Liontrust GF SF Pan-European Growth Fund

The Fund returned 3.8% over the quarter in euro terms, underperforming the MSCI Europe Index’s 7.7% (which is the comparator benchmark)*.

Volatility remains rife in markets, with violent moves between sectors and factors and uncertainty surrounding new strains of the pandemic. Macroeconomic debate continues to centre on long-term versus transitory inflation and the ability of central banks to control prices without disrupting recovery and we saw a first rate rise in the UK over December and the US Federal Reserve outline eight potential hikes over the next three years. For now, the European Central Bank remains one of the more dovish and maintains its patient approach, with concerns about a significant slowdown in the eurozone. The Bank voted to leave interest rates unchanged while its pandemic emergency purchase programme (PEPP) will end in March. As we said last quarter, increasingly hawkish policymakers have caused a rotation back into the ‘value‘ part of the market and many of our favoured quality growth companies have lagged.

Global supply chain issues are exacerbating inflationary forces as aggregate demand recovers from the depths of the pandemic and pricing power remains critically important for businesses to protect margins as costs rise. Our process looks beyond these shorter-term issues, however, and focuses on the themes that are driving our economy in the next decade and beyond as it becomes cleaner, healthier and safer.

Over the quarter, top performers included Nagarro, with this IT engineering business building software solutions for blue-chip clients such as BMW, Roche and McKinsey and held under our Increasing the resource efficiency of industry and agricultural processes theme. Back in October, the company announced the acquisition of New Jersey-based Advanced Technology Consulting Service; the company has a strategic focus on areas including digital, data, and analytics and the tie-up gives Nagarro access to the US and German markets, as well as a deeper presence across Asia-Pacific. Following the deal, Nagarro has subsequently been able to revise its 2021 revenue guidance upwards twice, rising from €515 million to €525 million in November and then to €535 million the following month. Estimates for gross margin and adjusted EBITDA margin remain at 28% and 14% respectively.

Private equity group 3i also registered a strong quarter, reporting a total return of £2.19 billion (24% on opening shareholders’ funds) over six months to end September. The company highlighted considerable momentum from its top investments over the period, particularly those in favoured value-for-money, e-commerce, consumer and healthcare areas. In competitive markets, 3i has continued to deploy capital selectively, with new investments in MAIT and the ten23 health platform, as well as bolt-ons for Cirtec Medical, Luqom and Havea. Other notable deals included the partial sale of a stake in Basic-Fit (which we also own in the Fund) at €44.25 per share, generating proceeds of around £146 million.

We hold 3i under our Increasing financial resilience theme, with the company’s  model based on investing and supporting businesses for growth and helping develop the infrastructure and technologies we need in a sustainable transition.

UK testing, inspection and certification (TIC) business Intertek had a strong Q4, supported by a trading update covering the first 10 months of 2021 and revealing it is on track to deliver full-year targets. For Q3, the company produced total revenue growth of 6.7%, boosted by recent acquisitions as well as positive momentum on margin and cash. Looking ahead, the pandemic has made the case for Total Quality Assurance clearer and Intertek expects the $250 billion global market to grow faster post-Covid.

Another positive contributor was Lifco, held under our Providing affordable healthcare theme, which acquires small and medium-sized business in areas including dental materials and equipment. The company reported a 24.9% rise in net sales over the first nine months of 2021, driven by a combination of organic growth and acquisitions. During this period, Lifco consolidated 14 acquisitions, with four in the dental area, and many of these are market leaders in their respective niches.

Puma is a further holding benefitting from strong numbers, posting a 20% Q3 increase in currency adjusted sales and revising its financial year 2021 outlook upwards to sales growth of at least 25% (up from 20%). CEO Bjorn Gulden said this is despite various operational challenges, with a Covid-related lockdown of production in South Vietnam, an overheated global freight market, port congestion and a difficult situation in China. We see the business as a strong fit for our Enabling healthier lifestyles theme, with around 33% of its sales derived from sportswear, which enable people to take part in sports, increase activity and tackle obesity.

