Liontrust Global Dividend Fund

The Liontrust Global Dividend Fund returned 5.3% in September, placing it in the first quartile of peers and ahead of the IA Global Equity Income sector average of 0.4% and the MSCI World Index which declined -0.2% (both comparator benchmarks).

This rounded out the third quarter in which the Fund returned -1.8% compared to the IA Global Equity Income sector average of 2.4% and the MSCI World Index return of 0.2%. Longer term performance remains strong, with the Fund having returned 124.5% since manager inception (31.08.17), ahead of the IA Global Equity Income sector return of 65.3% and the MSCI World Index return of 105.4%.

September proved a more upbeat finish to a third quarter characterised by bouts of extreme volatility, swings in consumer sentiment, and macroeconomic policy action. Notable was the decision by the US Federal Reserve to cut interest rates by 50 basis points at its mid-September meeting. This marked the first rate cut since the aggressive tightening cycle that began in early 2022 and was facilitated by an ongoing cooling of inflation data from the 2022 post-Covid peak. This change in policy direction served to stimulate both US and global markets, in part as it reduced pressure on other central banks around the world that have followed similar tightening patterns. We expect this change in policy direction to act as a tailwind for the types of high-quality innovative companies held in the Fund.

Later in the month the Chinese government launched an aggressive fiscal and monetary easing programme, a significant step-up from intermittent stimulus measures introduced throughout the year. This came as a welcome relief to an economy that had been long languishing off the back of a weak property market and associated low business and consumer sentiment. It kicked off the strongest rally in Chinese markets in over a decade, to the benefit of domestic stocks as well as global companies exposed to the Chinese economy. The scale of this stimulus programme, on top of record savings accrued over recent years, bodes well for Chinese consumer and business sentiment and the associated increased potential for spending and investment going forward. Our exposure to China is approximately 10-12% of the Fund, having increased our weighting through investments made in the first half of this year.

One such addition is e-commerce and cloud giant Alibaba, benefiting from the stimulus catalyst to emerge as one of the top contributors to Fund performance in September. The company was well positioned for a rebound following a strong August earnings update that showcased significant improvements in its e-commerce business, as well as noteworthy progress in its AI cloud business where AI-related product revenue sustained triple-digit growth rates. Alibaba is well placed as a major player entering the new AI-driven innovation cycle, with management confident that the cloud business will accelerate from here, over 50% of this growth being driven by AI products as enterprise budgets remain elevated. Despite only having paid its first ever dividend in late-2023, Alibaba already yields over 2% on a trailing 12-month basis, while also maintaining a $4 billion per quarter buyback program. Given its robust growth trajectory and improving profitability profile, earnings growth prospects look promising, supporting a further strengthening of returns going forward.

Similarly, beauty innovation powerhouse L'Oreal saw a strong rebound following these stimulus announcements, having faced ongoing headwinds from a weak Chinese consumer. As the world's number one beauty player and an innovative global leader, L'Oreal remains a core holding in the Fund and we continue to see further upside potential as end markets recover. The company's success is underpinned by its unparalleled commitment to innovation, investing €1 billion annually in R&D (3% of sales). This drives the consistent introduction of cutting-edge products, which typically account for 10-15% of annual sales. L'Oreal's pioneering 'beauty tech' strategy has boosted digital sales to a third of total revenue, with its early AI adoption showing impressive results – its GenAI beauty advisor increases customer conversion by 60% compared to in-store advisors. This digital prowess, combined with the company's scale and diverse brand portfolio, reinforces its market-leading position. Financially robust, L'Oreal has increased its dividend over fourfold in the past decade and maintains a 17% return on invested capital, demonstrating its enduring value in the dynamic beauty sector.

