Liontrust Global Dividend Fund

The Liontrust Global Dividend Fund continues to invest in innovative global leaders, buying companies on the right side of AI at cyclically depressed prices ahead of a new innovation cycle.

The Liontrust Global Dividend Fund returned 2.0% in August, compared with  the IA Global Equity Income sector average of 0.8% and the MSCI World Index return of 0.3% (both comparator benchmarks)*.

• We are investing in innovative global leaders on the right side of AI
• There are attractive investment opportunities across all sectors
• We are investing in high quality dividend stocks with strong dividend growth profiles

July’s volatility spilled into August, with the VIX index, a key measure of market uncertainty, spiking early in the month following the unwind of the now infamous Yen carry trade. This event sent ripples through global markets, exacerbated by declining investor confidence and increased recessionary fears, particularly in the US where the economy appears to have finally run out of steam. Weakening economic data saw a broad de-risking of portfolios early in the month, leading to a sell-down in many companies that had been winners year-to-date, notably within the technology sector.

Market sentiment improved throughout the month, with VIX settling down to more normalised levels while high-quality companies with structural growth opportunities returned to the fore. The MSCI World index ended the month up 2.5% (in USD), having fallen as much as 6.4%, while the tech-heavy NASDAQ 100 index ended August up 1.1%, having fallen as much as 7.7%. The smaller-cap oriented Russell 2000 index, meanwhile, ended August down 1.6%.

With inflation falling and economic data slowing, investors increasingly looked to Fed policy for relief against fears of a hard landing scenario. These concerns were abated later in the month at the Jackson Hole Economic Symposium where chair Jerome Powell indicated that “the time has come for policy to adjust”, signalling imminent interest rate cuts on the horizon.

Meanwhile peak earnings season forged ahead, with companies reporting against the backdrop of heightened investor scrutiny on AI, particularly regarding the timing of returns given ongoing sizeable investments. Alongside broader market uncertainty, this meant many companies faced a high bar for investor expectations coming in to reporting, leading to some significant – and often excessive – post-earnings share price declines in cases where companies were deemed to have disappointed on earnings or guidance, particularly relating to all things AI.

We continue to buy cyclically depressed companies

Sentiment and earnings-related volatility present buying opportunities for the Global Dividend fund. While maintaining our valuation discipline, we continue to take opportunities to buy high-quality global leaders during periods of share price weakness.

In prior months we used this approach to build positions in cyclically depressed companies in the consumer sector, including LVMH and Nike. These are high-quality innovative global leaders with strong structural growth drivers. This came to the fore in August as consumer sentiment proved not as bad as feared, helping these stocks perform strongly against a softening market backdrop (LVMH +3.2%, Nike +11.3%).

We saw similar opportunities in August, trimming winners and adding to high-quality companies in cyclical downturns or which over-sold during pockets of volatility. For example, early in the month we exited strong-performing Vertiv after it hit our price target. We also took the opportunity to enter into a position in McDonald’s, a global leader in the restaurant industry that is showing signs of a renewed focus on optimisation and customer value following an extended period of end-market weakness and share price decline.

August was volatile, but earnings updates throughout the month helped provide clarity with valuable insights into companies, markets, and trends. Importantly, we saw further evidence that:

Innovative global leaders on the right side of AI

Despite heightened market scepticism around potential AI hype, we continue to see strong signals that we are entering a new AI-driven innovation cycle, which will impact every sector. Company updates throughout August reinforced several key trends that we are seeing within the AI space, giving us confidence that our global leading companies remain plugged in to major structural trends which will drive top- and bottom-line growth in the years ahead.

Compute scale matters for AI: increasing compute enables better models, broadening AI applications and revenue opportunities across the economy – a scaling dynamic with at least five more years to run. This trend continued to play out in August, with global leaders in the hardware and equipment space remaining well positioned to benefit from this ramp – notably Nvidia, which saw a 122% year-on-year increase in Q2 revenues driven by AI-focused chip demand. And this is just the beginning: CEO Jensen Huang noted that the next generation of large language models will require 10-20 times more compute power. This echoes Meta which is already generating sizeable AI revenues through recommender-AI driven ads, and which has noted its next-gen Llama 4 model will require ten times more compute than Llama 3.

Shift from chips to systems: increasingly complex AI workloads need larger integrated systems – not just individual chips. This adds complexity to chip manufacturing, shifting value capture across the semiconductor value chain. We see good opportunity in global leaders in the materials engineering space, well positioned to benefit from this shift, including Lam Research and Applied Materials (AMAT). In their recent updates these companies reinforced this view, with AMAT reporting that it expects revenue from its advanced packaging portfolio to grow by $1.7 billion this year as it leads the way in a rapidly expanding market, and LAM highlighting $1+ billion growth opportunities in areas like gate-all-round, backside power delivery, and advanced packaging.

