Liontrust SF European Growth Fund

The Fund returned -2.2% over the quarter, compared with the -0.4% return from the MSCI Europe ex-UK Index and the -0.7% IA Europe ex-UK sector average (both of which are comparator benchmarks)*.

Shares in Europe moved lower in Q2 amid volatility caused by the announcement of parliamentary elections in France and subsequent fallout as the centrist government lost ground. Elsewhere, the European Central Bank (ECB) became the second major central bank to cut interest rates in June, though this was followed by fairly hawkish comments regarding the path to further rate cuts.

Weakness from mid and small cap stocks – where we retain a long-term overweight versus the benchmark – was exacerbated by large cap momentum in companies such as Novo Nordisk and adverse movements in interest rates which were expected to move lower at a faster pace.

Despite all the focus on inflation and rates, the long-term success of the fund will not be determined by calling which quarter interest rates will drop. That is why we remain focused on the long-term sustainability drivers toward a cleaner, safer and more efficient economy. These long-term drivers of growth have persisted for decades and we believe will continue on well into the future with structural shifts such as an ageing population, a digitising economy and a race to decarbonise our energy system.

The companies we select are typically smaller in size, growing at a faster rate than the market and have been very much out of vogue with the market given a higher cost of capital. However, with the rate hiking cycle peaking with normalising inflation, we believe that our process and high quality companies are well set to deliver strong share price appreciation from here with attractive valuation across the portfolio.

In terms of portfolio performance, Spotify, the world’s dominant audio platform, was the Fund’s top contributor after reporting a swing back to profit in the first quarter, as the company boosted subscribers and added new features. Held under our Encouraging sustainable leisure theme, Spotify announced that paid subscribers rose 14% year-over-year to 239 million, while total active users grew to 615 million.

While the company fits into our leisure theme, the environmental impacts of music consumption, now that this is virtually all digital, has reduced to the energy consumed by data centres and device use. This has dramatically reduced the environmental impact from physical records and discs which has issues with energy intensive hydrocarbon derived plastics and pollution issues with the eventual end of life of the disc.

Another top performer in Q2 was ASML, the leader in improving semiconductor fabrication through EUV development and holistic lithography. Held under our Improving the efficiency of energy use theme, shares in ASML rose after reports suggest that this year's sales might get a boost from a shipment of the latest chipmaking machine to Taiwan Semiconductor Manufacturing Company (TSMC). The company also continues to benefit from investor excitement around artificial intelligence and the associated use cases for semiconductors.

Shares in Unilever, one of the world’s largest consumer goods producers, rose after releasing estimate-topping Q1 sales after easing its pace of price hikes. Exposed to our Leading ESG management theme, Unilever reported a 4.4% rise in underlying sales growth, driven by bumper demand for beauty and wellbeing brands.

Unilever has sought to become a leader in managing their many ESG impacts, they are not perfect, but have taken leadership positions in palm oil, plastics and emissions. Equally, Unilever have focused on their product portfolio by improving the nutritional profile of their portfolio, divesting some areas and improving others under their Sustainable Living strategy.

Among the detractors was Adyen, a pure-play payments platform which is held under our Enhancing digital security theme. Adyen’s shares slumped after a slowdown in the company’s net revenue growth (to 21% year-on-year in Q1) led total revenue to €438 million to fall short of analyst’s expectations. Adyen operates a global payments platform, integrating the full payments stack: gateway, risk management, processing, issuing, acquiring, and settlement. They take a small charge on all transactions they process and win by having a single technology platform that is scalable, efficient and has minimal fraud rates. We strongly believe that any company whose revenues are generated from the safe shift away from cash to digital payments is one that provides net benefits to society.

