which slowing fleet growth in the UK and US prompted a strategic review led by Andy Walters, Quartix’s founder and former CEO who returned to the company as Chairman.
The provider of vehicle tracking systems and associated analytics and services released six-month numbers which were marginally ahead of guidance given earlier in the month, and which also commented that full-year revenue and profit will “moderately exceed” market consensus forecasts. Quartix recorded 1% revenue growth to £16.1 million in the first half of 2024, following a 13% increase in the rate of new units being added to fleet subscriptions (to 37,863). The fleet subscription base now stands at 282,922, with annualised recurring revenues rising 11% to nearly £31 million.
By some margin the weakest portfolio holding was Nexteq (-31%). It released a disappointing update which reported that trading was below market expectations, and separately the Chair, CEO and CFO will step down from the Board in the coming year. Nexteq’s Quixant division supplies computer platforms for the casino gaming and slot machine market, while its Denistron business provides display components into a diverse range of industrial sectors. Both units have seen soft demand in the first half of 2024, and Nexteq has cut full-year financial guidance as a result.
With regard to the management changes, Nexteq states that all three departures are amicable, but it would be reasonable to assume that there has been some level of disagreement at Board level. We have engaged with Deputy Chair, to seek reassurance that the strength in the operational management team below Board level mitigates the potential disruption to the day-to-day running of the business, but clearly it is important that the positions are filled in a timely manner and by the right candidates.
Returning to the positives, investors in Animalcare (+21%) received a boost earlier this year with the news that it had disposed of a non-core, majority shareholding in UK-based pet microchipping company Identicare for a cash consideration of £24.9 million – more than expected. This sale allowed Animalcare to focus on its animal pharmaceuticals business, and July’s interim trading update suggests its growth strategy is progressing well. Revenues rose 7% year-on-year to £36.9 million in the first half of 2024, with particularly strong demand in its Production Animals and Equine segments. The Identicare sale has bolstered net cash to £32.9 million, and Animalcare is actively seeking acquisition opportunities to accelerate its growth.
A Q3 trading update from AJ Bell (+21%) revealed that customer numbers rose 5% over the quarter and 13% annually to 528,000. Assets under administration have risen 4% in the quarter and 20% over a year to £83.7 billion, following new inflows of £1.7 billion in Q3. Its direct customer business saw particularly strong customer growth of 7% in the quarter. AJ Bell attributed this rising investor confidence in light of good recent stock market performance, a trend which has also driven higher levels of dealing activity, especially for international securities.
Alpha Group International (+15%) provides FX risk management and other banking services though two divisions: corporates and institutions (alternative investment managers in areas such as private equity, fund of funds, real estate and infrastructure). Despite what it describes as subdued activity in the institutional market, Alpha still managed to grow revenues by 16% to £64 million in the first half of the year. The company’s growth over the last few years saw it included in the FTSE 250 mid-cap index for the first time in June.
News of a £135+ million contract with the Royal Navy (for supply of a trainable decoy launcher system) lifted shares in Cohort (+12%) earlier this year. This strength has been maintained on the back of a number of smaller contract wins and a strong set of results – released in July – for the year to 30 April 2024. Revenues of £203 million, up 11%, and adjusted operating profit of £21.1 million, also rising 11%, were ahead of expectations after its Sensors and Effectors product areas saw strong growth. Cohort’s order book rose above £500 million for the first time, and now provides visibility on over 90% of market revenue expectations for next year. Order wins of over £70 million since the start of the new financial year have taken that ratio to above 95%
Although the majority of the portfolio’s holdings participated in UK market strength, allowing the Fund to record a solid gain for the month, there were also a handful of notable detractors. Among these, Learning Technologies Group (-15%) slid after it outlined a currency headwind from a weak US dollar which has pushed revenues down to £248 million in the first half of 2024, below the £268 million achieved last year and lower than consensus forecasts for around £260 million. Additionally, the company continues to see pressure on its c.25% transactional revenues due to company caution with training budgets. Learning Technologies is partially insulated from this short-term pressure by 75% of revenues deriving from software-as-a-service or long-term services contracts.
A Q2 trading update from Robert Walters (-16%) showed a 12% constant currency fall in net fee income year- on-year, as the recruitment market continues to rebase following the post-pandemic spike in activity. The company commented that this dip in conditions is longer than it had expected, as macroeconomic turbulence and political uncertainty weighted on client and candidate confidence. Robert Walters now doesn’t expect a recovery until at least 2025.
The position in Franchise Brands was exited during the period. A combination of management team turnover and a levered balance sheet informed the decision to sell the holding.
On the first day of August, the Bank of England cut interest rates by 25 basis points to 5.0%. Although increasingly priced into markets in the days and weeks prior to the decision, the cut is in our view another incremental positive in an improving outlook for UK equity markets.
The last few months have delivered stabilising inflation, a return to economic growth, a stable government, and now an interest rate reduction.
We feel that there is currently a compelling opportunity for investors in UK shares. The UK is at a clear valuation discount to historic averages and measures of intrinsic value but there is the potential for government policy intervention (focused on pension fund domestic equity allocations in particular) to help turn the tide of investor sentiment and capital flows, which would be of particular benefit to smaller company valuations.
Positive contributors included:
Quartix Technologies (+28%), AJ Bell (+21%), Animalcare (+21%), Alpha Group International (+15%) and Cohort (+12%).
Negative contributors included:
Nexteq (-31%), Robert Walters (-16%), Fevertree Drinks (-15%), Learning Technologies (-15%) and Big Technologies (-13%).
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 31.07.24, 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.
† Julian Fosh is on a leave of absence. The Economic Advantage funds continue to be managed by the other members of the team in Julian’s absence.
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 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. As the Fund is primarily exposed to smaller companies there may be liquidity constraints from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. In addition the spread between the price you buy and sell units will reflect the less liquid nature of the underlying holdings. 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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