Liontrust SF UK Growth Fund

The Fund returned 2.3% over the quarter, versus the IA UK All Companies sector average of 3.8% and the 3.6% return from the MSCI UK Index (both of which are comparator benchmarks)*.

The UK equity market enjoyed a strong quarter, as inflationary pressures receded, and the stability of a new government provided optimism for investors. The UK equity market outperformed its global equity peers for the first time in a number of quarters, and the relative performance of mid cap and cyclical sectors was more consistent. The UK equity market remains highly attractive in terms of its valuation, both compared to its developed market peers and to its own history. As the headwinds created through the political paralysis over the last few years come under control, as well as inflation, the UK equity market does provide significant opportunities and upside.

The Fund’s top performer for the quarter 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 realized in 2025, with a minimum of 10% allocated to a share buyback. These actions underlined the attractive valuation opportunity as we were pleased to see this after significantly increasing the position early in the year.

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.

Shares in UK bank NatWest rose after beating earnings estimates for Q1 as lending and deposits increased. Also held under our Enabling SMEs theme, NatWest reported pre-tax operating profit of £1.3 billion, compared with consensus estimates of £1.28 billion.

NatWest's 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. It aims to reduce carbon within their corporate loan book by at least 50% by 2030 and has potentially interesting initiatives around mortgages for energy efficiency improvements in housing.

AstraZeneca, the pharmaceutical giant held under our Enabling innovation in healthcare theme, was also among the top performers as its shares surged after reporting profit that exceeded expectations, driven by demand for its cancer blockbusters Imfinzi and Tagrisso as well as its newly release drug, Enhertu. AstraZeneca’s Q1 sales were up by 19% to $12.7 billion, driven by an 18% increase in product sales and continued growth in alliance revenue from partnered medicines.

British gene and cell therapy specialist Oxford Biomedica is exposed to our Enabling innovation in healthcare theme. Having struggled over the last two years on concerns around de-stocking, it was pleasing to see Oxford Biomedica perform strongly following a ratings upgrade and the release of encouraging full year results. The leader in lentiviral vector innovation and manufacture reported that it is seeing solid demand for its contract development and manufacturing organisation offering, as it moves away from the Covid-19 vaccine era.

Among the Q1 detractors was money transfer platform Wise, which is held under our Transparency in financial markets theme. Wise's mission is to bring transparency and fairness to into moving money around the world. This covers pricing of products and sharing the economies of scale. Its mission is to bring FX costs down to zero. Revenue for Q4 23 came in 24% higher year-on-year at £277.2 million (not including interest income), taking the full-year figure to £1.05 billion, which was below average estimates. We remain optimistic about the company’s prospects despite the move.

Trainline, another detractor over the quarter, is a good example of a long-term holding progressing well operationally and financially but is out of favour as a UK smaller technology company. Held under our Making transport more efficient theme, Trainline’s technology platform is digitising rail and bus ticketing in the UK and Europe, enabling lower impact forms of transport by reducing friction for travellers and helping operators to manage capacity.

Since 2019, Trainline has grown revenues by 89% and has nearly doubled gross profit and adjusted EBITDA – however during this period the share price has disappointed. Trainline, in addition to generating healthy profit growth, has a robust balance sheet and continues to invest to further extend its competitive advantage. We believe the company is very attractively valued given the highly profitable business model and future growth prospects and we remain invested for the long-term despite the poor share price performance.

Shares in Convatec, the manufacturer of medical devices for people living and managing chronic disease held under our Enabling healthier lifestyles theme, fell after company flagged short-term uncertainty in Advanced Wound Care, leading to a softer outlook for the division.

In terms of trade activity, 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 which are the anchor of the economy and employment.

We have watched the company for a number of years, and took the opportunity to open a position as the market was upset with slightly lower growth rates relative to the past. We believe this was an over-reaction and the company will still grow steadily over the long-term.

Intertek was sold after a long period of ownership. While we like the long-term structural drivers in increasing transparency and quality in supply chains, we believe that other companies in the portfolio offered a higher risk-adjusted reward with more effective asset allocation.

Distribution Finance Capital was sold to fund larger positions in Kainos and Gamma Communications – we believe these companies have stronger prospects and are less volatile larger companies.

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