- Volatile quarter included an unwinding of crowded trades, such as AI capacity buildout.
- The Fund’s fixed income allocation benefitted from falling yields, but equity returns were weighed down by weakness within technology and healthcare.
- A broadening of market leadership in Q4 should provide a fertile environment for stock-picking approaches to add alpha.
The Liontrust Balanced Fund returned -1.2%* over the quarter, compared with the average return of 1.6% in the IA Mixed Investment 40-85% Sector, its comparator benchmark.
Market backdrop
The third quarter of 2024 was not a period for the fainthearted as markets whipsawed their way through the summer.
Volatility was everywhere but nowhere more so than the Nikkei 225 in Japan, which fell 25% from mid-July to early August, including a 17% two-day fall as markets appeared to succumb to a 1987-like liquidity event.
Assets across the world reacted in tandem, with the US SOX semiconductor index in particular falling 25% peak to trough, reflecting a general move towards derisking of the most crowded trades (in this case the big AI capacity buildout). Even the US mega-cap constellation saw profit taking and a quarter of underperformance.
At the same time, interest rate markets were moving dramatically to price in a 50 basis points (bps) cut by the Federal Reserve in September. The short end (US 2-year bonds) saw yields fall a whopping 115 bps from 4.75% at the start of the quarter to 3.60 % at the end. In commodities, gold rose 14% in the quarter to complete a four-quarter winning run and hit new all-time highs, while oil fell 18% - perhaps taking its cue more from expected global economic weakness than the rising tensions in the Middle East.
All in all, the quarter was an ambiguous juxtaposition of asset price moves that left many wondering what the path to year end would really look like.
Portfolio review
The Fund’s c.14% average exposure to government bonds made a positive contribution to portfolio returns, as UK 10 year yields fell by 17 basis points to finish the quarter at 4.0%.
Within the equities component, returns were held back by weakness among US tech and healthcare stocks in particular, although this was partly offset by very strong returns from its handful of stocks in Japan and China – the latter benefitting from a range of economic stimulus measures announced at the end of the quarter.
The Fund’s technology stocks were exposed to weakening sentiment as investors paused to give the sector’s AI-fuelled gains more scrutiny. As well as AI bellwether Nvidia (-7.4%), the portfolio’s largest tech sector detractors over Q3 also included Micron Technology (-25%), CrowdStrike (-22%), Snowflake (-20%) and Intuit (-11%). Alphabet (-14%) and Microsoft (-9%) also fell foul of the profit taking seen among US mega-caps.
Of these, CrowdStrike sits alone in its share price weakness stemming from a stock-specific operational setback rather than a sector-wide shift in investor appetite. In July, the cybersecurity specialist pushed out a faulty software update responsible for one of the largest ever global IT outages. Although its subsequent Q2 results announcement in August quantified the sales impact at only a few percent this year, investors marked down the shares heavily.
Within healthcare, Novo Nordisk (-23%) was a weak spot in the portfolio as speculation mounted that it could be forced to lower prices on weight loss drugs in the key US market. DexCom (-44%) also tumbled as a Q2 update cut its 2024 sales guidance to 11% to 13% organic growth, down from the 17% to 21% range given in April’s Q1 announcement.
Japanese consultancy group BayCurrent (+74%) was among the portfolio’s strongest quarterly contributors. Its quarterly results release in July beat expectations, as revenues rose 26% year-on-year following strong domestic investment demand, with companies focusing on digital transformation and generative AI.
PayPal (+27%) also moved higher on the back of quarterly results; in the three months to 30 June, operating profit rose 17% as margins expanded 126bps, ahead of expectations and strong enough to prompt an upgrade to full-year guidance. PayPal is now targeting “low to mid-teens” percentage growth in earnings per share, up from “mid-to-high single digit” guidance given in April.
Likewise, Frontdoor (+34%) – the US home warranty provider – upgraded 2024 earnings targets after price increases drove Q2 revenue growth in the face of lower volumes.
