Liontrust UK Micro Cap 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. 
• Zoo Digital rallies strongly within AIM bounce, without issuing any investor update; Inspiration Healthcare and Nexteq among the fallers. 
• Eckoh moves higher as it accepts private equity takeover offer.

The Liontrust UK Micro Cap Fund returned -0.2%* in October. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned -1.0% and -0.3% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was -0.7%.

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 and 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 for the AIM market.

We were therefore relieved that the Chancellor did not fully remove IHT relief from AIM shares, which was what the market had priced in, but rather introduced a 50% 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 AIM for several weeks (and years) 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, but this cohort still lags substantially behind the FTSE Small Cap and FTSE All-Share indexes year to date, and we would expect this gap to narrow in the coming months.

Within this AIM bounce, Zoo Digital Group (+18%) recovered from being last month’s heaviest portfolio faller to the largest riser in October, without issuing any investor updates.

By contrast, the rally in IG Design Group (+17%) shares did stem from newsflow in the form of a trading update. Investor enthusiasm for the company’s restructuring plans has fluctuated this year, with the shares first rallying very strongly in May as full-year results showed profitability boosted by cost cutting efforts in the face of declining revenues, before an AGM update last month saw most of these gains reversed on evidence of weaker-than-expected revenues, particularly in its Americas division.

This was followed by a positive swing in October as another trading update from the gift wrap and greetings card manufacturer reassured that the outlook has stabilised, with results for the year to 31 March 2025 on course to match trimmed forecasts, while operating margins are forecast to return to pre-pandemic levels of 4.5%.

Two of the portfolio’s largest monthly detractors were Inspiration Healthcare Group and Nexteq, both down 20%.

Sales and profitability at Inspiration Healthcare were negatively affected in the six months to 31 July by a slowdown in sales in its neonatal business. Some of this related to a delay in receiving a $3.4 million deal – its largest ever – for its SLE6000 neonatal ventilators, First Breath Humidification and other accessories. This order was subsequently received in late July, with delivery expected to occur in the second half of the year. However, although it now has strong pipeline and order book positions, Inspiration warned there is likely to be profit margin pressure in the second half of the year as a result of a less favourable sales mix. As a result, it expects to make a larger loss than previously forecast this financial year, before returning to profit in the year to 31 January 2026.

Further to the management overhaul and profit warning announced in July, Nexteq (-20%) outlined ongoing de-stocking and reduced order intake in recent weeks, with some customer product and project launches delayed until 2025. As a result, 2024 revenue is expected to be another 10% - 12% below its recently reduced guidance.

The indicative 54p-a-share takeover approach received by Eckoh (+14%) in August converted to a firm offer which its Board recommended in October. Private equity group Bridgepoint will acquire the provider of secure payment products and customer contact solutions, subject to a shareholder vote, with completion scheduled for Q1 2025.

Netcall (+13%) reported solid growth in the year to 30 June 2024 and commented that sales momentum has carried over into the new financial year. The customer engagement software group grew revenue 9% to £39 million, with recurring cloud service revenues rising 19% to £20 million.

Positive contributors included:

Zoo Digital Group (+18%), IG Design Group (+17%), Eckoh (+14%), Netcall (+13%) and Fonix (+13%).

Negative contributors included:

Nexteq (-20%), Inspiration Healthcare (-20%), BigBlu Broadband (-14%) Focusrite (-12%) and Virgin Wines (-10%).

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, institutional 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.

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.

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