Bioprocessing equipment and consumables manufacturer Sartorius Stedim reported a year-on-year decline in net profit and sales revenue for Q1. Exposed to our Enabling innovation in healthcare theme, Satorius’ equipment is used by the pharmaceutical industry in the development and manufacture of the next generation of pharmaceutical treatments (biologics) including gene & cell therapy. The company reported that net profit for the three months to the end of March was €56.1 million, compared with €111.1 million a year ago. We decided to add to our position believing in the long-term growth prospects for this high-quality company.

AutoStore, the market leader in “cubic” automated storage and retrieval systems for warehouses, fell after missing estimates on both revenue and earnings in Q1, while also receiving a ‘sell’ recommendation from an analyst. Held under our Improving the resource efficiency of industrial and agricultural processes theme, AutoStore has developed a compact design to store and retrieve products in warehouses in a simple Rubik’s cube design. The system uses autonomous robots moving on top of an aluminium grid to store and retrieve bins and deliver products to port stations for packing and transport.

Italian drug delivery and containment solution company Stevanato was among the portfolio’s notable detractors over the month after cutting its sales and profit forecast for the full year, citing the impact of an industry-wide destocking trend. The company now expects revenue in the range of €1,125 million to €1,155 million, adjusted EBITDA in the range of €277.9 million to €292.2 million

A new holding in the portfolio, Stevanato was added under our Enabling innovation in healthcare theme, and provides drug delivery and engineering solutions to key customers in the pharmaceutical, biotech, and life science industries. It is a market leader in ready to use glass vials and pen cartridges. Using its expertise in science and engineering, it has built a competitive advantage in the offering of higher value add solutions for its customers rather than generic commoditised containers. We continued to build our position in the company on this short-term industry weakness.

After a quiet Q1 of trading activity, we took the opportunity to capitalise on some of the volatility caused by changes in interest rate expectations by initiating positions in ICON, Technoprobe, ASM International and Bechtle.

Held under our Enabling innovation in healthcare theme, ICON provides outsourced research services to pharmaceutical, biotechnology, medical device, government and public health sectors. It offers a range of specialised services to assist pharmaceutical, biotechnology and medical device companies to bring new drugs and devices to market faster.

Technoprobe was added under our Better monitoring of supply chains and quality control theme, and is the pioneer behind the semiconductor probe card. Its probe cards help to find faulty semiconductors early on in the manufacturing process, helping fabricators such as TSMC to cut down resource waste before packaging.

ASM International, the market leader in Atomic Layer Deposition (ALD) manufacturing tools for the semiconductor industry, was added under our Improving the efficiency of energy use theme. ALD is a critical process for customers to produce chips in a Gate-All -Around (GAA) architecture, which enables an improvement in energy efficiency of approximately 25%.

Last, we added German value added reseller or VAR, Bechtle under our Enabling SMEs theme. Technology vendors, both hardware and software, such as Microsoft or HP enlist the help of VARs like Bechtle to act as an outsourced distribution network. VAR’s understand the technology requirements of their clients, guiding them through the myriad of options from cyber security to CRM and data centres. Their services enable SMEs, larger enterprises, and public sector organisations utilise technology to become more efficient and secure.

In terms of exits, sold Basicfit after we lost conviction in the fundamentals of the business, with particular worry about the rapid expansion of sites in France and not achieving the requisite number of members to reach the desired returns on capital. Combining this worry about returns the balance sheet looks slightly stretched, we therefore saw better risk return in other areas of the Fund.

We also sold international payment service provider Edenred following the accusations of management fraud in Italy led to a downgrade in our ESG matrix rating. Coupled with this, we believe a recent string of acquisitions completed at expensive valuations will likely result in lower returns on capital in the long-term.

Netcompany, the Danish IT solutions and services provider, was exited due to downgrade in matrix rating relating to a cyber security attack which we are concerned could have an impact on the company’s reputation and long-term financial prospects.

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

*Source: FE Analytics, as at 30.06.24, total return, net of fees and income reinvested

** Source: FE Analytics, as at 30.06.24, primary share class, total return, net of fees and income reinvested