Liontrust UK Growth Fund

The Liontrust UK Growth Fund returned 2.7%* in July. The FTSE All-Share Index comparator benchmark returned 3.1% and the average return in the IA UK All Companies sector, also a comparator benchmark, was 3.6%.

An eventful month of political developments failed to hold back the UK market, with investors focused on an equally busy period for company reporting and looking forward with increased confidence to upcoming interest rate cuts in the UK and US (the former being delivered in early August).

Enthusiasm around artificial intelligence suffered a moderate setback as earnings updates from some Magnificent Seven constituents underwhelmed, a trend which presented a big headwind to US markets and global indices. The UK’s lower exposure to this theme allowed it to sit among the world’s best performing major markets in June.

The Fund’s strongest riser was WH Smith (+18%) after the retailer issued a solid update on trading in the 13 weeks to 1 June. Over that period, it generated 4% like-for-like growth, once again driven by its travel division. While its legacy high street shops saw a further 1% like-for-like decline, WH Smith’s shift towards travel essentials continued with 5% like-for-like growth (and 8% overall, including new stores) in its network in rail stations, airports and hospitals. The company has reiterated its confidence in achieving financial targets for the year to 31 August.

British American Tobacco (BAT, +13%) is also in a transition phase as it manages the long-term decline of its tobacco products and grows its smokeless new categories such as vapes and heated tobacco products. While overall revenues dropped by just under 1% in adjusted organic terms in the first half of 2023, new categories rose 7.4% - albeit only accounting for 13% of the total currently. Shares in BAT rose as profitability marginally exceeded expectations; the company has maintained its full-year guidance.

In a Q2 trading update, Indivior (-14%) warned that its sales growth of its Sublocade opioid addiction treatment is being significantly constrained by the headwind of Medicaid patient disenrollments. There had previously been automatic Medicaid coverage renewals in place in the US as part of Covid emergency measures, but these have now lapsed. Sublocade now accounts for around two-thirds of Indivior’s sales; although it is still expected to grow by around 25% in 2024, this is down on the 35% expected as of its late-May trading update. As a consequence, Indivior’s 2024 net revenue guidance has been cut from a $1.24 billion – $1.33 billion range (c.18% year-on-year growth) to $1.15 billion - $1.22 billion.

BP (-3.4%) also slid after a Q2 trading statement announced an asset impairment of $1 billion – $ 2 billion relating to its previously announced review of a refinery in Germany. Comments on oil trading were also disappointing, with indications of a $0.5 billion – $0.7 billion headwind from lower realised refining margins. The shares recovered some of the lost ground after full Q2 results released late in the month exceeded revised expectations: underlying replacement cost profit was $2.76 billion, ahead of consensus forecasts of $2.54 billion, while it also announced plans for a $3.5 billion share buyback in the second half of the year.

Diageo (-2.8%) shares have suffered from downgrades to earnings expectations over the last year or two as investors have digested indications of soft consumer demand in the North American market. Full-year results released during July did nothing to dispel these concerns. While a challenging year was fully expected, with the spirits giant reporting a 1% organic fall in net sales, investors had hoped for a more upbeat outlook; however, Diageo warned that the tough trends have persisted into the start of its new financial year.

While Hargreaves Lansdown (-2.4%) issued a solid quarterly trading update, its investment outlook remains dominated by the possibility of a bid from a private equity consortium. In July, the consortium received an extension of its deadline to make a firm offer or formally walk away from 19 July to 5 August.

On the first day of August, the Bank of England cut interest rates by 25 basis points to 5.0%. Although increasingly priced into markets in the days and weeks prior to the decision, the cut is in our view another incremental positive in an improving outlook for UK equity markets.

The last few months have delivered stabilising inflation, a return to economic growth, a stable government, and now an interest rate reduction.

We feel that there is currently a compelling opportunity for investors in UK shares. The UK is at a clear valuation discount to historic averages and measures of intrinsic value but there is the potential for government policy intervention (focused on pension fund domestic equity allocations in particular) to help turn the tide of investor sentiment and capital flows.

Positive contributors included:

WH Smith (+18%), Savills (+15%), Moonpig (+14%), Coats Group (+13%) and British American Tobacco (+13%).

Negative contributors included:

Indivior (-14%), BP (-3.4%), Diageo (-2.8%), Hargreaves Lansdown (-2.4%) and BAE Systems (-1.7%).