Liontrust UK Smaller Companies Fund

• December’s decline completes a lacklustre second half of 2024 for the UK market. 
• On the Beach rallies on upbeat full-year results while Raspberry Pi continues its strong run since IPO in June. 
• Impax Asset Management the biggest detractor after losing £5bn+ St James Place mandate.

The Liontrust UK Smaller Companies Fund returned -0.1%* in December. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned 0.6% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was -0.6%.

December’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 2.7% and 2.6% respectively, 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 -1.7% in December and returned -4.0% over 2024.

The Fund participated in the Raspberry Pi’s (+72%) oversubscribed initial public offering to the London market back in June at a price of 280p. Shares in the market leading designer and manufacturer of single-board computers (SBCs), have since roughly doubled, helped by interim results in September which reported a stronger-than-expected first half of 2024 – reducing the expected reliance on higher activity in the latter months of the year.

On the Beach (+52%) shares rallied 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.

Impax Asset Management (-26%), the specialist in sustainable investment strategies, fell heavily on news it had lost the second and larger of its two mandates with St James’s Place. The £5.2 billion Sustainable & Responsible Equity Fund is being reassigned by St James Place in an effort to diversify the fund across investment styles. The mandate loss is expected to result in lost revenues of around £12.7 million for Impax, in the context of last year’s total revenue of £170 million.

Intellectual property support services provider RWS Holdings (+18%) has previously faced headwinds in the form of macro-related delays in decision-making among some customers and market concerns about the impact of generative AI models. However, RWS has been confident in its ability to integrate AI into its portfolio of services, and full-year results show these products contributing to a return to growth in the second half of the year. Organic constant currency (OCC) revenue growth in the second six months was 2%, resulting in a flat performance for the year as a whole. Within this, around 25% of revenue came from AI-related services such as TrainAI and Language Weaver, a category which grew at 7% in OCC terms over the year.

September’s conditional 100p-a-share approach for Learning Technologies Group (+7.8%) from US private equity vehicle General Atlantic was highly opportunistic. At the time, the fund managers commented they were amazed and dismayed that the board of LTG was “minded to recommend unanimously” at that level and they retain this view following official agreement of terms in December.

Recent trading has undoubtedly been beset by short term headwinds due to the impact of macroeconomic pressures; nevertheless, LTG were keen to emphasise – as recently as in its interim results published just ten days prior to the approach being made public – that “the structural drivers of the learning and talent development market remain intact and support our belief that LTG will return to growth when market conditions improve”.

Positive contributors included:

Raspberry Pi (+72%), On The Beach Group (+52%), LSL Property Services (+18%), RWS Holdings (+18%) and Learning Technologies Group (+7.8%).

Negative contributors included:

Impax Asset Management (-26%), Bioventix (-14%), Quartix Technologies (-13%) Craneware (-12%), and Integrafin (-12%).

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

*Source: Financial Express, as at 31.12.24, total return (net of fees and income reinvested), bid-to-bid, institutional class. **Source: Financial Express, as at 31.12.24, total return (net of fees and income reinvested), bid-to-bid, primary 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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