Liontrust SF Global Growth Fund

The Fund returned 4.0% over the quarter, underperforming 7.3% from the MSCI World Index and the 4.7% IA Global sector average (both of which are comparator benchmarks)*.

Volatility remains rife, 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 the US Federal Reserve outline eight potential hikes over the next three years at its December meeting. 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. As always, our process looks beyond these shorter-term issues and focuses on the themes that are driving our economy in the next decade and beyond as it becomes cleaner, healthier and safer.

Looking at our best performers over Q4, US healthcare name Thermo Fisher Scientific is once again leading the way. As we have highlighted before, the company’s logo, as the world leader in serving science, is healthier, cleaner and safer (a slight variation on the cleaner, healthier and safer at the heart of our Sustainable Future approach), and it is a strong fit for our Enabling innovation in healthcare theme. Healthcare needs to become more efficient and a key part of that lies in early diagnosis of diseases based on genetic make-up; Thermo Fisher contributes to this by selling medical technology products across areas as diverse as mass spectronomy, allergy/auto immunity testing, food safety testing, cancer testing diagnostics and post-transplant tissue testing.

Its shares have continued to rise on the back of quarterly numbers, with the company announcing a 9% rise in Q3 revenue to $9.33 billion as well as a range of new launches and expansions. These included products to enable advancements in oncology, cell and gene therapy and to provide increased sensitivity in low-flow liquid chromatography, plus a new Bioprocess Design Centre in South Korea and, as part of a strategic partnership with CSL (which we also own in the Fund), assuming responsibility for a biologics site in Lengnau, Switzerland.

Cadence Design Systems is another long-term outperformer under our Improving the efficiency of energy use theme, with the company continuing to broaden its chip design software offering to new customers, as the likes of Amazon, Google and Tesla invest in this area. Cadence’s software is essential to this design, and demand from these businesses, as well as more traditional chip manufacturing customers, will drive growth over the short and long term. Again, the company’s shares have benefitted from stronger-than-expected Q3 numbers, with revenue of $751 million compared to $667 million for the same period in 2020 and an operating margin of 26%.

Having exceeded guidance on all key metrics for the third quarter, Cadence raised its outlook for the year, citing accelerating demand for its solutions and highlighting four significant new products in Q3, including the Integrity 3D-IC Platform. 

VeriSign also reported solid Q3 performance over the period, with this provider of domain name registry services and internet infrastructure held under our Enhancing digital security theme. This is a simple business but it performs a critically important service for the global economy in operating two of the most important internet root servers. This provides registration services and authoritative resolution for the .com and .net top-level domains, enabling global communication and most of the economy’s e-commerce.

Alphabet has been an ever present in our top performers over the year and the company’s shares continued to grind upwards over the quarter, with the market remaining positive on Google’s ability to pick up business as the economy reopens and withstand potential regulatory changes. Announcing Q3 profits and earnings above analysts’ estimates, CEO Sundar Pichai said he highlighted a vision to become an AI-first business five years ago and latest results show how the company is building more helpful products for people and partners, with ongoing improvements to Search for example. For us, Alphabet stands out because the core Google Search business makes the internet a more efficient place through its indexation and democratisation of information. This is provided free to the vast majority of users and has become an integral part of everyday life, which is why the company sits in our Providing education theme.

Elsewhere, Q2 purchase NVR has a strong early period in the Fund, with the US housebuilder exposed to our Building better cities theme: 100% of its homes built in 2020 were verified by an external party as more energy efficient than the average home built that year. The company is unique in the industry in that it exercises a capital-light business model by acquiring options to buy land, as opposed to having a large land bank. This is more costly in the near term but enables NVR to survive downturns in a cyclical industry; it was the only profitable homebuilder in the US during the global financial crisis.

Despite that industry cyclicality, NVR’s returns have been strong and disciplined capital allocation has seen the share count fall by 50% since 2005. In its Q3 results, the company reported net income and diluted earnings per share up 29% and 33% respectively.

