Liontrust UK Micro Cap Fund

Key highlights

• Amid the ongoing relative drawdown for Quality stocks, there is growing recognition among market observers that valuations look too far disconnected from fundamentals.
• The Fund has a double-digit expected earnings growth and a dividend yield of 3%.
• ActiveOps and James Cropper made headway on evidence of good trading; BigBlu Broadband fell on decision to delist from AIM.

Performance

The Liontrust UK Micro Cap Fund returned -2.5%* in November. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned -1.1% and -2.2% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was -1.9%.

Commentary

The Bank of England held interest rates at 4.0% and commented that market pricing for two further cuts was a reasonable prediction of its likely path as it approaches the end of an easing cycle. In the US, a deal was reached to end the extended government shutdown, but the main market action during the month was triggered by valuation concerns around the biggest AI plays. 

Despite this wobble among some of the global equity market’s largest stocks, the established trend of underperformance of the Quality factor extended in November. The drawdown in Quality’s relative performance is increasingly unprecedented in terms of its duration and depth, leading a growing number of market commentators to highlight the potential for an inflection. 

A recent study by Canaccord Genuity Quest found that the highest-scoring Quality stocks on the UK market underperformed the worst-ranking cohort for ten consecutive quarters from February 2022 through to May 2025. This is despite UK interest rates starting a cutting cycle from July 2024 – an environment that would usually favour Quality’s long duration earnings profile. 

As a result, the Fund’s portfolio of high-quality compounders trade at significant discounts to historical averages, yet their fundamentals remain attractive and updates on trading have been, on the whole, pleasingly robust given the uncertain macro environment.  

Following on from last month’s trading statement and upgrade to full-year guidance, ActiveOps (+10%) released interim results showing 58% growth in annual recurring revenue in the six months to 30 September. The provider of decision intelligence software signed five new customers during the period and also expanded relationships with existing customers – leading to a net revenue retention of 114%. The second half of its financial year has also begun well, with three customers added. 

Interims from JamesCropper (+15%) gave further evidence that the new management team is making progress in implementing its business strategy. As indicated in an August trading statement, revenues were slightly ahead of expectations in the first half of its financial year, up 3.7% year-on-year. It commented that trading in October and November has been in line with expectations. In the longer term, the management team aims to generate double-digit percentage annual growth in the Advanced Material business, while returning the Paper & Packaging unit to sustainable profitability. 

Bigblu Broadband (-71%) has over recent years sold major operating assets and evolved into a small holding company with minority stakes having disposed of its Australian subsidiary Skymesh for a consideration of up to £26 million. The company returned money to shareholders through a tender offer in which the Fund participated for the full allocation of 26%. Following this, in November, Bigblu surprised investors by announcing that talks with Skymesh’s buyer suggest that it may not be entitled to any deferred consideration and may face a liability. At the same time the company announced a decision to delist from AIM. The team took the decision to sell the remaining position while liquidity allowed. 

Microlise (-15%) is a provider of integrated hardware and software solutions for operators of large commercial vehicle fleets. Following on from an upbeat Q3 update released in September, its full-year trading update in November described trading as more mixed, resulting in a guidance downgrade to revenues of £84 million, below the £91 million investors expected. The downgrade is the culmination of a general trend to lower order volumes in automotive and construction sectors – due to trade tariffs and macro weakness – and a delay to a large UK project for a retailer hit by a cyber-attack earlier this year. 

We remain resolutely focused on the application of the investment process, ensuring that we manage portfolios in a consistent way which avoids style drift. The portfolio retains its conviction in high-quality compounders despite the style factor being as out of favour as we can remember. As we approach year-end, a growing number of market commentators are observing the historic disconnect between Quality stocks’ robust fundamentals and their depressed valuations.  

Calling the timing of turning points in stock markets is difficult, and not something we as a team attempt to do.  When it arrives, a Quality rebound offers the prospect of a quite significant valuation re-rating; in the meantime, the portfolio’s long-term total return prospects are underpinned by a double-digit average forecast 1yr earnings growth and a dividend yield of 3%. 

Positive contributors included:

Cropper (+15%), ActiveOps (+10%), Fonix (+8.1%), CML Microsystems (+3.4%) and Begbies Traynor (+2.7%).

Negative contributors included:

Bigblu Broadband (-71%), Beeks Financial Cloud (-17%), Microlise Group (-15%), Calnex Solutions (-14%) and Netcall (-8.3%).

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

*Source: Financial Express, as at 30.11.25, total return (net of fees and income reinvested), bid-to-bid, institutional class. **Source: Financial Express, as at 30.09.25, total return (net of fees and income reinvested), bid-to-bid, institutional class.