Liontrust SF Managed Fund

The Fund returned -1.3% over the quarter, versus the 1.7% IA Mixed Investment 40-85% Shares sector average (the comparator benchmark)*.

Global equities continued to be driven by the theme of rapid AI investment growth, particularly within the US, which accounts for around two thirds of the index and investable universe. Over the quarter, a narrative began to emerge that software investment, which is such a key driver of overall business efficiency improvements, was beginning to stall, as business owners preferred to focus on AI opportunities. This was primarily driven by some disappointing numbers from a number of large software bellwethers, with Salesforce’s quarterly numbers the catalyst. At the same time, Apple’s announcement that it was targeting on-device AI led to strong performance across AI and those connected to smartphones.

There was significant divergence in performance within the technology sector, with software names down, often in double digits. From a style perspective, these trends played further into the narrow performance leadership from mega-cap technology stocks. The sheer size of both the market cap of these companies, and the large movements higher in their share prices, has made keeping up with the index very challenging for active managers. Furthermore, weakness from mid and small cap stocks – where we retain an overweight – has been exacerbated by AI and adverse movements in the US 10-year treasury yield.

Within equities, underperformance for the quarter was driven by our exposure to software names, particularly related to our “more efficient” set of themes. While we do have exposure to some energy efficiency plays in AI and semi-conductors, performance has been driven by the mega caps, with Apple and Nvidia the key beneficiaries. Our industrials sector exposure also suffered, as names exposed to the US housing sector fell on the back of the Pool Corp’s underwhelming Q2 earnings release.

Higher bond yields in both the UK and the US were a headwind to our infrastructure portfolio, and the rate-sensitive nature of these long duration assets led to a fall in nine of the 11 names in the portfolio. The Canadian Solar Infrastructure Fund, Aquila Renewables and Asian Energy Impact Trust were the worst performers, all down more than 10%. The sector should benefit from falling long term rates, but the technical headwinds created by a lack of flows into natural buyers for these funds remains an issue. Consolidation and share buybacks are options being considered by management teams across this sector. 

Our corporate bond portfolio also fell over the quarter. Corporate credit fundamentals are robust, and global default rates remain low and are forecast to decline further. When combined with economic data that has remained resilient, this has resulted in corporate credit spreads tightening over the year. Relative returns in the corporate bond allocation has been strong, offsetting much of the drag stemming from yields trending higher over the first half of the year. However, much of the spread tightening occurred in the first quarter which resulted in returns and relative performance being more in line over the second quarter as corporate credit spreads were flat over this period. Banks and insurance bonds have been positive contributors throughout this period. 

Asset Allocation for the quarter was neutral. Overall, we moved to reduce the overweight infrastructure position, and reallocated this to increase the overweight in global equities. We remain overweight global equities, UK equities, credit and infrastructure, and fund this from underweight government bonds and cash.

We continue to believe in the quality of the companies held within our portfolios. In aggregate, they are performing well operationally and are on attractive valuations. This gives us confidence for the future outlook for our funds and investors.

Payroll provider Paylocity was the Fund’s most notable exposure to the investor rotation away from software names. Shares in the company had initially risen sharply having lifted its annual revenue outlook and posted stronger-than-expected quarterly results, but gave back ground over the quarter as the backdrop became less supportive. Held under our Enabling SMEs theme, Paylocity is a leading Human Capital Management (HCM) software provider. Its products enable its customers, which are primarily small businesses, to manage the increasingly complex demands of managing its employees.

Also 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 of €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. It takes a small charge on all transactions processed and has 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.

IQVIA, the life sciences company, slid after cutting its revenue forecast range for the full year to $15.3 billion - $15.6 billion from $15.4 billion - $15.7 billion. Held under our Providing affordable healthcare theme, IQVIA is a leading global provider of advanced analytics, technology solutions and clinical research services to the life sciences industry. The company connects healthcare organisations and patients with data in an effective way to ensure faster decision making on healthcare outcomes.

Turning to the portfolio positives, Alphabet was the top performer after reporting Q1 revenue that exceeded analysts’ expectations, buoyed by growth in its cloud computing unit. Held under our Providing education theme, Google’s parent company generated sales, excluding partner payouts, of $67.6 billion for the three months ending March 31, surpassing the $66.1 billion expected on average. The company also said it would pay a dividend of 20 cents a share, its first ever, and repurchase an additional $70 billion in stock.

Spotify, the world’s dominant audio platform, also rose strongly 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 lowered the environmental impact from physical records and discs, which have issues with energy intensive hydrocarbon derived plastics and pollution issues at end of disc life.

Another strong performer was investment company Molten Ventures. Held under our Enabling SMEs theme, Molten first saw its share price increase after US firm Hologic announced it had agreed to buy Endomagnetics, a medical technology company that Molten has been invested in since 2018. Shares also rose sharply in June on the release of full-year results in which the venture capital firm announced around £100 million of capital to be realised in 2025, with a minimum of 10% allocated to a share buyback.

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 they realise their investment and recycle into new ventures.

In terms of trade activity, we initiated positions in ASM International, West Pharmaceuticals, Sage Group and ServiceNow. 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%.

West Pharmaceuticals is a new holding under our Enabling innovation in healthcare theme, designing and producing high quality integrated containment and delivery systems for injectable drugs and healthcare products. Key customers include biologic, pharma, diagnostic and medtech companies. The focus here is on quality – excellence in manufacturing, scientific and technical expertise to ensure delivery of safe and efficacious drug products to patients. West's expertise and high quality standards facilitate the delivery of medicine to patients around the world and offers innovation and expertise to help maintain the quality and efficacy of very impactful drug types like biologics injectables and cell and gene therapies.

We added Sage Group under our Enabling SMEs theme. Sage provides accounting, payroll and HR solutions to SMEs that include 25% of employees in the UK. At any one time SMEs in the UK are owed an average of £22,000, so enabling them to keep track of their finances and meet regulatory standards increases the resilience of small businesses who are the anchor of the economy and employment.

Lastly, ServiceNow was added to our Improving the resource efficiency of industrial and agricultural processes theme. ServiceNow builds workflow tools for companies to automate previously manual tasks. This reduces waste and by freeing up employee time thus helping makes companies more efficient.

Adobe was sold. We are concerned that generative AI competition may begin to eat away at the virtual monopoly that Adobe enjoys in its creative cloud business. This follows the failed attempt to acquire competitor Figma, for which it offered an eye wateringly high multiple, suggesting some desperation by the management team. We see the Adobe investment thesis at risk on a five-year view.

We also sold Illumina, as the business moves to spin off the Grail business. We are concerned the core Illumina business is experiencing a step change in the elasticity of demand for its products. As it’s dropped the price of sequencing a single genome, customers are potentially using that to improve their own margins, rather than it leading to significant growth in the number of genomes they sequence. Competition has also increased, and Illumina’s dominance of the sequencing market has been attacked from China and across the world.

Finally, we also disposed of Equinix on concerns that practices it has related to overselling power may become a headwind as power demand related to AI grows exponentially. We were also concerned following the abrupt departure of the CEO, which we view as a risk to the investment thesis.

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

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