Liontrust UK Micro Cap Fund

• Ongoing macroeconomic and geopolitical uncertainty fuels investor risk aversion and weak sentiment towards small and micro caps.
• Many high quality but out-of-favour businesses – particularly in the small cap space – now trade at extreme low valuations, representing a latent source of pent-up value which will be released when sentiment turns.  

The Liontrust UK Micro Cap Fund returned -12.0%* in Q1. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned -6.6% and -4.9% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was -7.4%.

Mounting geopolitical instability and uncertainty over US trade tariffs defined the market environment in Q1.

President Trump’s approach to the Ukrainian conflict 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 factored in higher expectations of military spending in Europe from governments attempting to fill the void and deter Russian aggression – leading to a sharp rally in defence sector stocks.

At the same time, investors struggled to price in the impact of Trump’s trade tariff threats. While it initially seemed that the threatened levies could be negotiating tools to win concessions from trade partners, Trump showed little sign of backtracking ahead of his promise of a further batch of reciprocal tariffs in early April – prompting significant investor nervousness.

In this environment, large-caps and defensive areas held up best. Beneath the FTSE All-Share’s solid quarterly gain of 4.5% is substantial variation in returns to different size segments. While the FTSE 100 was up 6.1%, both the FTSE 250 and FTSE AIM All-Share lost around 5%.

As the managers have stated on a number of occasions, this underperformance of mid and small caps – driven itself by risk aversion stemming from macro events – has opened an opportunity to invest in these companies at generational valuation lows.

The portfolio exhibits a strong bias towards the quality style factor as a result of the investment process, which targets companies with enduring competitive advantage stemming from intangible asset strengths, resulting in high cash flow returns on capital. However, value style characteristics outperformed quality and growth in the quarter

While recent market trends have been tough for relative portfolio performance, there is mounting potential for outperformance from some of the more unloved areas of the market as and when sentiment recovers and valuations revert towards long-term averages. Despite the harsh and indiscriminate de-rating in valuations seen across much of the market it was pleasing to see the share prices of a number of holdings respond to good newsflow with positive share price movements.

Virgin Wines UK (+42%) was the largest riser, initially rallying after a trading update showed 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. Alongside subsequent half-year results, Virgin also released a new capital allocation plan and a strategy to “turbocharge” revenue growth to £100 million 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.

Inspiration Healthcare Group (+34%) 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.

Solid State (+30%) 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, notwithstanding the current delays to the order cycle.

Quartix Technologies (+26%) also gained strongly. The provider of vehicle tracking systems and associated analytics and services grew its fleet subscription base 13% to 300,168 in 2024, with annualised recurring revenue rising 12% to over £32 million. The company commented that 2025 has started on a strong note, allowing it to modestly upgrade its guidance. Customer acquisition rates have improved– setting it on track to grow both recurring revenues and adjusted profit before tax by about 10% this year.

With the general de-rating of small and micro cap companies extending into Q1, companies experiencing operational or strategic setbacks were penalised especially harshly.

There were three material detractors from performance during the period: IG Designs, Zoo Digital and Vianet, which collectively cost over 300bps as their share prices sold off sharply in response to disappointing trading updates.

IG Design Group’s (-64%) shares fell after issuing a profit warning which cited tough retail conditions, particularly in the US, where several key customers faced financial distress, including bankruptcies. As a result, the manufacturer and supplier of private label greeting products expects a 10% year-on-year revenue decline for the fiscal year ending 31 March 2025, with adjusted profit hovering around break-even − far below the previous year's $25.9 million. Consequently, IG Design acknowledged it would fall short of its target to restore profit margins to pre-pandemic levels of 4.5% in fiscal 2025. The position was exited in full shortly after the end of the period.

Zoo Digital Group (-72%), the provider of localisation and digital media services to the entertainment industry, also warned on profits in the wake of the 2023 Hollywood strikes. The company said 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. Since the strikes finished, Zoo Digital has seen 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. With our original investment case for the business having deteriorated substantially, we sold out of the position during the quarter.

Vianet (-49%),the international provider of actionable data, business insights, and payment solutions, fell after its trading update released towards the end of the warned of short-term challenges. The company expects revenue for the 2025 financial year to be around £15.7 million, and EBITA to be around £3.6 million. 

It was a relatively busy period of portfolio activity as decisions were made to exit a number of the lower conviction, higher risk positions in the portfolio; Bango, CMO Group (following the announcement that the shares will delist from AIM), Hvivo, Totally and Zoo Digital. Eckoh was also exited in advance of the completion of the acquisition of the company by Bridgepoint.

A new position in Begbies Traynor Group was initiated during the quarter. 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.

Positive contributors included:

Virgin Wines (+42%), Inspiration Healthcare Group (+34%), Solid State (+30%), Quartix Technologies (+26%) and Microlise Group (+14%).

Negative contributors included:

Zoo Digital Group (-72%), IG Design Group (-64%), Vianet Group (-49%), Calnex Solutions (-22%) and Tristel (-29%).

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.

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.

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.