Recent addition Oxford Nanopore has enjoyed a strong start in performance terms, with the company behind a new generation of nanopore-based sensing technology and its products enabling scalable analysis of DNA and RNA. The company updated its full-year revenue guidance following a ‘significant expansion’ of its activities in a large customer project in the United Arab Emirates. Having IPOd out of IP Group in September, the company sits in the applied genomics market, including agriculture, pharmaceuticals, food and water, and safety, as well as infectious disease, immune profiling and cancer diagnostics, and is therefore another strong fit for our Enabling innovation in healthcare theme.

Elsewhere, several of our long-term semiconductor and financial holdings also featured among the top contributors, including Infineon and ASML in the former and Rilba (Ringkjøbing Landbobank) and St James’s Place in the latter.

Weaker names over the period included Zur Rose Group, with its shares falling as the German health minister announced the expected mandatory introduction of e-prescriptions in medical practices, pharmacies and clinics in January will be postponed as ‘necessary technical systems are not yet widely available’. While we anticipated digitalisation would be bumpy – innovative change is never easy – such an indefinite delay was unforeseen.

Zur Rose has reaffirmed its medium-term guidance, believing that, five years from now, 10% of prescriptions will be digital. Equally, reimbursement of telemedicine appointment to patients starts in January and the company has the biggest platform for this. Having seen the trajectory in countries like Sweden, we continue to believe in our thesis and expect prescriptions and GP appointments will increasingly move to a digital basis across Europe. Zur Rose is in prime position with brand and technology but when you have something requiring buy-in from intransigent groups, you have to prepare for slow, volatile B roads before you hit the motorway of fast adoption.

Trainline also saw its shares falling despite also reporting a return to profitability over the first half of 2021 as passengers came back and moved to digital ticketing. For the six months to end August, the company posted EBITDA of £15 million versus a £16 million loss in the same period a year ago, while revenue rose 151% to £78 million and net ticket sales were 179% higher at £1 billion. As a travel company, it has obviously been hit more recently as the Omicron variant led to concerns about renewed lockdowns and restrictions.

Spanish blood plasma business Grifols also had a weaker quarter, with ongoing concerns about sourcing plasma amid the pandemic.

After a long process of engagement and analysis, we decided to sell our remaining position in Kingspan Group towards the end of the year. We have invested in Kingspan for more than 15 years and have held the company in high regard for the benefits its products bring, playing a key role in energy efficiency in buildings and therefore carbon dioxide emission reduction. Revelations from the Grenfell Tower Inquiry, however, have raised concerns about the culture and controls within the insulation business.

We initially decided to downgrade Kingspan’s sustainability rating (in our proprietary matrix) from A1 to A4 in December 2020, a significant reduction in terms of management quality. This means we view a company as higher risk and its weighting in the portfolio fell substantially as a result. Our view at that stage was to reserve final judgement until after the Inquiry concludes and we could discuss the findings and recommendations with the company’s management and other parties. As part of continuing engagement, we requested a meeting with the new Chairman to understand his view of how the culture has changed, and needs to change further, towards safety. This has not been forthcoming, however, which is disappointing given our large holding and long-term support of the business. This lack of engagement has prevented us from improving our rating from A4.

There are also more fundamental issues to consider. With the share price currently around 105 euros, on our modelling, the company had to deliver faultlessly over the coming years for there to be upside. On balance, factoring in concerns on valuation, culture and management rating, we feel now is the right time to exit.

In terms of buys over Q4, we introduced GN Store Nord, a global leader in the design of hearing aids and ‘unified communication’ devices. With an ageing population, and growing middle-class, the hearing aid addressable market continues to grow steadily. GN has consistently outgrown the market with innovative new features, such as mobile connectivity, and is also developing lower-cost devices for people with mild hearing loss. Unified communication devices include professional headsets and video cameras used by companies in video conferences – which is important in the new remote and hybrid working environment.

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

*Source: Financial Express, as at 31.12.21, primary share class, in euro terms, total return, net of fees and income reinvested.

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