The Fund returned 4.1% over the quarter, versus the IA UK All Companies sector average of 2.9% and the 4.1% return from the MSCI UK Index (both of which are comparator benchmarks)*.
Across our Funds, we have been pleased with the ability of the businesses we invest in to deliver growth and execute, in spite of the slowing global economy. This is testament to the structural nature of the themes we invest in, which we believe have strengthened – energy security, innovation in healthcare and environmental efficiency have all a much higher priority than they did even five years ago. We also have great confidence in the quality of the businesses and management teams of our selected companies.
The catalyst for the stronger performance across our asset classes was the market’s realisation in October that inflation and interest rates had likely peaked. As inflationary data began to soften and normalise, central banks, led by the US Federal Reserve, started to suggest that the monetary tightening cycle of the past two years had been sufficient to control inflation. This and a slowing economy may lead to loosening of monetary policy at some point in the near future. This removed a significant headwind to structural returns.
The Fund’s top performer in Q1 was lender NatWest. The company most notably reported strong operating performance for the full-year with a return on tangible equity (RoTE) of 17.8% − above its previously guided range. Held under our Financing housing theme, NatWest is a UK-focused bank that operates both retail and commercial operations. Its corporate lending is focused on the areas that we view as being most beneficial to sustained economic growth, namely SME lending, leasing and factoring and traditional retail banking. In terms of its sustainability credentials, NatWest aims to reduce carbon within its corporate loan book by at least 50% by 2030 and has potentially interesting initiatives around mortgages for energy efficiency improvements in housing.
Private equity company 3i Group was the top contributor to performance in March following strong performance of one of its portfolio companies – discount retailer Action. Held under our Enabling SMEs theme, 3i reported that Action’s 2023 net sales rose 28% to €11.3 billion, with this strong performance continuing into 2024, with net sales up 21% in the first 11 weeks of the year. 3i also commented that there was good momentum across the rest of its portfolio companies which are in the predominantly in retail, infrastructure, healthcare, technology and industrial space.
Trustpilot also provided a positive update, commenting that adjusted EBITDA in 2023 was ahead of market expectations. Revenue for the year rose 17% and bookings were up 16%, while operating leverage boosted margins. The independent review platform is part of our Connecting people theme due to its role in connecting consumers and businesses and addressing the ‘trust gap’ on the internet.
Pharmaceutical giant GlaxoSmithKline performed strongly after announcing full-year results. Held under our Providing affordable healthcare theme, the company grew turnover by 5% at constant exchange rates to £30.3 billion, driven by a 25% increase in vaccines sales to £9.9 billion.
Among the detractors was Molten Ventures. Exposed to our Enabling SMEs theme, Molten Ventures provides early-stage capital and backing for entrepreneurial companies linked to improving resource efficiency in industrial processes, increasing financial resilience, and innovation in healthcare. It tends to nurture companies until IPO or private sale, at which point it realises its investment and recycles into new ventures. The share price has been hit by concerns around the true value of the underlying companies and so trades at a very large discount to the stated asset value. Valuing early-stage companies is an inexact exercise but we believe that there are several very successful businesses in the portfolio and these justify a much higher share price and will also demonstrate Molten Ventures’ success in selecting winners.
Oxford Nanopore shares sank at the start of the year after the DNA-sequencing company reported preliminary 2023 life science research tools revenue of c.£169 million, missing market expectations. Later in the quarter, the company, which is held in our Enabling innovation in healthcare theme provided underwhelming guidance for the year and revised its forecast for achieving adjusted EBITDA breakeven to the end of 2027 from the end of 2026.
With regards to trade activity, we added communications specialist Gamma Communications under our Connecting people theme. Gamma’s voice, data and mobile products and services technology enable businesses, mostly SMEs, to reduce their need for telephony hardware and also facilitate home and hybrid working which eliminates reliance on large call centres to handle customer communications.
We also added Kainos Group under our Improving the resource efficiency of industrial and agricultural processes theme. Kainos is a technology consulting and software development business focused on Workday (the on-demand financial management, human capital management, and student information system software vendor). The company helps organisations of all sectors modernise and digitise their operations – improving efficiency, customer experience, resilience, and digital security.
We sold Ceres Power, a company we had owned for several years and cut the position in 2021 when it was at a peak valuation. We maintained a small position on the basis that the company had attracted interest from Bosch and Weichai for its innovative fuel cell technology. However, it seems there have been substantial delays to commercialisation and we concluded we should sell the small remaining stake.
We also sold St James’s Place, which was a very frustrating investment given it is a clear beneficiary of our Saving for the Future theme. However, in spite of the strong demand in the UK for financial and investment advice, the company has executed poorly. This culminated in it being slow to react to the changes in Consumer Duty, and latterly poor record keeping around charging for advice. This has left the business exposed to legal recourse from clients and damage limitation in terms of reputation. Therefore, while we can see attractive value in the shares in some scenarios, the unpredictability of the near term means we see better opportunities elsewhere.
Discrete years' performance (%) to previous quarter-end**:
|
|
Mar-24 |
Mar-23 |
Mar-22 |
Mar-21 |
Mar-20 |
|
Liontrust Sustainable Future UK Growth 2 Acc |
9.5% |
-12.7% |
-8.0% |
42.6% |
-9.2% |
|
MSCI UK |
8.5% |
5.6% |
19.1% |
20.0% |
-19.1% |
|
IA UK All Companies |
7.6% |
-1.9% |
5.4% |
38.0% |
-19.2% |
|
Quartile |
4 |
4 |
4 |
1 |
1 |
* Source: FE Analytics, as at 31.03.24, total return, net of fees and income reinvested
** Source: FE Analytics, as at 31.03.24, primary share class, total return, net of fees and income reinvested
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.
All investments will be expected to conform to our social and environmental criteria. Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. The Fund may encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. Outside of normal conditions, the Fund may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.
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