Familiar names such as Palo Alto, Intuit and IQVIA also featured among our top contributors, as did larger financials such as Schwab and Rilba (Ringkjøbing Landbobank) and global leader in simulation software Ansys. We bought the latter after a 40% share price fall at the height of initial Covid panic in February 2020 and the stock has subsequently moved back towards its previous high, with its products helping customers get their own to market quicker, reducing risks around defects and improving innovation. Revenues are tied to R&D budgets, which we feel are much less cyclical than other areas in which businesses tend to invest.

In a similar vein to many of the holdings highlighted, Ansys reported record revenue, cashflow and its own ACV metric for Q3, exceeding guidance, with the acquisition of Zemax in October expanding its solutions into optical and photonics products.

DocuSign was among our weaker names over the period, with the shares dropping more than 40% in a single day in November after the company released Q3 2022 earnings. While numbers actually beat expectations, delivering 42% revenue year-on-year to end October, the billings (which better reflects recurring-type revenue for a software as a service business) fell to 28% in Q3 versus the same period the year before. This was below the company's guidance of 34% and DocuSign also downgraded billings guidance for Q4 2022 to 22%. With consensus figures of 32%, the market is clearly concerned about the company slowing.

This business had been growing in the 40-50% range over 2020, which carried on over the first half of 2021 and into summer. It is clear many customers have materially increased their e-signature capacity, however, and over the third quarter, stepped back from growing at the same rate. The company also noted the sales team’s ability to upsell customers had fallen short of what they had been achieving pre-pandemic. DocuSign now has 1.1 million customers, a fourfold increase over five years. CEO Dan Springer said the disappointment stemmed from the fact sales were driven by meeting clients' orders, and as demand suddenly slowed, they have not been penetrating the ‘land and expand’ strategy that has been so successful.

After such a large move in share price, the question is what we feel the company can deliver and what is priced into the stock. We had expected DocuSign's growth to slow into 2022, from the 40-50% range to a medium-term 30%. The justification for this is low penetration of digital signatures (still only around 15%) and the ability for the business to work with clients to drive new use cases and expand the platform.

DocuSign is exposed to our Increasing waste treatment and recycling theme and has created a unique product to digitalise the signature part of document production – an excellent example of a solution that makes the world more efficient. The company has a 70% market share for e-signatures globally but its addressable market is around 10 times larger than current sales figures, given it is effectively competing with paper.

Autodesk also had a weaker quarter despite beating expectations in its fiscal third-quarter 2022 earnings report, with the market seemingly concerned by falling free cashflow and more conservative guidance: for the fiscal fourth quarter, the company projects sales will not exceed analyst forecasts for $1.2 billion and may fall below that. Autodesk is the global leader in software designed to digitalise the manufacturing and construction sectors, with its software used to ensure projects are updated in real time from the site, through the use of cloud computing and data analytic technology. Earlier in the year, we saw the market react badly to conservative guidance for full-year 2021 but, as then, we feel Autodesk is in a strong position, as its software is still in the early stage of its adoption curve. While construction and manufacturing are both cyclical end markets and have been affected by the pandemic, the structural nature of demand for Autodesk’s products will drive growth and ongoing performance.

PayPal shares also remained volatile, having issued revenue guidance for Q3 short of Wall Street targets, but this should be seen in the context of considerable growth over the last five years. PayPal makes transacting online safer and easier for merchants and consumers and the company’s management of major ESG issues is best in class, so we believe it remains better positioned than ever to take advantage of the growing trend towards digital payment as part of our Increasing financial resilience theme.

Another financial holding going through a softer patch is Visa, selling off on concerns around the buy-now-pay later sector disrupting the network operators, a slower-than-expected recovery in the cross-border business, and the tussle with Amazon as the platform has warned it will no longer accept Visa credit cards in the UK. Every so often, businesses with huge competitive moats are doubted and we believe this is happening now with Visa. The payment industry is complex and undergoing significant innovation but we have followed such changes closely and remain confident networks such as Visa continue to lie at the heart of most of these developments.

Finally, Splunk was penalised by the market despite a record third quarter, with the company held under our Enhancing digital security theme. It saw a first billion-dollar cloud quarter, accounting for a record 68% of software bookings and up 75% year on year, but shares fell as CEO Doug Merrit announced he is stepping down, with concerns about rising competition from public cloud providers.

In terms of trades over Q4, 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.

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

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

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