Liontrust Special Situations Fund

• Retention of 50% IHT relief on AIM shares is a better-than-feared outcome, allowing investors to re-focus on significant undervaluation of many small cap shares. 
• Moonpig and Robert Walters rally, but macroeconomic uncertainty feeds through to weak returns for the Fund’s engineering groups. 
• Keywords Studios exits portfolio on completion of its acquisition; the position in iomart also sold.

The Liontrust Special Situations Fund returned -3.0%* in October. The FTSE All-Share Index comparator benchmark returned -1.6% and the average return in the IA UK All Companies sector, also a comparator benchmark, was -2.1%.

Global equity markets fell in October as the prospect of the approaching US election, weaker-than-expected earnings from US tech titans and ongoing geopolitical instability in the Middle East contributed to a risk-off environment.

In the UK, investors had to contend with an additional source of uncertainty in the form of the Autumn Budget. Ahead of the Budget, speculation had been rife over potential changes to the investment landscape, including the capital gains tax rate or the inheritance tax (IHT) status of AIM-listed shares. This contributed to a substantial degree of nervousness from investors in the weeks running up to the announcement, which was most pronounced on the AIM market.

We were therefore pleased to see the Budget clarify that AIM shares will retain 50% IHT relief. By retaining some relief, the government recognises the vital role played by the AIM market in the UK’s economic growth.

Equally important is that the policy uncertainty that has been hanging over UK equities for several weeks has now been put to bed. With the IHT removal risk now crystalised with a better-than-feared scenario, AIM shareholders and UK investors more broadly can look forward more confidently, focusing on company fundamentals. UK equities continue to trade at a substantial discount to their intrinsic value, particularly at the smaller end market cap scale. This investment opportunity is based on company fundamentals, rather than any preferential tax treatment, and we remain confident that the high-quality companies our funds seek out will ultimately re-rate to close this valuation anomaly.

Several of the portfolio’s AIM stocks rallied towards the end of month following the Budget, including Mortgage Advice Bureau (+27%), the portfolio’s strongest riser over the month. A number of the portfolio’s engineering groups saw weaker returns in October as confidence in the resilience of the global macroeconomic backdrop wavered.

Among these Renishaw (-14%) sold off the most as it issued a trading statement showing a continuation of mixed end market conditions, but Spirax Group (-14%), Intertek Group (-9.9%) and Rotork (-9.9%) also fell.

Renishaw’s trading statement saw it give up the gains made in September on the back of full-year results. The specialist in high-tech precision measuring and calibration equipment grew revenue by 6% to £174 million in the three months to 30 September, with adjusted profit before tax rising 22% to £34 million. Within this, the Americas and Europe/Middle East/Africa regions grew, while Asia Pacific was lower due to a comparable period last year that was boosted by orders from consumer electronics manufacturers.

Moonpig Group’s (+22%) latest update was better received, as investors welcomed its commitment to returning excess capital. In a statement released to coincide with a ‘capital markets day’, Moonpig’s management displayed confidence in its balance sheet strength and ongoing cash generation by proposing a £10 million dividend this year, which will thereafter grow in line with earnings per share to maintain 3x to 4x cover. It will also commence its first share buyback programme, starting in November and worth up to £25 million.

Although Robert Walters’ (+14%) Q3 trading update maintained its prior assessment of a hiring market slowdown that is unlikely to improve until 2025, shares in the company rallied. Year-to-date revenues have fallen 12% in constant currency terms as client and candidate confidence remains subdued. Despite this, it is confident of protecting profitability this year after headcount was reduced by 17%. 

Auction Technology (+7.3%) moved higher on evidence of improved momentum in the second half of its year to 30 September. The company operates online auction marketplaces and services across two key sectors: Industrial & Commercial and Art & Antiques. While some of these end markets have been weak recently, Auction Technology commented that gross merchandise value has improved significantly towards the end of the year, while its targeted improvement to profit margins was also achieved.

Keywords Studios, the support services provider to the video gaming industry, exited the portfolio in October on completion of its acquisition by Swedish private equity group EQT.

The Fund’s position in cloud computing infrastructure and IT managed services provider iomart was sold during the month. In recent years the managers have become increasingly concerned over the strength of the company’s competitive advantage, as the dominance of hyperscale cloud providers has grown and businesses have increasingly turned to public cloud solutions. For iomart, which owns its own data centres and specialises in private and hybrid cloud provision, organic growth and operating profit margins have trended down and put significant pressure on cash flow returns on capital. Although the company has committed to reshaping its offering, hoping to grow higher margin, faster growing areas of managed service provision such as data and cyber security, we believe the risk of effecting such a transition in the glare of the public markets outweighs the potential reward and have taken the decision to exit the position.

Positive contributors included:

Mortgage Advice Bureau (+27%), Moonpig Group (+22%), Robert Walters (+14%), Auction Technology (+7.3%) and Alfa Financial Software (+6.9%).

Negative contributors included:

Renishaw (-14%), Spirax Group (-14%), Future (-13%), Intertek Group (-9.9%) and Rotork (-9.9%).

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

*Source: Financial Express, as at 31.10.24, total return (net of fees and income reinvested), bid-to-bid, institutional class. **Source: Financial Express, as at 30.09.24, 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.

This Fund may have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the Fund's value than if it held a larger number of investments. 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. The Fund will invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities 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. 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.

DISCLAIMER

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice.