Liontrust US Opportunities Fund

The Liontrust US Opportunities Fund returned -6.6% in the first quarter, versus the S&P 500 Index return of -2.0% and the IA North America sector average return of -2.9% (both comparator benchmarks)*^{^}.

After a strong year of returns in 2021, US equity markets have endured a tough start to 2022. Markets have rapidly recalibrated their expectations for significantly tighter monetary policy. This follows on from the “Fed pivot” at the end of last year, when the Federal Reserve made it clear it recognised that inflation was less transitory than initially hoped and that it would accelerate plans to taper quantitative easing and hike interest rates. The Fed raised interest rates for the first time in several years at its Federal Open Market Committee meeting in March and signalled that it foresees 6 more 0.25% rate hikes and balance sheet reductions at subsequent meetings this year. The investment backdrop has also been rocked by the previously unthinkable Russian invasion of Ukraine, which has further destabilised the global geopolitical backdrop and added to inflationary pressures.
 

Bond yields, both nominal and real, have risen sharply. This has hit equity market valuations and particularly those of highly valued, high growth companies. Unprofitable, high growth software companies have seen some of the largest impacts on their valuations.

While the US economy remains strong, with house prices, retail sales and industrial production all buoyant, there are growing concerns that the Fed will be unable to deliver a “soft landing” and that its bid to curb surging inflation will cause a recession. While time will tell, it is important to remember US households and corporates are in much better health than they have been for many years.  Wages are rising, household debt is near record lows and excess saving balances are high, thanks to generous furlough payments during the pandemic. This will help the US consumer to support an economy that will inevitably slow over the rest of 2022 and address the higher costs of inflation.

The earnings backdrop changed as we entered 2022. After a period in which US corporates beat earnings expectations by some margin, the first set of quarterly earnings were much more in-line with historical averages. The reception to earnings at the end of January and February was muted. The main issue was companies’ guidances, most of which were delivered when the Omicron Covid wave was sweeping through the US. Around half of the companies that gave guidance for the rest of the year pointed to below market expectations. 

The Liontrust US Opportunities Fund underperformed both the S&P 500 and its wider peer group during the quarter. The Fund suffered from its lack of holdings in the energy sector, which has outperformed significantly due to the rapid rise in the oil price this year. Additionally, the biggest detractors in the portfolio during the period were our holdings in the software and wider technology space.

More generally, these companies fell foul of the shift in sentiment away from higher growth, higher valuation companies due to rapidly rising bond yields. The market has also been quick to punish those businesses seen as beneficiaries of a not-to-be repeated demand environment created by the pandemic. We have a couple of holdings that we believe are unjustifiably perceived as being part of this group.

Stronger performers this quarter included companies that are generally seen as benefiting from a re-opening of the US economy, operating in industries such as those involved in live events and rental car toll road payments. 

In terms of portfolio activity, we have made relatively minor changes to the portfolio and have been focusing our attention on companies and industries that we see as structural beneficiaries of the post-Covid world. We believe that disruption, and particularly digital disruption, will remain the most important determinant of corporate success. We continue to search for companies that will drive this disruption (disruptors), help fuel it (enablers) or indeed benefit from it (embracers).

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

*Source: FE Analytics as at 31.03.22

**Source: FE Analytics as at 31.03.22. Quartiles generated on 05.04.22

KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.  

DISCLAIMER

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.