Alibaba (+39%) and Trip.com (+24%) moved higher as Chinese and Hong Kong listed stocks responded dramatically to authorities’ efforts to stimulate the economy
Portfolio Changes
We initiated several new holdings across the equity portfolio with the aim to provide further diversification and balance across sectors, themes and style. These were funded by trimming existing holdings, and exiting CrowdStrike where we see near term challenges, and Apple, where we believe the valuation is baking in a very optimistic growth scenario.
Air travel has been a secular growth theme for many years, with passenger growth exceeding GDP over several economic cycles; this has increased the demand for Airport infrastructure and related services. We have initiated holdings in both Flughafen Zurich and Aena, two high quality airport operators with exposure to stable European markets, offering steady growth in cash flows and dividends.
Gold is a proven hedge against inflation and instability. Given the uncertain global geopolitical and macroeconomic picture, we have added holdings in Barrick Gold and Newmont Mining, two large scale gold miners where we see near term production growth and strong management teams with good track records at containing costs.
Consumer staple Reckitt Benckiser is another new addition; it has a portfolio of strong brands in the household and personal care segment and is in the process of restructuring its operations, which could unlock significant value. Mowi is another new holding in the consumer staple space. Mowi is the world’s large producer of farmed salmon, a commodity that is in demand as several new markets open up, but remains supply constrained by regulatory, biological and ethical barriers.
Within the oil and gas sector, we added TGS, the largest geophysical consulting company, with unparalleled data gathering capabilities and a large database of seismic and geophysical data.
Wayfair was added to provide exposure in the challenged home furnishings space. Its growth has been relatively resilient, and it is well place for an environment where economic headwinds subside. Another addition was Trimble, which provides several hardware and software related solutions to the construction, agriculture and transportation industries. The company is undergoing a shift from being reliant on hardware sales to becoming more software focused, which should lead to increasing margins and higher quality recurring revenues.
Late in the quarter, the fund increased software exposure with SAP, Shopify and Samsara. SAP continues to see robust growth in its S/4HANA ERP product cycle driven by cloud migration and up-sell opportunities. Shopify is seeing strength in merchants’ gross merchandise value and increasing its generative AI offerings. Samsara is helping industrial companies to digitalise physical assets and offer surface real-time visibility. It continues to scratch its surface of penetration, with new software offerings and asset tags providing large greenfield opportunities and expansion of its addressable market.
Outlook
With so much lack of clarity, it normally pays to be more cautious. However, we believe there are clear ways to generate alpha in equity markets even if the overall direction is unclear.
The Fed commentary surrounding the 50bps cut in September made clear that the economy is strong, yet the rate cut itself might suggest otherwise, so we believe the market is going to remain volatile around data points until the path of the economy is clear.
While market direction may be hard to predict into year-end, we believe the backdrop is supportive of a broadening out in the market. This should translate into fertile conditions for stock, sector, or theme pickers. Looking at the winning equities ‘baskets’ in Q3, (according to Goldman Sach’s designations), the US is led by housing, non-profitable tech, ‘power up America’ and infrastructure – all lower rate beneficiaries while their AI basket of names turned in a negative quarter. Technology has been side-lined at its broadest level as the next wave of AI opportunity is more carefully scrutinised.
Our base case remains that set out last quarter: alpha will be generated from a focus on a broadening out of market leadership and less so from betting on the absolute direction of markets. It’s time to think beyond the consensus trades of the last 12 months; this should be highly beneficial for stock-picking strategies.
Discrete years' performance (%) to previous quarter-end:
|
|
Sep-24 |
Sep-23 |
Sep-22 |
Sep-21 |
Sep-20 |
|
Liontrust Balanced C Acc |
16.9% |
7.2% |
-13.9% |
13.7% |
16.4% |
|
IA Mixed Investment 40-85% Shares |
13.9% |
5.1% |
-10.2% |
16.6% |
-0.2% |
|
Quartile |
1 |
2 |
4 |
4 |
1 |
* Source: FE Analytics, as at 30.09.24, total return, net of fees and income reinvested
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.
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. 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.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
