Liontrust SF European Growth Fund

The Fund returned 5.0% over the quarter, outperforming 0.5% from the MSCI Europe ex-UK Index and the 1.6% IA Europe ex-UK sector average (both of which are comparator benchmarks)*.

September was more volatile for European equities, ending a streak of seven consecutive positive months, with the Federal Reserve discussing a start to tapering in November, supply chain blockages, spiralling raw material prices, a new standoff over the US debt ceiling and concern around contagion from the collapse of debt-plagued Chinese property giant Evergrande.

We have never been keen to focus on short-term performance and Q3 highlights exactly why. Given our quality growth focus, the portfolio underperformed earlier this year with expectations of imminent rate hikes to control inflation resulting in a value rotation into more cyclically sensitive and optically cheaper companies. This reversed in July/August as the Fed indicated it would let the economy run hot without raising rates until late 2022 or 2023, refocusing markets on reliable growth and causing a fast move back into our favoured names.

More hawkish central banks in September drove another turnaround and a selloff in technology, however, and all this has been without any underlying change in the prospects for our selected companies. The market remains volatile and often disconnected from fundamentals in the short term, and we focus on long-term positive shifts in our economy and high-quality businesses driving, and benefitting from, these changes.

Over the quarter, top performers included Nagarro, a strong fit for our Increasing the resource efficiency of industry and agricultural processes theme, with this IT engineering business building software solutions for blue-chip clients such as BMW, Roche and McKinsey. The company released its first half-year report in August, announcing year-on-year revenue growth up 12.5% despite an overheated jobs market and the second wave of Covid-19 in India. While demand remained strong for its services, supply was significantly constrained by these disruptions but the company introduced various initiatives to keep recruiting what it calls Nagarrians and added more than 2000 in the first six months of 2021.

Another strong name was recent addition Lifco, held under our Providing affordable healthcare theme, which acquires small and medium-sized business in areas including dental materials and equipment. The company also released first-half results over the quarter, showing a 24.6% rise in net sales and 50% growth in pre-tax profits. The CEO said improvements in profitability are a result of organic growth, Lifco’s continual focus on margins, acquisitions, and continued low sales and marketing activities as a result of the pandemic, with earnings per share over the period also increasing 56.2%.

Elsewhere, Swedish investment platform Avanza has continued to perform well since we added the stock last year, announcing second-quarter numbers in July including a 43% rise in operating income and a 61% increase in profits. Over the period, the company passed milestones of 1.5 million customers and SEK 700 billion in savings capital, also ranking highest among banks and number four overall in Kantar Sifo’s reputation index 2021, meeting one of its sustainability targets for the year.

Unifiedpost was another strong contributor, more than doubling its consolidated revenue over the first half of the year, largely driven by acquisitions completed in the period. Celebrating its first anniversary as a public company, CEO Hans Leybaert said the six acquisitions completed since IPO should allow the company to enhance its offering and rapidly expand the network, which is being rolled out across 30 countries. This is another holding exposed to our Improving the resource efficiency of industrial and agricultural processes theme, focusing on digitising business administration and payments. Around 95% of documentation between European businesses is still paper based, which is slow, subject to error and has a significant environmental footprint, and this company’s software allows companies to cut down paper, time, money and fraud.

ASML also remains among our best positions, although the shares were caught up in the technology selloff at the end of September. This was despite the company increasing its financial forecasts for the next decade amid booming demand for its lithography systems, a key component for computer chip makers. The company predicts revenue growth of around 11% annually up to 2030 and estimates its revenue will hit €24-30 billion in 2025, with gross margins up to 55%.

Q2 addition Qiagen has also had a solid start in the portfolio, with this German provider of sample and assay technologies for molecular diagnostics, applied testing, academic and pharmaceutical research. We continue to see innovation as the key driver in healthcare, with a massive step change required in technologies that help treat disease more effectively. Companies like Qiagen continue to drive down the cost of understanding the human genome, allowing experts to tailor therapies more precisely to individual needs and with fewer side effects, thereby reducing the burden on the healthcare system. Qiagen reported net sales up 28% in the second quarter, driven by strong performance from non-Covid product groups.

Weaker names, in the context of more volatile markets and that tech selloff, included Spotify and Kone. Kone’s shares look to have been hit by the Evergrande situation and broader concerns about Chinese real estate, which is the key growth market for the Finnish lift and escalator company.

With Spotify, shares fell in July as the company reported lower-than-expected new user numbers in the second quarter, with the pandemic suppressing growth in markets such as India. Spotify added nine million monthly active users over Q2, bringing the total to 365 million, falling short of its own forecast as well as the market’s 372.5 million average estimate. We model growth slowing to a more mature 10% to 15% over the next five to 10 years in terms of new users but remain excited to see signs of monetising the audience, including news of an expansion into live events.

Recent additions to the portfolio included American-Swiss medical device company Alcon, which specialises in design and manufacture of interocular lenses, consumables used in ophthalmic surgery and consumer contact lenses. The company has recently spun out of Novartis and is going through a period of reinvestment and renewed innovation, resulting in market share gains over the last 18 months and evidence of a strong, long-term orientated management team. Alcon is another business exposed to our Enabling innovation in healthcare theme, tackling the growing issue of vision impairment. Nearly a billion people have a preventable impairment and the company tackles this with both its products and its foundation, which spends roughly 1% of sales on treating this affliction in developing economies.

Another purchase was Topicus, a Vertical Market Software company that predominantly services European public sector customers in education, healthcare and local government. The company focus is on developing custom software to make the lives of educators, healthcare professionals and civil servants easier, with reducing error, duplication and generation friction positive for the economy, and we hold Topicus under our Better resource efficiency theme.

In terms of sells, we exited our position in Kerry Group after seven years. The company is exposed to our Delivering healthier foods theme, using its IP to improve the nutritional characteristics of our foods. We sold after our annual review as the share price now reflects our five-year assessment of intrinsic value; we were sad to say goodbye to this high-quality company dedicated to improving our food.

We also sold Schneider Electric, which provides products and services to manage electricity on the demand side, once it has been sold to the user. The company has a dominant market position in energy management and industrial automation and its success will be driven by the growth in electricity and demand for greater energy efficiency. Again, we recently reviewed the business and the current valuation reflects our assessment of intrinsic value.

Finally, we sold Chr. Hansen, a bioscience company that engages in the development of natural solutions for the food, nutritional, pharmaceutical, and agricultural industries. The company’s biocatalysts help drive innovation and resource efficiency and it is also exposed to our Improving the resource efficiency of industrial and agricultural processes theme. Given the sharp re-rating in valuation, we see better risk/reward in other portfolio holdings and the company returns to the watchlist, along with Schneider and Kerry.

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

* Source: Financial Express, as at 30.09.21, primary share class, total return, net of fees and income reinvested

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