Liontrust Special Situations Fund

The Liontrust Special Situations Fund returned -1.0%* in August. The FTSE All-Share Index comparator benchmark returned 0.5% and the average return in the IA UK All Companies sector, also a comparator benchmark, was 0.1%.

The FTSE All-Share Index mirrored US markets in experiencing a V-shaped dip and rebound that left it finishing August higher than it started, but a look at the market cap breakdown shows that the recovery was less than complete at the mid and small cap levels. While the FTSE100 recorded a solid 0.9% gain for the month, the mid-cap FTSE250 Index lost 2.0% and the FTSE AIM All-Share Index dropped 1.7%, albeit the relatively limited group of stocks in the FTSE Small Cap (ex-investment companies) Index returned 0.7%.

August began with a widely expected 25 basis point interest rate cut from the Bank of England, but attention swiftly shifted to the US where weaker than expected employment data prompted yet another shift in investor sentiment, undermining confidence in a soft economic landing and reviving recession fears. The mid-month recovery was driven by a clear indication from the US Federal Reserve that it will cut rates in September.

The Fund’s higher exposure to stocks below the FTSE 100 – around 55% of the Fund compared to 16% of the FTSE All-Share – left it particularly exposed to softening sentiment towards midcaps and small cap AIM-listed shares as these background economic concerns ebbed and flowed.

Bookending the Fund’s portfolio of monthly performers are GSK (+11%) – boosted by legal developments in the US – and John Wood Group (-36%) – relinquishing recent takeover-driven gains. In between these two sit a number of companies updating on trading, many of them providing interim results for the first half of 2024.

Starting with GSK (+11%), the pharma group’s shares have risen strongly this year, helped by upgraded medium-term sales targets as demand in its vaccines unit has outstripped expectations. This positive year-to-date showing was dented in June by a surprise ruling in the US that evidence in multiple legal cases surrounding side effects of Zantac (ranitidine) treatment would be allowed to be presented at trial. In late August, the Delaware Supreme Court announced that this decision will now be reviewed, prompting a rally in GSK shares.

For the second successive year, John Wood Group’s (-36%) share price has endured a high level of volatility driven by takeover speculation. In 2023, the engineering and consultancy group received five takeover proposals from private equity group Apollo, rejecting the first four but agreeing to enter discussions following the final cash proposal of 240p before Apollo dropped its interest. In a similar turn of events, Wood Group this year rejected three successive takeover proposals from Dubai-based group Sidara before agreeing to enter discussions over fourth and final offer at 230p, only for Sidara to walk away in August. Sidara stated its decision had been affected by rising geopolitical risks and financial market uncertainty. The Fund had been actively selling down its position ahead of the put-up-or-shut-up (PUSU) deadline but was not able to complete the order due to relatively thin trading, with other market participants seemingly also worrying about the likelihood of Sidara walking away.

Delving into the half-year updates, industrial threads and footwear component manufacturer Coats Group (+9.9%) provided one of the highlights due to an upgrade to 2024 forecasts. Following better-than-expected constant currency revenue growth of 8% in the first six months of the year, Coats now expects full-year numbers to exceed market expectations. Coats commented that the inventory destocking trend which negatively affected volumes in 2023 now looks to be behind it, with the recovery well underway.

Half-year results from Haleon (+9.9%), the consumer healthcare business spun out of GSK in 2022, were also well received. Revenue growth of 3.5% was driven by price increases, with volumes slightly lower, although Q2 did see volume growth turn positive. Adjusted operating margins improved 160 basis points organically to 22.7%, helped by efficiency efforts and lower cost inflation, lifting adjusted operating profit by 11%. The company raised its full-year operating growth target to “high-single digit”.

Softness in Spirax Group’s (-15%) shares reflects interim results which were slightly short of expectations and included a small downgrade to full-year forecasts. The specialist engineer of steam management systems has seen demand held back by lower-than-expected global industrial production in the second quarter. Organic revenue growth of 1% in the first half of the year is slightly below its forecasts and, while it expects stronger growth in the second half, it has still trimmed its 2024 forecasts from the levels given in a May update. It now expects mid-single digit organic revenue growth rather than high-single digits, and its adjusted operating profit is on track to be around 20.0% instead of the prior target of over 20.7%.

Among the other updates PageGroup (-7.8%) gave up some ground as its statement painted a picture of challenging recruitment market conditions putting pressure on revenues, with activity levels softening further towards the end of the six-month period. TP ICAP (+9.7%) interims showed profit growth, flagged the potential for market volatility to boost inter-dealer broking business levels and confirmed it continues to explore spin-off options for its Parameta Solutions unit. Bunzl (+8.7%) the outsourced procurement and distributor of everyday items, showed evidence of operating margin progress from 7.4% to 8.0% in the first half of 2024, allowing it to upgrade full-year profit growth guidance to a “strong increase” on last year’s level.

While the background macroeconomic picture remains somewhat volatile, UK equities continue to trade at a substantial discount to their intrinsic value and to their long run average, providing attractive opportunities for investors able to take a longer-term view. The fund managers remain convinced that it is only a matter of time until this gap begins to close, with ongoing high levels of inbound M&A interest in the market, as well as government policy initiatives to reverse decades-long flows out of UK equities from domestic pension funds, providing key catalysts. In the meantime, although there are pockets of trading weakness from companies more exposed to cyclical demand pressures, overall the Fund’s companies remain insulated by their superior quality characteristics, continuing to demonstrate higher returns on capital, higher margins and lower leverage than the wider market.

Positive contributors included:

GSK (+11%), Coats Group (+9.9%), Haleon (+9.9%), TP ICAP (+9.7%) and Bunzl (+8.7%).

Negative contributors included:

John Wood Group (-36%), Big Technologies (-21%), Spirax Group (-15%), Mortgage Advice Bureau (-15%) and PageGroup (-7.8%).

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

*Source: Financial Express, as at 31.08.24, total return (net of fees and income reinvested), bid-to-bid, institutional class. **Source: Financial Express, as at 30.06.24, total return (net of fees and income reinvested), bid-to-bid, primary class.

^† Julian Fosh is on a leave of absence. The Economic Advantage funds continue to be managed by the other members of the team in Julian’s absence.

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.

The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

This Fund may have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the Fund's value than if it held a larger number of investments. The Fund may encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. The Fund may invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing. The Fund will invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. Outside of normal conditions, the Fund may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.

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