Liontrust UK Ethical Fund

The Fund returned 0.4% over the quarter, versus the IA UK All Companies sector average of 3.8% and the MSCI UK Index’s 3.6% (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.

Shares in UK bank NatWest rose after beating earnings estimates for Q1 as lending and deposits increased. Held under our Enabling SMEs theme, NatWest bank 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.

Shares in investment platform AJ Bell rose sharply after the company reported consensus-topping half year profit and revenue, while increasing its dividend. Exposed to our Saving for the future theme, AJ Bell's pre-tax profit jumped 47% to £64.1million in the six months to the end of March, while revenue grew 27% to £131.3million. The company also announced an interim dividend of 4.25p per share, up 21% on the same period a year earlier.

Telecom equipment specialist Helios Towers also performed strongly on positive Q1 earnings. The company, held under our Connecting people, which builds and operates telecoms towers for mobile network operators in Africa and the Middle East, said revenues increased 14% to $194.6 million in the three months to 31 March. Looking forward, Helios reiterated its full-year guidance, forecasting organic tenancy additions of between 1,600 and 2,100 for the full year, and adjusted EBITDA of $405 million - $420 million.

Among the detractors for Q1 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 moving money around the world. This covers pricing of products and sharing the economies of scale. Their 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.

Shares in Mobico Group (formerly National Express) weakened over the quarter after the bus and rail company reported underwhelming earnings, while guidance for the current year also disappointed. Exposed to our Making transportation more efficient or safer theme, Mobico operates bus, coach and rail services, with an exceptional record on safety and progressive on environmental improvements, helping to make cities less congested and air cleaner.

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.

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.

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.