Liontrust UK Micro Cap Fund

• Large caps and defensive areas of the market outperform as macroeconomic uncertainties remain heightened.
• Solid State rallies as it confirms delayed UK defence order and outlines improved business outlook, notwithstanding short-term order cycle disruption
• Facilities by ADF slides on ongoing disruption from the US writers’ and actor’s strikes.

The Liontrust UK Micro Cap Fund returned -4.4%* in March. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned -0.4% and -3.0% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was -3.6%.

A subdued market environment persisted in March as Donald Trump showed little sign of backtracking on his promise of a further batch of reciprocal tariffs in early April and geopolitical tensions surrounding the Ukraine conflict remained elevated. European markets continued their year-to-date outperformance of the US – a reversal of prior years’ established trend – as Germany’s plans to expand borrowing and unleash hundreds of billions of investment in defence and infrastructure promised a large fiscal boost to the region.

On the UK market, defensive areas such as telecoms and utilities held up best, while more cyclical areas like consumer discretionary, industrials and financials found themselves in negative territory. The FTSE 250 mid-cap segment’s underperformance of large-caps was extended – down 3.9% compared to a 2.0% fall for the FTSE 100 – as it was for the FTSE AIM All-Share index, which returned -3.0%.

For the year to date there is now a conspicuous gap between the performance of the FTSE 100 – up 6.1% - and of companies further down the market cap scale, with both the FTSE 250 and FTSE AIM All-Share losing around 5%. As the managers have stated on a number of occasions, this relative performance trend – driven itself by risk aversion stemming from macro events – is opening an opportunity to invest in small cap companies at valuations which are at generational lows.

Full-year results from Quartix Technologies (+25%) built on the positive tone of its January trading update. The provider of vehicle tracking systems and associated analytics and services grew its fleet subscription base13% to 300,168 in 2024, with annualised recurring revenue rising 12% to over £32 million. In January’s update the company commented that 2025 has started on a strong note, allowing it to modestly upgrade its guidance. Quartix commented that this positive momentum has been sustained, with customer acquisition rates rising – setting it on track to grow both recurring revenues and adjusted profit before tax by about 10% this year.

Solid State (+26%) rose after announcing a $25 million order – deliverable in the year to 31 March 2026 – for communications equipment as part of a “prominent defence order programme”. This news is particularly reassuring in light of the profit warning issued by Solid State in November when the electronics component supplier announced that this contract and others had been delayed due to the UK government’s Strategic Defence Review, due in summer 2025.

While that review is still ongoing, an exception has been made for this equipment order, news which should give investors confidence that other contracts delayed from the 31 March 2025 financial year will be received in coming months. Furthermore, the geopolitical backdrop has evolved significantly since Solid State’s November update, with Solid State believing that the outlook for increased defence and security spending has boosted its medium-term prospects, not withstanding the current delays to the order cycle.

Since its addition to the Fund, the investment case for Facilities by ADF (-33%) has unfortunately been overwhelmed by the continued fallout from the US writers’ and actors’ strikes which, although concluding towards the end of 2023, have continued to impact trading.

The provider of premium serviced production facilities for film and high-end TV warned last year that 2024 revenue and profits would be at similar levels to 2023 due to delayed and cancelled productions from its sales pipeline. In March’s update, it stated that market conditions remain challenging amid subdued activity in its operating segments and a greater client focus on budget control. It now expects 2025 trading to show growth on 2024, albeit significantly below prior market expectations.

BigBlu Broadband (+20%) deemed £6.1million of the £14.9 million cash received as part of the sale of its Australian business SkyMesh to be surplus capital which it will return to shareholders in a tender offer. The tender offer will be undertaken at 40p a share, a large premium to the 28p price at which the shares traded immediately prior to the announcement. The buyback amounts to around 25% of the issued share capital of BigBlu broadband – providing a significant boost to the share price.

Also launching a share buyback scheme was Virgin Wines (+18%), which – alongside half-year results – released a new capital allocation plan and a strategy to “turbocharge” revenue growth to £100m within five years, from £59 million in 2024.

The company has net cash of £17.3 million and a further £6.4 million of customer deposits – resulting in a gross cash position of £23.7 million, a total which it thinks is more than sufficient to finance its new growth investments across customer acquisition, commercial partnerships, technology and its Warehouse Wines brand. It therefore plans a share buyback scheme amounting to up to 15% of its share capital.

Beeks Financial Cloud Group (-26%) has enjoyed very positive newsflow over the last year or so, announcing several contract wins and extensions, including with the Johannesburg Stock Exchange. With this strong progress priced into its shares and with the key details of half-year trading already pre-announced in a February update, investors found little to sustain further short-term momentum within March’s interims result release. Beeks simply commented that its outlook for the new financial year is positive and “within the range of market expectations”.

A new position in Begbies Traynor Group was initiated during the period. Begbies has the highest volume share of the UK insolvency market and has growing advisory and property services businesses. The company has an excellent track record of growth having delivered a six-fold increase in profit-before-tax since 2014. Recent market volatility presented an attractive entry point into the shares, which had de-rated meaningfully at the point of initiation.

The position in Zoo Digital was exited in full during the month.

Positive contributors included:

Solid State (+26%), Quartix Technologies (+25%), BigBlu Broadband (+20%), Virgin Wines (+18%) and Begbies Traynor (+7.2%).

Negative contributors included:

Facilities by ADF (-33%), James Cropper (-27%), Beeks Financial Cloud Group (-26%), Vianet Group (-23%) and Calnex Solutions (-18%).

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

*Source: Financial Express, as at 31.03.25, total return (net of fees and income reinvested), bid-to-bid, institutional class. **Source: Financial Express, as at 31.03.25, 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.

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.

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