Liontrust Global Innovation Fund

The Liontrust Global Innovation 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 US Federal Reserve’s change in policy direction should act as a tailwind for our portfolio companies
• The Fund is well-positioned to capitalise on China’s economic recovery and growth potential 
• Innovative companies in our portfolio continue to benefit from emerging structural trends such as power demand and shifts towards renewable energy

The Liontrust Global Innovation Fund returned 6.0% in September, placing it in the first quartile of peers and ahead of the IA Global sector average of 0.1% and the MSCI All Country World Index return of 0.3% (both comparator benchmarks).

This rounded out the third quarter in which the Fund returned -3.7% compared to the IA Global sector average of 0.2% and the MSCI All Country World Index return of 0.5%. Longer term performance remains strong, with the Fund having returned 61.6% since manager inception (30.06.19) placing it in the second quartile of the IA Global sector. This is ahead of the sector average of 52.3%, but slightly behind the MSCI All Country World Index return of 66.5%.

Market outlook

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 started 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.

Unsurprisingly, several Chinese holdings emerged as key contributors to September's performance, notably leading social e-commerce platforms Meituan and Pinduoduo (PDD). PDD's innovative "team purchase" model and its global expansion through Temu, now boasting 289 million monthly active users, have driven impressive growth. Recognising the potential in a recovering Chinese market, we strategically increased our stakes in well-positioned companies. Earlier in the month we added a position in L'Oréal, the global beauty leader with significant China exposure, known for substantial R&D investment, early AI adoption, and a balanced brand portfolio. We also initiated a position in Anta Sports Products, an innovative Chinese sportswear company well-placed to capitalise on China's growing sports market through its product innovation and strategic partnerships. With the Fund's exposure to China standing at 10%, we believe we are well-positioned to capitalise on the country's economic recovery and growth potential going forward.

Beyond the macro environment, innovative companies in our portfolio continue to benefit from emerging structural trends, with GE Vernova and Constellation Energy Group emerging as key contributors to the Fund's September outperformance. Both companies are capitalising on the surging power demand driven by AI data centres and the increasing shift towards renewable energy – a structural trend brought into sharp focus early in the month by Constellation's landmark 20-year deal to provide 35MW of nuclear energy for Microsoft’s data centres by restarting part of the US’s Three Mile island nuclear reactor. Constellation's ongoing discussions with other major tech companies to meet this surging demand supports its guidance of mid-teens earnings growth prospects through the rest of the decade.

GE Vernova (GEV), generating about 30% of global electricity, is similarly well-positioned, leading in gas turbines and US onshore wind, while its growing electrification software business modernises grid operations. The company's innovative grid automation solutions are reducing network outages by 18% and speeding up restoration times by 40%, addressing a critical challenge for data centres. Since its spin-off from General Electric, GEV has pivoted towards profitability, with EBITDA margins expected to climb above 10% within three years (from 5-7% today), supported by a robust backlog of over $116 billion that covers 50% of 2025 revenue.

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 addition to L’Oreal and Anta Sports, we saw further buying opportunities in the month, adding new positions in Brookfield Renewable Partners and Sweetgreen. Brookfield Renewable, a global leader in clean energy, further capitalises on the structural trend of surging power demand driven by AI data centres that is benefiting Constellation Energy and GE Vernova. Meanwhile, Sweetgreen has established itself as a rapidly growing player the fast-casual dining sector with its focus on healthy, customisable salads and grain bowls. This tech-savvy chain has gained popularity in the US by offering fresh, locally sourced ingredients through a convenient digital ordering system. Sweetgreen provides quality and convenience, its competitive edge stemming from a user-friendly app, streamlined operations, and commitment to quality ingredients.

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. In September, this discipline led us to exit a number of positions as markets rebounded, including Regeneron, DraftKings, and Amazon. While these companies continue to demonstrate strong market positions and growth potential, we saw more compelling risk-adjusted return profiles in innovative companies on our watchlist. Now back on the bench, we will continue to monitor the progress of these companies and look for more attractive valuation entry points in the future.

Looking ahead, we remain optimistic about the opportunities for innovative companies 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. The Fund is well positioned to outperform in such cutting cycles. 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 for innovators across our portfolio and watchlist. 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 the active risk inherent in our approach. This strategy helps us navigate periods of market uncertainty while pursuing long-term growth potential.

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

*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 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.

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.

Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. The Fund may invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of the fund over the short 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. 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.