Liontrust UK Micro Cap Fund

• Macroeconomic and geopolitical instability reflected in a risk-off mood that sees defence sector lead large-cap gainers, while mid-cap and small-cap segments lose ground.
• Inspiration Healthcare rallies on positive trading update showing higher-margin sales mix.
• Setbacks at CMO Group, Totally and Zoo Digital Group weigh on returns.

The Liontrust UK Micro Cap Fund returned -4.4%* in February. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned -5.0% and -1.8% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was -3.1%.

Mounting geopolitical instability was reflected in aerospace & defence’s position at the top of the FTSE All-Share’s sector breakdown for February – up 18% in total return terms. President Trump’s approach to the Ukrainian conflict has included calling for a swift end to the war, criticising President Zelensky and indicating an unwillingness to continue financial and military assistance. As a result, investors are factoring in higher expectations of military spending in Europe from governments attempting to fill the void and deter Russian aggression.

Ongoing uncertainty over trade tariffs also contributed to macroeconomic nervousness. Equity markets sold off in the first days of February as Trump announced a range of tariffs on Canada and Mexico, only to defer them a couple of days later having won some concessions on matters including border security. This added to investor confusion over whether Trump’s tariff threats are statements of true intent or negotiating tools.

While the FTSE All-Share’s sector breakdown hints at the prevailing mood during the month, the risk-off tone is very apparent through the negative returns down the market cap scale: the FTSE 250 mid-cap index fell 2.9%, the FTSE Small Cap ex-IT lost 5.0%) and FTSE AIM All-Share returned -1.8%.

In our review of the Fund in 2024, we have written at more length about the tough market backdrop for small-caps, particularly ‘growth’ and AIM stocks, as well as the sizeable store of potential future outperformance created by these stocks’ increasingly heavy valuation discounts to long-run averages – towards which we should at some point see a reversion.

Compounding the impact of negative sentiment towards UK small companies, three of the Fund ‘s holdings also suffered setbacks during the month albeit the relatively small position sizes helped to contain the impact on Fund performance.

CMO Group (-86%) shares tumbled the most after it announced plans to delist from the AIM market. The online retailer of general building materials has recently outlined tough trading due to a drop in customer confidence. At the same time, the company believes it is at an inflection point in its long-term growth plan which requires additional investment. While CMO announced last month that it would seek to fund these investments and working capital requirements from a combination of banking facilities and shareholder fundraises, it has now concluded that it will be able to access capital more cheaply as a private company without the costs of maintaining a stockmarket listing. The position was exited following the news that the company would delist from AIM.

Totally (-60%) were also heavily hit as the provider of outsourced healthcare services announced the loss of an NHS England contract. An NHS 111 Contract for national support worth £13 million concluded in mid-February and was not renewed. While Totally states that financial targets for the year to 31 March 2025 should still be met without the contract renewal, its prior guidance for the following year had assumed a contract renewal. As a result, it has downgraded its revenue forecast for the year to March 2026 to predict a flat performance versus 2025.

Totally emphasised that the NHS decision to remove national 111 resilience support has not negatively affected the overall prospects for independent providers to assist the NHS in meeting high levels of demand on the service, across urgent and elective care. Later in the month, Totally announced multi-year contract renewals valued at £30 million for GP out-of-hours services in the north east of England and the provision of 111 and 999 support for an ambulance trust in the north of England. The position was exited in full during the month.

Zoo Digital Group (-47%) also warned on profits. The provider of localisation and digital media services to the entertainment industry stated that although it expects to return to profitability in the year to 31 March 2025, both revenues and earnings will fall short of market expectations. Coming off the back of a very tough period of trading initially triggered by the 2023 Hollywood writers’ strike, Zoo Digital is now seeing customer planning activity stepping up markedly albeit largely encompassing third party licensing rather than new original programming. The company is implementing fixed cost cuts as it looks to improve margins and ensure positive cash flow while the trading backdrop remains tough.

Returning to more positive portfolio developments. Inspiration Healthcare Group (+46%) announced that a strong second half of the year to 31 January had boosted revenues ahead of last year’s level and returned the company to profitability. The specialist in neonatal intensive care medical devices benefitted from an improved sales mix of higher margin products and the effects of its cost reduction efforts.

Inspiration expects strong trading momentum to carry over to the new financial year. While net debt has risen as a result of working capital requirements due to its recent strong activity, the company expects inventory reduction to contribute to good operating cash flow over the period – meeting its debt facility covenants.

A trading update from Brickability Group (+7.0%) showed sales rising 12.3% on a like-for-like basis in the four months to 31 January, with growth across all four of the company’s divisions. With good trading momentum and visibility on orders and projects in the remainder of the year to 31 March 2025, Brickability stated that it now sees earnings on track to be modestly ahead of market expectations.

Virgin Wines UK (+31%) and, to a lesser extent, Property Franchise Group (+6.7%) both rallied through February on the back of trading updates released at the end of January. Virgin Wines reported 6.7% year-on-year growth over the six weeks covering its key Christmas trading period, taking sales to the highest levels since the Covid-19 lockdowns. Property Franchise Group delivered in-line 2024 results and commented on good January demand and sales pipeline for the upcoming year, which will be defined by the integrations of its Belvoir and GPEA acquisitions as well as the property market reaction if base interest rates are cut as expected.

The Fund’s position in Hvivo was also exited during the month.

Positive contributors included:

Inspiration Healthcare Group (+46%), Virgin Wines UK (+31%), Oxford Metrics (+13%), Brickability Group (+7.0%) and Property Franchise Group (+6.7%).

Negative contributors included:

CMO Group (-86%), Totally (-60%), Zoo Digital Group (-47%), Intercede Group (-19%) and Calnex Solutions (-15%).

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

*Source: Financial Express, as at 28.02.25, 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, institutional class.

KEY RISKS

Past performance does not predict future returns. You may get back less than you originally invested.

We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.

The Funds managed by the Economic Advantage team:

• May invest in smaller companies and may invest a small proportion (less than 10%) in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, a 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 a fund to defer or suspend redemptions of its shares. 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.
• May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
• May invest in companies predominantly in a single country which maybe subject to greater political, social and economic risks which could result in greater volatility than investments in more broadly diversified funds.
• Outside of normal conditions, 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.

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