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VIew NowPast performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.
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.
- Inspecs Group topped November’s risers on further bid interest, while Kainos moved higher on solid trading.
- The Fund has a double-digit expected earnings growth and a dividend yield of 3%.
Performance
The Liontrust UK Smaller Companies Fund returned -3.4%* in November. The FTSE Small Cap (excluding investment trusts) Index comparator benchmark return was -1.1%, and the average fund in the IA UK Smaller Companies sector, also a comparator benchmark, returned -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 trading updates have been, on the whole, pleasingly robust given the uncertain macro environment.
November’s batch of releases included Kainos Group’s (+12%) solid set of interim results, which built on September’s half-year trading update and guidance upgrade. The outsourced provider of custom digital platforms and the Workday enterprise software suite saw strong sales performance across its divisions drive a 27% rise in bookings to £228 million. It now has a contracted order backlog of £397 million, which compares with revenues of £196 million (+7% year-on-year) in the half-year ending 30 September.
GlobalData (+7.8%) launched a £10 million share buyback programme, following on from £40 million of repurchases made in the first half of the year, and confirmed that it remains committed to a move of its share listing to London’s Main Market, with an update on timings scheduled for January.
Shares in the company had previously spiked earlier in the year on private equity takeover interest, which was successfully rebuffed, before sliding on an October warning that profit margins were being squeezed in the short term by investment in growth and the integration of acquisitions.
In October eyewear manufacturer Inspecs Group (+16%) had confirmed it received two takeover approaches and a separate offer to acquire part of its business. Shares in the company continued to rise in November as extensions were agreed to the Takeover Panel’s deadline for firm intentions, and as Safilo Group – the party originally targeting Inspecs’ Eschenbach Group and BoDe businesses – upgraded its interest to indicative cash offers for the entire group.
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.
Having slid on a September interim update that highlighted trading headwinds in its UK and European sea food divisions, shares in Hilton Food Group (-21%) weakened further as it noted that challenging conditions remain. The packager of meat, seafood, vegetarian, vegan and convenience food products for large grocery retail customers such as Tesco in the UK and Woolworths in Australia and New Zealand has experienced soft UK white-fish demand – due to cost inflation and cautious consumer spending – and ongoing regulatory disruption to European smoked salmon shipments to the US.
Next 15 Group’s (-28%) shares gave back October’s gains as disposal talks ended without a deal being reached.
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:
Inspecs Group (+16%), Kainos Group (+12%), GlobalData (+7.8%), Foresight Group (+4.4%) and Mortgage Advice Bureau (+3.7%).
Negative contributors included:
Next 15 Group (-28%), Hilton Food Group (-21%), Cohort (-19%), Microlise (-15%) and On The Beach (-10%).
Discrete years' performance** (%) to previous quarter-end:
| Sep-25 | Sep-24 | Sep-23 | Sep-22 | Sep-21 |
Liontrust UK Smaller Companies I Inc | 1.1% | 8.3% | -1.6% | -28.9% | 46.9% |
FTSE Small Cap ex ITs | 6.4% | 22.4% | 12.7% | -24.4% | 72.4% |
IA UK Smaller Companies | 2.5% | 16.1% | 2.2% | -31.9% | 51.1% |
Quartile | 3 | 4 | 4 | 2 | 3 |
*Source: Financial Express, as at 31.10.25, 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, primary class.
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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.
- Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund.
- The Fund, may in certain circumstances, invest in derivatives but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead.
- Credit Counterparty Risk: outside of normal conditions, the Fund 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.
- Diversification Risk: the Fund is expected to 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.
- Smaller Companies Risk: as the Fund is primarily exposed to smaller companies there may be liquidity constraints from time to time, i.e. in certain circumstances, the 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 the fund to defer or suspend redemptions of its shares. In addition the spread between the price you buy and sell units will reflect the less liquid nature of the underlying holdings. The Fund 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.
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