Liontrust UK Micro Cap Fund

• Small negative UK market return in Q4 completes a lacklustre second half of the year, having started 2024 strongly.
• Setbacks for Solid State, Inspiration Healthcare and Nexteq outweigh large rally for On The Beach.
• Eckoh exits in advance of takeover completion.

The Liontrust UK Micro Cap Fund returned -2.9%* in Q4. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned -1.0% and -2.3% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was -1.9%.

 Q4’s fall completed a lacklustre second half of 2024 for the FTSE All-Share Index. After a strong start to the year which saw an 8.7% total return in the first five months, the UK market largely moved sideways over the remainder of the year, with the 0.7% total return since the end of May comprising a 1.1% price fall offset by dividend income.

July’s UK election result initially looked as if it would clear the path for stronger gains, with political uncertainty removed and the prospect of positive policy catalysts imminent. However, this confidence gave way to some uncertainty around possible changes to the fiscal landscape ahead of the Autumn Statement, with investor sentiment also proving vulnerable to shifts in the global macroeconomic outlook.

US and UK inflation data released during December ensured investors finished 2024 discussing the year’s dominant theme: the paring back of expectations for interest rate cuts. Data for November showed consumer prices still rising at a rate of 2.7% (US) and 2.6% (UK), in line with expectations but stubbornly higher than the target rates.

Persistence in inflation led to around 100 basis points (bps) fewer interest rate cuts in 2024 than were expected at the start of the year. When combined with the expected inflationary impacts of the Trump presidency in the US and Labour budget commitments in the UK, only a couple of 25bps cuts are now forecast for 2025.

While the tax-status policy uncertainty which weighted on AIM shares for much of 2024 was put to bed with the Autumn Budget’s announcement of a 50% inheritance tax relief, this end of the market is yet to stage a concerted rally to regain relative weakness against the wider market. The FTSE AIM All-Share lost 2.3% in December and returned -4.0% over 2024.

The portfolio’s largest quarterly contributor was On the Beach (+82%). Its shares rallied significantly following an upbeat full-year results release. In the year to 30 September, the online package holiday group saw revenue rise 14% to £128 million after total transaction value (TTV) increased 15% to £1.2 billion. These trends have continued into the new financial year with 14% growth in TTV allowing On the Beach to approach its key booking period with what it describes as significant momentum. In a sign of its management team’s confidence, a £25 million share buyback was announced – the decision follows the reinstatement of a dividend policy last year, having been suspended during the Covid years.

On the flipside, its most costly detractor was Solid State (-45%). The electronics component supplier issued a profit warning due to delays on a “prominent defence order programme” in the UK. While the company states its confidence that this is a temporary setback which will still result in orders being received, the delay could extend until after the UK government’s strategic defence review in summer 2025.

Sizeable share price setbacks for Inspiration Healthcare Group (-42%) and Nexteq (-32%) also weighed on fund returns.

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 previously reduced guidance

Returning to positive developments, locksmith and fire security solutions provider Croma Security Solutions Group (+26%) performed well, describing good levels of organic growth across its core markets of education, utilities, health and leisure. Croma has historically been acquisitive in expanding its portfolio of businesses across security, fire and locksmith services. Currently, it has a strong pipeline of opportunities to acquire profitable locksmith stores, which it would then convert to modern security centres to extend the Croma network.

Elsewhere amid the risers, Netcall (+22%) 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 services revenues rising 19% to £20 million.

Gift wrap and greetings card maker IG Design (+22%) finished the year with a positive quarterly return. 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 in September 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 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%. Despite interim results in November which flagged a competitive US retail environment experiencing subdued consumer sentiment, shares in the company rallied into the year end.

The indicative 54p-a-share takeover approach received by Eckoh (+16%) 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. The position was exited in advance of the expected completion date.

Positive contributors included:

 On The Beach Group (+82%), Calnex Solutions (+31%), Croma Security Solutions (+26%), Netcall (+22%) and IG Design Group (+22%).

Negative contributors included:

 Solid State (-45%), Inspiration Healthcare Group (-42%), Kooth (-40%), Nexteq (-32%) and Facilities by ADF (-31%).

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

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

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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