Liontrust UK Smaller Companies Fund

• Small negative UK market return in Q4 completes a lacklustre second half of the year, having started 2024 strongly.
• Sizeable rallies for On The Beach and Raspberry Pi largely offset setback at Impax Asset Management.
• Eckoh exits in advance of takeover completion; Learning Technologies recommends highly opportunistic private equity bid.

The Liontrust UK Smaller Companies Fund returned -0.4%* in Q4. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned -1.0% and 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 weighed 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.

Raspberry Pi (+62%) was another large gainer, albeit with a lower contribution to fund performance due to its smaller holding size. The Fund participated in its 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 other hand, the Fund’s biggest negative single-stock impact came from Impax Asset Management (-35%). 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.

Defence technology specialist Cohort (+15%) strengthened on news it is to acquire EM Solutions, an Australian naval communications firm, for £75 million. This move is expected to enhance Cohort's capabilities in satellite communications for global naval and defence applications. The company raised £41 million through a share placement to fund this acquisition, which is anticipated to be accretive to adjusted earnings per share from the fiscal year 2025/26.

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.

Video game developer Team17 Group (-19%) had rallied after the release of reassuring interim results in mid-September, but it gave up these gains across Q4 in the absence of any significant newsflow to maintain momentum.

Foresight Group (-21%), the fund manager specialising in real assets, gave up ground after the release of interim results. Although headline figures were solid, with assets under management rising 2% to £12.4bn and adjusted earnings growing 5% to £29m, investors chose to focus on some modest fund-raising setbacks which include the cancellation of a hydrogen energy fund and slower asset gathering for its latest energy transition strategy.

Microlise (-18%), 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.

The indicative 54p-a-share takeover approach received by Eckoh (+15%) 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.

In September, Learning Technologies Group received a highly opportunistic takeover approach from US private equity vehicle General Atlantic. 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”.

The Fund’s position in cloud computing infrastructure and IT managed services provider iomart was sold. 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:

On The Beach Group (+82%), Raspberry Pi Holdings (+62%), Netcall (+22%), Eckoh (+15%) and Cohort (+15%).

Negative contributors included:

Impax Asset Management (-35%), Foresight Group Holdings (-21%), Team17 Group (-19%), Fevetree Drinks (-18%) and Microlise Group (-17%).