Major upgrade cycle at the edge: AI is shifting to edge devices (smartphones, PCs, laptops). This will increase AI accessibility across the economy, but also places significant demands on these devices which need more compute, memory, and power to run AI applications. Seven billion smartphones and four billion PCs must be replaced by 2027 to enable AI, spurring a super-cycle which comes hot on the heels of a recent downturn in the edge computing space. We have used this recent cyclical weakness to build positions in innovative global leaders in the smartphone (Apple), PC (Dell), and memory (SK Hynix) markets. August updates from these companies highlighted that, while we are still early in this multi-year cycle, the ramp is staring to get underway. Apple reported promising smartphone recovery ahead of its AI-ready iPhone 16 launch in September, while Dell indicated positive signals for AI PC growth in the years ahead – another leg of growth alongside its stellar AI server segment which it reported will hit $8-10 billion in revenues this year.

Opportunities across sectors

AI is a once-in-a-generation general purpose technology that has the potential to transform every sector, not just technology. August updates saw continued diffusion of AI across all sectors, with early adopters benefiting from enhanced productivity and product innovation – benefits which we expect to compound over time. However, it is also clear that the broader AI build-out is still in the early stages, so most value is still accruing to those facilitating the physical needs of AI. Beyond the technology sector, one key bottleneck we are seeing at present is in power, creating challenges and opportunities in sectors such as industrials, utilities, and energy.

Power demand is spiking: global power demand is set to increase significantly in the years ahead, driven by major industrial themes of electrification, automation, and near-shoring. But these all pale in comparison to the enormous demand expected from AI, where power is seen as a key bottleneck to further progress. AI servers consume around 10 times more power than traditional CPU servers; with AI server penetration predicted to grow from to 30% by 2027 (from 10% in 2023), data centre power consumption is set to reach 10% of global energy consumption by the end of the decade. August updates from our companies indicated that this demand is already ramping: Constellation Energy, the largest nuclear and carbon-free fleet operator in the US, reported growing power demand from data centres, leading it to raise full-year earnings guidance; Schneider Electric saw strong growth in its energy management division, driving record quarterly group revenues; and Eaton saw a surge in demand for data centre power management, with a significant AI-driven backlog of projects supporting future revenues.

Healthcare innovation: A key sector poised for significant gains from the rise of AI is healthcare, where AI’s potential to revolutionise drug discovery, diagnostics, and treatment is becoming increasingly evident. However, healthcare is also experiencing another potential once-in-a-generation revolution unrelated to AI – the rise of GLP-1 treatments, which are revolutionising the treatment of obesity and diabetes. In their August updates, Global Dividend fund companies Eli Lilly and Novo Nordisk reaffirmed the staggering demand for drugs such as Wegovy, Ozempic, and Mounjaro, still far in excess of supply and bolstered by strong efficacy and continued label expansion into new indications beyond weight loss (such as cardiovascular disease, sleep apnoea, and potentially even Alzheimer’s disease). Demand shows no signs of slowing, leading both companies to make significant investments in manufacturing capacity to ensure they remain well-positioned to lead this rapidly expanding market in the years ahead.

Strong dividend growth profiles

We continue to focus on innovative global leaders that are well positioned to grow dividends over time. As market leaders they have strong competitive positions, allowing them to capitalise on major trends like AI and healthcare advancements. This strength enables them to generate substantial cash flow, allowing them to invest in innovation to stay ahead while also increasing shareholder returns.

In August we saw further evidence of these strong dividend growth dynamics across our portfolio, particularly in companies exposed to structurally ramping end-markets. For example, GLP-1 manufacturer Novo Nordisk increased its interim dividend 17%, while compatriot Eli Lilly maintained its impressive five-year dividend growth of 15%. In the AI infrastructure space, Applied Materials raised its quarterly dividend by 25%, following the lead from interconnect solutions leader Amphenol, which coming into the month increased its quarterly dividend by a whopping 50%.

Recent additions to the portfolio also bring strong dividend growth track records: LVMH, Nike, and McDonald's have five-year annualised dividend growth rates of 16.7%, 11%, and 7.5% respectively. As global leaders these companies are well positioned to come out the other side of a cyclical downturn having strengthened their market positions, setting them up well for continued innovation and dividend growth in the years ahead.

As we move forward, our focus remains on investing in high-quality global leaders during periods of cyclical weakness, ensuring we capitalise on the structural growth these companies can offer. We are still in the early stages of a new innovation cycle driven by AI, which is expected to deliver substantial growth opportunities and disruption across sectors. We remain confident that innovative global leaders on the right side of this transition stand to benefit significantly, regardless of broader market conditions or outcomes.

We remain confident in our portfolio companies' ability to sustain dividend growth. Ongoing trends in AI, healthcare, and other sectors provide opportunities for continued innovation and expansion. By staying at the forefront of these developments, our companies are well-positioned to generate strong cash flows and deliver growing dividends to investors.

We will continue to engage with companies during upcoming research trips to innovation hubs of Silicon Valley and New York. These interactions allow us to stay at the forefront of technological advancements and identify emerging leaders in the AI space and beyond. Additionally, the potential for interest rate cuts suggests further tailwinds for growth, supporting the companies best placed to lead the next wave of innovation.

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

*Source: FE Analytics, as at 30.06.24, C accumulation share class, total return, net of fees and income reinvested. Fund inception date is 31.12.01; the current fund managers’ inception date is 01.07.19.

KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

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