The Liontrust Global Innovation Fund returned -13.3% in January. The MSCI All-World Index comparator benchmark returned -4.0% and the average return in the IA Global Equity Income sector, also a comparator benchmark, was -7.2%.
Among the notable contributors, American Express (+11.2%) benefited from the announcement that fourth-quarter earnings had surpassed estimates thanks to record credit card spending, along with the company boosting forecasts for revenue and profits in 2022. American Express is gaining market share against the big two card networks Visa and Mastercard as card transactions migrate to electronic transactions. Digital wallets and online checkouts create a more level playing field than leather wallets. The burgeoning ranks of Amex members are increasingly focused on rewards, where American Express beats the big two hands down.
As commerce shifts online, merchants are pressured to reduce even the smallest payments frictions so accepting Amex is essential. Moreover, Amex is thriving while travel remains subdued. Its revenues and profitability are already above pre-covid levels and as travel recovers it will enjoy excellent operating leverage.
In a disappointing month for Fund performance, Sea (-32.2%), the low-cost ecommerce company was the most notable detractor to returns. Sea comprises three complementary businesses: gaming, via Garena, one of the leading global game developers and distributors; ecommerce via Shopee, an ultra-low cost Amazon.com primarily in South East Asia and increasingly expanding to sell the regions low cost manufactured goods in other emerging markets such as Latin America and India; and fintech via. Shopee Pay. The highly profitable Garena produces cash to fund the growth of Shopee while Shoppee Pay leverages of Shopee and enhances its take rate.
Netflix (-28.4%) plunged after disappointing the market with forecast figures for new users – the company announced that it expects to add 2.5m subscribers, which fell below the average estimates. Netflix added just 18.2 million customers in 2021, down about 50% from the record year before. It’s forecasting that slowdown will continue, at least for another quarter.
We continue to believe that original content means TV streamers are differentiated from one another not commoditised. In turn, this advantages the scale player, which can spread content production cost over more subscribers and offer a higher quality/price ratio to each subscriber than competitors. At >200m, Netflix currently provides c.$20bn of annual content for c.$12 per month, the best quality/price in the industry. In turn, this superior offering draws more demand and thus, we believe, compounds Netflix’s advantage.
Another notable detractor was PAR Technology (-28.3%), a turn-around business that for over forty years has provided point-of-sale hardware to major fast-food chains (including McDonalds, KFC and Taco Bell) and is today focused on building a unified software operating system to modernise the whole restaurant. Fast-food restaurants today face major challenges due to the need to cater to customers through multiple channels, including mobile ordering, curb-side pick-up and so on, and manage the workflow throughout the overall operation.
Moreover, these challenges are combined with very high levels of competition, low margins and rising labour costs. PAR’s experience, long-standing customer relationships and focus, following a recent change of management, give it a good chance of success in delivering large productivity gains for restaurants and establishing a long-term competitive advantage in a large market.
Going into 2022, the market’s preference for financials, energy and low-multiple stocks has continued, as the narrative around higher-than-expected inflation drives down the shares of companies that trade on optically high multiples. This rotation into more ‘value-oriented’ stocks was the cause for a number of our holdings falling, with no other significant stock-specific newsflow – one example of such a company impacted by this rotation was Nvidia (-16.0%).
Nvidia has held an unrivalled position within computer game graphics for the past 25 years via its graphics processing units (GPUs). However, the computational tasks required for artificial intelligence are similar to gaming and as such Nvidia has been able to position itself technologically as the performance leader by far in AI computing capabilities. We view AI as a major General Purpose Technology (GPT), and as such the likely growth and breadth of AI applications across the whole economy means Nvidia has robust growth drivers for the years to come.
The current adjustment to interest rate expectations taking place presents a short-term valuation challenge to disruptive and innovative growth companies, but, we believe, not a significant longer-term operational one. Indeed, innovative companies are the most resilient and adaptable in the face of challenges and, as such, as higher interest rates lead to tougher macroeconomic conditions, we expect them to manage much better than non-innovators.
Top performers
American Express (+11.2%), Tencent (+7.5%), ING (+6.2%), Progressive (+6.9%), Pinduoduo (+3.6%)
Bottom performers
Sea (-32.2%), Netflix (-28.4%), PAR Technology (-28.3%), Intuitive Surgical (-20.2%), Tradeweb Markets (-14.5%)
Discrete years' performance (%)**, to previous quarter-end:
|
Dec-21 |
Dec-20 |
Dec-19 |
Dec-18 |
Dec-17 |
Liontrust Global Innovation C Acc GBP |
12.1% |
32.1% |
18.3% |
-2.7% |
20.5% |
MSCI AC World |
19.6% |
12.7% |
21.7% |
-3.8% |
13.2% |
IA Global |
17.7% |
15.3% |
21.9% |
-5.7% |
14.0% |
Quartile |
4 |
1 |
4 |
2 |
1 |
*Source: FE Analytics as at 31.01.22
**Source: FE Analytics as at 31.12.21. Quartile generated on 07.01.22.
Key Risks