Liontrust Global Smaller Companies Fund

The Liontrust Global Smaller Companies Fund returned 16.0% over the quarter, outperforming both the MSCI World SMID Index and the IA Global sector, which returned 5.7% and 6.9% respectively (both comparator benchmarks)*.

US equity markets continued their strong rally but were driven more by the secular growth areas of the market as opposed to the more cyclical areas which have dominated in recent quarters. The more cyclical and reflationary factions of the market have enjoyed a strong run after the vaccination efficacy announcements last October and thanks to the Democrats’ more stimulatory agenda catalysed by a Biden presidency last November and the Georgia Senate election run-off seats in January. The dominant debate this year, so far, has surrounded inflation and whether the pick-up in inflation we have seen is transitory in nature or something more structural which will cause the Fed to tighten monetary policy quicker than otherwise might have been expected. Alongside evidence that the US economy is bouncing back from the pandemic extremely impressively, growth in 2021 is likely to be fastest in almost 40 years, fears over inflation had driven 10-year US bond yields up to c.1.75% by the end of the first quarter, rising by 0.83% in just three months. Inflationary fears have subsided during this latest quarter, with investors deducing that many of the factors that are causing the current pick-up in inflation will be more temporary in nature (e.g. supply chain shortages). Bond yields subsequently subsided helping the more secular growth areas of the market over the quarter.

We continue to look for companies that are capable of long-term growth using the five key drivers of Science, Intellectual Property, New Deep Technology, Positive Social Change and Entrepreneurial Vision. As a result, we focus on capital light businesses and it leads us to avoid sectors and sub sectors that are capital intensive where larger and existing companies have a huge advantage. Given the sheer number of exciting, high-growth and fundamentally underappreciated stocks within the US and the innovative nature of these companies, we are currently finding the most opportunities there – this overweight to the US was particularly beneficial over the quarter, contributing the most to the outperformance of the Fund from a regional perspective.

As has been commented on in previous quarters, the Fund maintains it overweight to technology-related stocks or those companies utilising technology to gain a competitive advantage versus industry peers. Indeed, from a sector perspective, technology was the most significant contributor to the outperformance of the Fund over the period. At the stock level, Upwork, Rapid7 and Cloudflare were the most significant contributors to the Fund’s outperformance over the quarter. Cybersecurity companies like Cloudflare continue to benefit from the broad increase in IT spend on next generation cybersecurity solution as the breadth and extent of cyber-attacks continues to rise with more high-profile cyber-attacks such as the recent ransom attack on Colonial Pipeline.

The dominant debate this year, so far, has surrounded inflation and whether the pick-up in inflation we have seen is transitory in nature or something more structural. We continue to believe, like many, the best protection against inflation is to own strong companies with competitive advantages and pricing power allowing them pass inflating costs down the chain.

Furthermore, we continue to be very positive on the outlook for high quality growth stocks over the next year. We are especially positive as the small cap area of the market continues to give considerable scope for further outperformance as the world continues to recover from the Covid-19 pandemic. Our emphasis on the drivers of Science, Intellectual Property, New Deep Technology, Positive Social Change and Entrepreneurial Vision will, we believe, guide the Fund towards those companies that will change the world as we adapt going forward.

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

*Source: FE Analytics as at 30.06.21

**Source: FE Analytics as at 30.06.21. Quartiles generated on 07.07.21.

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.