Liontrust UK Micro Cap Fund

• External influences played a significant role in shaping market dynamics in November.
• Global telecommunications specialist BigBlu Broadband was the top performer after confirming reports that it is in discussions for a deal involving one of its subsidiaries.
• Facilities by ADF and IG Design Group were among the detractors after reporting lacklustre earnings releases.

The Liontrust UK Micro Cap Fund returned 1.8%* in November. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned -0.4% and 2.6% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 1.2%.

UK equity markets experienced a largely positive month, with the FTSE 100 index recording a 2.6% gain, the mid-cap FTSE250 Index rising 2.1% and the FTSE All Share returning 2.5%. Among the smaller capitalisation indices, the FTSE AIM All-Share Index dropped 0.4%, and the FTSE Small Cap (ex-investment companies) Index fell 0.6%.

External influences played a significant role in shaping market dynamics. Global volatility was sparked by the re-election of U.S. President Donald Trump, who announced new tariffs on imports from key trade partners, including a 25% tax on goods from Mexico and Canada and a 10% tariff on Chinese products.

It was encouraging to see some evidence of renewed investor confidence in UK-focused funds, which saw inflows for the first time since mid-2021, although returns to the smaller cap end of the market remained depressed in November.

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.

While the re-rating potential of UK equities, small caps in particular, is significant, the timing and magnitude of the catalysts remains uncertain. In the meantime, we are optimistic about the portfolio’s ability to continue to deliver attractive compounding longer term investment returns supported by an attractive combination of earnings growth and increasingly shareholder yield (both dividend and share buybacks).

Global telecommunications specialist BigBlu Broadband (+61%) rose sharply after confirming reports that it is in discussions with Australian-based investment manager Salter Brothers for a deal involving subsidiary SkyMesh – the provider of internet connectivity services to customers in regional and rural Australia. On confirming the deal, BigBlu announced that the “potential transaction is in line with the Board's stated strategy to assess all options to realise value and maximise returns for shareholders from its operating assets.” 

Essensys (+19%), the leading provider of software and technology solutions for the commercial real estate and flexible workspace industry, moved higher after a robust full-year results release. Essensys delivered revenue, profitability and cash ahead of market expectations, a good outcome in market conditions which continue to be challenging for the company, with delays to sales cycles and lower capex budgets constraining the activity of its customers.

Locksmith and fire security solutions provider Croma Security Solutions Group (+16%) announced increased sales, profits and margins in its annual results. Having disposed of its manned guarding business Vigilant, Croma has focused on its locksmith's arm, with this strategy being rewarded by an 9% uplift in group revenues for the period.

Facilities by ADF (-40%), a provider of premium serviced production facilities for film and high-end TV, expects full-year 2024 revenue and adjusted EBITDA to align with 2023 levels. Delayed and cancelled productions from its sales pipeline, primarily due to ongoing disruption from the US writers’ and actors’ strikes, have impacted results. In response to the strikes, ADF focused on shorter domestic productions for FY24, which has provided a degree of support to utilisation rates.

Microlise (-20%), the provider of transport management technology, reported a cyber security breach that affected its operations. While the company announced that services were expected to return to normal shortly after the incident, it confirmed that corporate data had been exfiltrated, prompting notifications to international authorities.

Gift wrap and greetings card maker IG Design Group (-20%) reported declines in revenue and profit for the six months ending September 30 due to a competitive US retail environment experiencing subdued consumer sentiment. Revenue dropped from $444 million to $393 million, while adjusted pre-tax profits fell sharply from $38.2 million to $14.7 million. Despite "challenging market conditions and retail trends" expected to persist into H2, IG Design remains on track to restore adjusted operating profit margins to pre-pandemic levels of at least 4.5% by FY25.

ZOO Digital (-21%) reported a 29% revenue increase to $27.6 million for the six months ending 30^th September, driven by a recovery in content output after the 2023 Hollywood strikes. Despite this growth, the company posted a $2.5 million operating loss, , albeit the result was a considerable improvement on the comparative period in the prior year.

Positive contributors included:

BigBlu Broadband (+61%), Essensys (+19%), On The Beach (+16%), Croma Security Solutions (+16%), Focusrite (+13%)

Negative contributors included:

Facilities By ADF (-40%), hVIVO (-24%), ZOO Digital (-21%), Microlise (-20%), IG Design Group (-20%)

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

*Source: Financial Express, as at 30.11.24, 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.

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