Liontrust SF UK Growth Fund

The Fund returned 0.1% over the quarter, underperforming the IA UK All Companies sector average of 2.1% and 5.1% from the MSCI UK Index (both of which are comparator benchmarks)*.

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. 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.

Syncona was our top contributor over the period, with this investment trust owning stakes in privately held biotechnology firms as it looks to deliver transformational treatments to patients in areas of high unmet medical need. Within our Enabling innovation in healthcare theme, we aim to find companies providing step changes in the way science discovers and creates treatments and a key area is gene therapy. The majority of Syncona’s current portfolio (of 12 early-stage companies) are working in the gene and cell therapy space and our holding could be considered a diversified play on the growth of these technologies as a whole. The company has a strong track record of building and selling innovative companies: it founded Nightstar in 2013, for example, and sold this to Biogen for $877m in 2019.

Despite reporting an NAV fall over six months to end September, the company highlighted positive clinical progress in the portfolio, which now has five clinical stage companies as well as two more primed for initiation of trials in 2022.

Perennial outperformer Croda also continues to feature among the top names, with the speciality chemical company’s compounds helping increase energy and resource efficiency, reduce the use of toxic substances and improve efficacy of pharmaceuticals. Sitting under our Improving the efficiency of energy use theme, the business announced the sale of the majority of its Performance Technologies and Industrial Chemicals division to Cargill towards the end of December.

Private equity group 3i 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.

Another top financial holding, under our Saving for the future theme, was Mortgage Advice Bureau, which reported revenue growth of 46% for the first half of the year, up to £92.4 million, and adjusted EPS growth of 36%. Mortgage completions increased 48% in a favourable market fuelled by strong customer demand and the company has also secured significant new lead sources, including a long-term agreement with MoneySuperMarket. MAB provides a platform for advisers to help individuals get mortgages and insurance products and we expect to see ongoing expansion by continuing to attract advisers to join the brand. With a market share of around 6%, there should be significant growth ahead without any real capital requirements needed to achieve this.

In a connected area, but held under our Building better cities theme, Home REIT was another contributor, which we added in the early part of the year. The company looks to a provide property to help alleviate homelessness in the UK and addresses a critical need, with an increasing homeless population but a lack of available and affordable housing to accommodate them. At present, local authorities are struggling to meet the cost of providing accommodation to the homeless, with the worsening shortage meaning they are forced into using more expensive bed and breakfast hotels and guesthouses. These relationships with local authorities and housing associations provides stability of rent for Home REIT, offering long-term leases at cheaper levels.

In a December update, the company said it now has properties accounting for more than 7000 beds across the UK, following a significantly oversubscribed £350 million top up equity issue in September.

UK testing, inspection and certification (TIC) business Intertek also 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.

Elsewhere, Oxford Instruments was another holding benefitting from impressive results, with revenue growth of 26.8% over six months to end September, and up 13.5% against the same period in a non-Covid impacted 2019. The company, which sits under our Better monitoring of supply chains and quality control theme, develops products and services around imaging, from the atomic to the astronomical scale, and said it has emerged from Covid a stronger, more focused and efficient business, even more aligned to customer needs.

Weaker names over the period included Learning Technologies Group, held under our Providing education theme, with a collection of e-learning, compliance, training and Human Resources software and content brands. The company continues to consolidate the e-learning space with a number of acquisitions designed to access new technologies, geographies and cross sell to new customers. Over the quarter, LTG reported a swift return to organic revenue growth in the first half and another in a line of acquisitions, GP Strategies for $394 million, but the shares have been volatile and gave back most of their growth from recent months.

Another company returning part of its 2021 performance in Q4 is Oxford BioMedica, despite announcing record first-half results (boosted by its role in the AstraZeneca Covid vaccine) and news it has extended its agreement for the manufacture of lentiviral vectors for several Novartis CAR-T products to the end of 2028. Echoing our arguments outlined for Syncona, as a leading gene and cell therapy player, Oxford BioMedica is well placed to maximise opportunities, both in lentiviral vectors as well as other viral vector types.

As we have said before, while the vaccine and its supply agreement with AstraZeneca grabs the headlines, the investment case for Oxford BioMedica’s shares is primarily based on other conditions its technology can treat, varying from lymphoma to Parkinson’s.

Trainline also saw its shares falling despite 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.

In terms of recent activity, as flagged last quarter, we sold our position in anti-virus provider Avast after it merged with US peer Norton as we do not rate the combination very highly in terms of business growth.

After a long process of engagement and analysis, we also 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.

Key Risks 

Disclaimer