Liontrust SF European Growth Fund

• Global equity markets endured a see-saw quarter, including a sharp sell-off in August and the long awaited first interest rate cut from the US Federal Reserve.
• On Holding and Nagarro were among the top performers following strong earnings releases, while ASML weakened following softening sentiment in the semiconductor space.
• Trade activity was fairly minimal in Q3. We sold our holding in venture capital firm Kinnevik, and purchased Italian industrials company Interpump under our Improving the resource efficiency of industrial and agricultural processes theme.

The Fund returned 0.8% over the quarter, compared with the 0.1% return from the MSCI Europe ex-UK Index and the 0.3% IA Europe ex-UK sector average (both of which are comparator benchmarks)*.

The third quarter of 2024 saw the long anticipated cut in interest rates from both the US Federal Reserve and the Bank of England. This was precipitated by moderating inflationary pressures and a weakening macro-economic environment. Risk assets have been torn between the benefits of easing monetary policy and the potential weakening of the global economy. The summer began with markets pricing in little risk of a recession in the US, by the end this risk was clearly more of a concern with mixed economic data. In short, markets started the quarter worried about inflation and interest rates and ended it worried about growth.

Looking more closely at Europe, the manufacturing sector remains weak – particularly in the Germany industrial segment. With weak demand from within Europe and slowing exports to important markets like China, some forecasters are predicting a German recession in the coming quarters. Linked to this weakness, the European Central Bank cut rates by 25 basis points for a second time in September. These moves were ahead of the US Federal Reserve and they have signalled further easing at the next meeting in October.

UK equity markets continued to perform well over the quarter. The Bank of England embarked on a rate cutting cycle with easing inflationary pressures, and a new labour government has provided some much needed political stability – in contrast to the uncertainty in European politics. Despite stronger performance, the UK equity market remain cheaper relative to European and US valuations.

As always, we are more observer than predictor of macroeconomic data.

The top performer for Q3 was Swiss sports brand On Holding. Early in the quarter, the company which is held under our enabling healthier lifestyles theme, reported second quarter results that were well-received by the market, while it also reiterated its full year outlook for sales growth of around 30%. The company continues to take market share whilst incumbents such as Nike, Lululemon and Puma continue to demonstrate slowing growth.

With regards to its sustainability credentials, On has developed its brand to focus on performance and sustainability and are constantly innovating to improve the quality and reduce the impact of its products. Some of its innovations include a resale platform for used goods called Onward, a subscription product service called Cyclon designed to close the loop in footwear and apparel, as well as aiming for 100% recycled or organic cotton and 100% recycled polyester and polyamide. We believe the company is well placed to benefit from our Enabling healthier lifestyles theme as people focus more sports and activity.

Bioprocessing equipment and consumables manufacturer Sartorius Stedim reported revenue for the first half-year that met consensus estimates. Exposed to our Enabling innovation in healthcare theme, Satorius’ equipment is used by the pharmaceutical industry in the development and manufacture of the next generation of pharmaceutical treatments (biologics) including gene & cell therapy. We continue to believe in the long-term growth prospects for this high-quality company.

Nagarro, a global leader in digital engineering and technology solutions, was another strong performer in Q3. Its Q2 revenue grew 7.6% year-on-year to €244.1 million, despite a tough macroeconomic backdrop. Exposed to our Improving the resource efficiency of industrial and agricultural processes theme, Nagarro’s programmers help companies in all sectors modernise and digitise their operations, improving efficiency, customer experience, resilience and digital security. This helps to drive the top and bottom line. Nagarro’s specialist IT engineers can focus on discrete projects, allowing its customers to focus on their core competencies and reduce their need for additional fixed costs – helping them to increase agility and responsiveness.

Despite Dutch semiconductor chip equipment maker ASML reporting better-than-expected earnings for Q2, it was Fund’s largest detractor in Q3. Following a slump in growth in Q1, the company reported net bookings of €5.6 billion in Q2, up 24% from a year ago. While these strong sales figures are encouraging, it was overshadowed by news of more US restrictions on its business in China. Shares in ASML fell sharply after reports that the US is considering using the most severe trade restrictions available if companies including ASML continue to give China access to advanced semiconductor technology.

The poor performance in the second quarter was followed by a c.15% downgrade of sales growth guidance for 2025 – with the Q3 order book particularly disappointing investors. While the company remains confident in the long-term demand for their lithography machines, driven by AI demand, they have cited customer caution impacting their willingness to invest in semiconductor manufacturing capacity.

Danish hearing-aid and audio equipment company GN Store Nord reported weaker-than-expected earnings for the second quarter. Whilst hearing aid sales continue to recover from a demand slump during COVID-19 and gain market share with a new product release, sales in their professional headsets segment continued to move sideways with customers unwilling to invest. Despite this weakness, there is good evidence to  this is more a purchasing delay – demand will eventually return and has maintained a greater than 50% global market share

Shares in German sportswear maker Puma tumbled after it reported lacklustre Q2 results, while also lowering its profit forecast for the year, citing cautious consumer sentiment and higher freight costs. Puma’s underperformance is disappointing, with the share price now discounting little growth or improvement in profitability. At present we think this forecast is overly pessimistic and on a positive note the company has started to use their strong balance to repurchase shares and boost our share of the business.

Shares in new holding Technoprobe, the pioneer behind the semiconductor probe card, fell after the company reported a decline in first-half profitability and pointed towards a challenging third quarter. Despite the excitement in the AI semiconductor market, with the likes of Nvidia reaching dizzying market capitalisations, the majority of the semiconductor market remains in a significant post-Covid slump with inventory levels only now bottoming. This cyclical slowdown has provided us with an opportunity to build our stake in the business at attractive valuations.

Technoprobe is held under our theme of Better monitoring of supply chains and quality control, Technoprobe’s testing cards help to find faulty semiconductors early on in the manufacturing process, helping chip manufacturers such as TSMC cut down resource waste and reduce defective chips

In terms of trade activity, we initiated a position in Italian industrials company Interpump under our Improving the resource efficiency of industrial and agricultural processes theme. Interpump focuses on resource efficient high pressure water jetting equipment, as well as durable and efficient hydraulic systems. Its products help to reduce water and energy consumption in industrial processes, and reduce toxic chemical use in water jetting. After a period of particularly strong post COVID-19 growth, the hydraulics market is now slowing. This has provided an opportunity to buy share in this high-quality business at a discount to the long-term valuation.

In terms of sells, we sold our position in venture capital firm Kinnevik. While we remain confident in long-term opportunity for Kinnevik’s portfolio, we saw greater risk adjusted upside in new holding Interpump. Kinnevik returns to our watchlist of potential ideas

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

* Source: FE Analytics, as at 30.09.24, total return, net of fees and income reinvested

** Source: FE Analytics, as at 30.09.24, primary share class, total return, net of fees and income reinvested