Liontrust UK Smaller Companies 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.
• Alfa Financial Software rallies through February following an upbeat Q4 trading update in late-January.
• By contrast, Everplay and Fever-Tree Drinks gave back January’s gains in the absence of newsflow.

The Liontrust UK Smaller Companies Fund returned -2.7%* in February. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark returned -5.0% and the average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was -3.3%.

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, 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.

While the overall small-cap market environment was negative in February, this isn’t a reflection of newsflow. The Fund’s largest fallers didn’t issue any updates of note during the month. Everplay (-28%) – recently renamed from Team17 – and Fever-Tree Drinks (-16%) gave back January’s gains, the latter of which was triggered by a strategic partnership with Molson Coors. The North American brewing giant will take on US production and distribution for Fever-Tree in order to accelerate US growth, also making a £71 million investment to acquire an 8.5% stake in Fever-Tree – the proceeds of which will be returned to shareholders via a share buyback scheme. There was no newsflow to trigger Everplay’s retracement of last month’s rise.

Alfa Financial Software (+7.2%) rallied through February after issuing an upbeat Q4 trading update at the end of January. The software provider to the asset finance sector described the quarter as exceptional in terms of converting prospects to contract wins, with five deals secured. Q4 revenue growth of 21% year-on-year took the 2024 total to £110 million, up 8%. Operating profit growth was ahead of expectations at 13% (to £34 million). Following eight contract wins over the year, Alfa now has total contracted value of £221 million, up 34% over the year. With its Alfa Systems 6 product recently launching across all regions, the company is upbeat regarding the outlook for growth in 2025.

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.

In addition to announcing a new £50 million share buyback programme, GlobalData (+5.3%) announced its intention to move from the junior AIM market to the London Stock Exchange’s Main Market. Echoing the rationale of Brooks Macdonald when announcing the same move last month, GlobalData believes the move will enhance its corporate profile and allow it to access a larger pool of potential investors. Several fund holdings have now completed or committed to a move to the Main Market, and the Fund will happily continue to own them.

Learning Technologies Group (+8.5%) edged closer to completion of its acquisition by US private equity vehicle General Atlantic, a 100p-a-share transaction over which we have expressed our dissatisfaction on several occasions. The Fund sold out of the position ahead of the deal’s imminent conclusion.

Positive contributors included:

Judges Scientific (+13%), Learning Technologies (+8.5%), Alfa Financial Software (+7.2%), Brickability Group (+7.0%), GlobalData (+5.3%).

Negative contributors included:

Everplay Group (-28%), Robert Walters (-17%), Fevertree Drinks (-16%), Kainos Group (-15%) and Microlise Group (-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, primary 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.

The risks detailed above are reflective of the full range of Funds managed by the Economic Advantage team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.

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.

DISCLAIMER

This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.

It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.

This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.

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