Liontrust US Opportunities Fund

During the first quarter of 2020, the Liontrust US Opportunities Fund returned 4.1%, underperforming the S&P 500 Index return of 5.1% and the IA North America sector average return of 5.0% (both comparator benchmarks)*.

US equities continued the strong, cyclical, reflationary rally that began in earnest in the summer of last year fuelled by continued fiscal stimulus and evidence that US economy is bouncing back quicker than many thought it would. Markets quickly expected more stimulus after the Democrats won the Georgia Senate election run-off seats in January giving them de-facto control over the Senate. Although the margins were tight, this meant the Democrats had control of both Congress and the White House having maintained the House and with Joe Biden defeating Donald Trump for the White House back in November.  At the beginning of March, a $1.9tn stimulus bill, the American Rescue Plan, was signed off, sending more stimulus cheques to the American public. This took the total amount of stimulus from the 3 major stimulus packages since the onset of Covid-19 to around $5tn or 25% of US GDP. And there is likely to be more stimulus, in the form of an infrastructure bill, later in the year.

Good news this quarter has come from the vaccination rollout in the US. After perhaps a slightly slow start, the program has picked up speed impressively. By the end of March, the US was averaging over 3 million doses per day and around 105 million Americans (40% of eligible adults) had received at least one dose of vaccine and more than 60 million were fully vaccinated.  This has helped the US re-open at an impressive pace. There is significant pent-up demand evident in many areas of the US economy. Indeed, it is likely we’ll see the strongest year of growth since the early 1980s.

The rapidly improving picture has helped propel bond yields much higher over the quarter with the widely followed 10-year yield rising from under 1% at the beginning of the year to 1.7% by the end of March. The combination of stimulus and evidence of inflationary pressures rising (in both wages and supply chain shortages) meant the market began to question whether the Fed would stick to their outlook of not raising interest rates until 2024. Chair Jerome Powell and the other FOMC members have been at pains to reiterate whenever possible that they remain extremely accommodative and are targeting average inflation in an important regime change.

From an equity market perspective, this meant there was a significant cyclical bent to returns this quarter. Rapidly rising yields put pressure on many of the longer duration, or secular growth, segments of the market which had performed so well last year.  Tech, utilities and consumer staples lagged the rally which was led by the energy, financials and industrials sectors. From a factor perspective, this dynamic also saw significant outperformance of ‘value’ over ‘growth’.  This also helped smaller market cap companies to once again outperform their larger peers by a considerable margin. The Russell 2000 Index, a proxy for smaller caps, was up by 12.7% compared to 6.2% for the large cap S&P 500 (both in US dollar terms).  Finally, it is worth noting that we did see a meaningful, and in our view healthy, correction in some of the more speculative areas of the US market which had been gaining attention. A good example of this is in the SPAC, or blank check company, space where there has been a tsunami of new offerings in the past 12 months. These companies started to noticeably underperform from mid-February onwards.

After a strong period of performance, the Liontrust US Opportunities Fund did slightly underperform the S&P 500 and the wider peer group during the quarter. This was perhaps to be expected in a period of significant market rotation where many of the stocks that have performed well in the past year gave way to the laggards. The Fund was helped by its larger than benchmark position in smaller cap companies and indeed many of the strongest performers during the quarter were to be found down the market cap spectrum alongside holdings in more cyclical sectors including financials (Silicon Valley Bank) and industrials (Advanced Drainage Systems). The weakest holdings, this quarter, were to be found in the Fund’s exposure to more secular growth areas including, for example, software (e.g. Black Knight and Everbridge).

In terms of portfolio activity, we have made relatively minor changes to the portfolio and have been focusing our attention on companies and industries which we think we will structural beneficiaries of the post-Covid world. We continue to believe that disruption, and particularly digital disruption, will remain the most important determinant of corporate success. We continue to search for companies that we believe will be drivers of this disruption (disruptors), help fuel it (enablers) or indeed benefit from it (embracers).

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

*Source: FE Analytics as at 31.03.21

**Source: FE Analytics as at 31.03.21. Quartiles generated on 13.04.21.

KEY RISKS

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

DISCLAIMER

The information and opinions provided 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. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.