Beyond the macro environment, we continue to see innovative global leaders across our portfolio benefiting from a variety of ongoing and emerging structural trends. Most prominent in September was Constellation Energy Group, the world's leading nuclear provider and the strongest contributor to fund performance this month. Constellation surged by over 20% after announcing a landmark 20-year agreement with Microsoft to provide 35MW of nuclear energy for its datacentres by restarting part of the US's Three Mile Island nuclear reactor. This deal, the largest nuclear power purchase agreement in history, underscores the growing importance of reliable clean energy in powering the AI revolution. Constellation's c.22GW nuclear capacity, the largest and most efficient in the US, generates 180 million MW hours of clean energy annually, with a 93% capacity factor, making it ideal for AI datacentres which are approximately 10x more power-intensive than traditional ones. As Constellation engages in discussions with every major tech company to meet this surging demand, the company is well-positioned to compound earnings in the mid-teens through the decade while growing its dividend at an impressive 25% per annum.

We maintain our view that the last few months have served as a reset point for valuations across the market, presenting considerable upside opportunities across our fund and watchlist and thus attractive buying opportunities of which we continue to take advantage. This optimism has been supported by an earnings season in which we saw innovative companies across our portfolio continue to deliver strong progress in both fundamentals and competitive positioning, and further vindicated by the affirmative policy actions seen throughout September.

In September we topped up our position in Amphenol, a leader in high-tech interconnects, after the company sold off early in the month. Amphenol is at the forefront of the AI revolution, providing essential interconnects for datacentres and GPU clusters. With AI servers requiring 50-100% more interconnect content than traditional servers, and AI server penetration in datacentres expected to rise from <10% last year to 30% by 2027, Amphenol is well-positioned for growth. The company's IT datacom end market is currently expanding at a 56% year-over-year rate. Beyond datacentres, Amphenol's technologies enable electrification across various sectors, supporting consistent double-digit sales and mid-teens EPS growth, as well as 16% five-year dividend growth track record. We also built an entry position in Diageo, the global leader in premium spirits. Known for iconic brands such as Johnnie Walker, Smirnoff, and Guinness, Diageo has struggled over the past couple of years as expectations for market growth moderated. However, we believe the company's strong brand portfolio and global presence position it well for a recovery as consumer markets stabilise, facilitating a return to its long history of steady dividend growth and presenting an attractive risk-adjusted opportunity at current valuations.

On the other side of the equation, we maintain our strict valuation discipline, trimming or exiting stocks as they approach our target price. This strategy enables us to take advantage of cyclical shifts in the share prices and is particularly important during periods of market volatility where upside potential can swing rapidly. For instance, we trimmed our position in Costco, the low-cost membership warehouse retailer, after a strong run that saw the stock rise 33% year-to-date by end-September. We also exited our position in Schneider Electric, a leader in electrification and automation solutions for industries and datacentres that has experienced a similarly strong run year to date. While Schneider boasts strong market positions and significant exposure to growing trends like AI, we opted to move the stock back to our watchlist as we saw better upside opportunities elsewhere. Similarly, having built a position in sportswear leader Nike earlier in the quarter when it appeared oversold, we opted to exit the stock in September after it saw a significant overnight boost on the announcement of the triumphant return of veteran Elliott Hill to the role of CEO. Now back on our watchlist, we will continue to monitor the stock going forward and look for a more attractive valuation entry point in the future.

We remain optimistic about the opportunities for innovative global leaders as we enter a new innovation cycle. In the near term the potential for further supportive policy action is encouraging, with the US Federal Reserve likely to pursue additional interest rate cuts later this year. This should alleviate pressure on other central banks, facilitating similar patterns in markets worldwide. Scheduled key government meetings in China later this year provide potential for further stimulus or expansive policy actions, building on recent positive momentum. These concurrent global efforts should provide a tailwind for innovative companies across various markets worldwide as we approach another crucial earnings season, in which we anticipate further signs of progress from our global leading companies. While we expect US election-related volatility in the months ahead, we do not foresee the outcome significantly impacting the Fund's performance. In this dynamic environment, we will continue to maintain our strict valuation discipline, seeking to capitalise on attractive opportunities while managing risk in the portfolio. This approach helps us navigate periods of market uncertainty while pursuing long-term growth potential.

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*Source: FE Analytics, as at 30.09.24, 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 31.07.17.