Liontrust SF Global 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.
• NVR and Bright Horizons Family Solutions were among the top performers following strong earnings releases, while ASML and Cadence Design Systems weakened following softening sentiment in the semiconductor space.
• Trade activity was fairly minimal in Q3. We sold our holdings in IQVIA and Brown & Brown, while initiated positions in TransMedics and Core & Main.

The Fund returned -0.7% over the quarter, versus the 0.2% return from both the MSCI World Index and IA Global sector average (both of which are comparator benchmarks)*.

Global equity markets endured a see-saw quarter, including a sharp sell-off in August, with Japanese equity markets enduring the worst fall, falling 20% from its peak at one point. The trigger for the sell off and market volatility was surprisingly weak jobs data from the US in early August. This created a changing narrative around US growth, as the idea of a hard landing in the US began to creep into the market’s thinking. This weakening economic backdrop was also clear throughout earnings season, particularly for the industrials sector and some companies exposed to US residential housing.

The dominant theme of global equity markets throughout 2024 continues to be the enormous investment in AI. An arms race has taken hold among the world’s largest technology companies, as they seek to ensure they have the leading AI engines, to provide AI adoption among their customer bases. Over Q3, news emerged that Nvidia’s new GPU chip, the Blackwell, would be slightly delayed. News that the US government was looking at incremental measures to curb semiconductor technology access in China also led to a sell off across the semiconductor space. While the large-cap technology giants underperformed for the quarter, the broader capital equipment suppliers took the brunt of the sell off.

September saw the long-awaited first cut from the US Federal Reserve, as it decided to cut 50 basis point (bps). The size of the cut reflects the weakening macroeconomic environment and the backdrop of disinflationary pressures emerging in the economy. Bond yields fell below 4% and equity markets recovered the losses in August to finish the quarter in marginally positive territory.

Despite all the focus on inflation and interest rates, we remain resolutely focused on the long-term sustainability drivers towards a cleaner, safer and more efficient economy. These long-term drivers of growth have persisted for decades and we believe will continue well into the future due to structural shifts such as an ageing population, a digitising economy and a race to decarbonise our energy system.

In terms of portfolio performance, the Fund’s top contributor in Q3 was US home construction and mortgage banking and title services business NVR. Exposed to our Building better cities theme, NVR builds high-quality homes that have better energy efficiency ratings than the average new homes built by competitors. The management team has built a culture of focusing on efficiency and scale alongside excellent capital allocation. Similarly to the UK, there is a large shortfall in the number of homes being built every year and so homebuilders play a crucial role in meeting that demand.

NVR exceed revenue expectations for Q2 results, with consolidated revenue increasing 12% year-over-year to $2.61 billion. The company’s shares moved steadily higher following the earnings release as investors priced in a larger 50 basis points cut to interest rates by the US Federal Reserve and its likely knock-on effects of lower mortgage rates, and higher housing demand.

Bright Horizons Family Solutions, the US–based child-care provider and largest provider of employer-sponsored child care, was another strong performer in Q3. Held under our Providing education theme, Bright Horizons reported significant growth across key metrics in Q2. Revenue increased 11% to $670 million, while net income surged 90% to $39 million. The company's strong performance is attributed to enrollment gains, tuition price increases, and increased utilisation of back-up care services. Based on these positive trends, Bright Horizons updated its 2024 outlook, projecting revenue between $2.65 billion and $2.70 billion up from, $2.6 billion to $2.7 billion. We are pleased that Bright Horizons has been able to adapt its business to a post-Covid world, where hybrid working has clearly affected demand and patterns for childcare.

Dutch payments company Adyen posted a strong earnings release, reporting a 26% year-over-year increase in its Q2 net revenues, reaching €475 million, ahead of consensus estimates. A major driver of this growth was a 45% year-over-year surge in total payment volume (TPV), which totalled €322 billion for the quarter. Adyen's solid revenue growth was complemented by a slight sequential improvement in its take rate − a key profitability metric for payment processors. The take rate increased to 14.8 basis points (bps) from 14.7 bps in Q1, surpassing market expectations. On the earnings front, Adyen's EBITDA grew by 32% year-over-year to €423 million, with margins improving by 3 percentage points to 46.3%.

Despite Dutch semiconductor chip equipment maker ASML reporting better-than-expected earnings for Q2, it was the Fund’s largest equity 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.

Held under our Improving the efficiency of energy use theme, ASML remains at the forefront of improving semiconductor fabrication through EUV development and holistic lithography. Smaller process nodes mean more chips per wafer in manufacture and smaller, cheaper, more reliable, more energy efficient and more powerful end products.

Staying in the semiconductor space, chip design software specialist Cadence Design Systems reported first-quarter estimates that exceeded consensus estimates. However, a downward revision of its third-quarter and annual forecasts caused the shares to slip. Cadence projected third-quarter revenue between $1.165 billion and $1.195 billion, which fell short of analysts' average estimate of $1.20 billion, while its annual EPS forecast was trimmed to $5.77 - $5.97 from an earlier guidance of $5.88 - $5.98 due to a lack of visibility from sales in China.

The market is watching closely to weigh up the potential impact of aforementioned bans in China, which do appear to be very small for the companies we hold, against the possible benefit of an improving semiconductor cycle, driven by AI and smartphone investment. As AI becomes more deeply integrated across industries, the need for energy-efficient semiconductors will only intensify. Both ASML’s cutting-edge lithography technology and Cadence’s design expertise are indispensable to addressing this challenge, making them key players in the industry's future. We believe that their strategic focus on energy efficiency, coupled with the rising importance of sustainability in technology, will enable both companies to outperform over the long term, regardless of short-term market movements.

Edwards LifeSciences, a global leader in both surgical heart valves and transcatheter aortic valve replacement (TAVR), disappointed the market at its latest quarterly earnings in July, explaining that it expected growth in its core TAVR product to be slower this year than previously expected. Following this aggressive sell off in the share price, the company has repurchased more than $1billion of its own shares. Our confidence in the longer-term recovery of this segment, as well as the early successes we are seeing it have in other areas in cardiology gave us confidence to add to our position at what we felt was an attractive valuation. 

In terms of trade activity, we added Core & Main, the US distributor of pipes, valves and fittings to help disperse and control the flow of water and wastewater transmissions under our Improving the management of water theme. The fittings are used to connect pipe sections, valves and other devices. These have outsized benefits from an environmental perspective, given the importance of managing water and water infrastructure effectively. The wastewater products enable water to be reclaimed and are used in a variety of applications from industrial processes to agricultural irrigation.

We also added US company TransMedics under our investment theme of Enabling innovation in healthcare. Already held in the Liontrust GF SF US Growth Fund, we believe TransMedics is changing the face of organ transplants as a company that makes organ transplant modules and facilitates a US based organ transportation service that eases the friction between donor and patient. TransMedics developed a variety of ‘organ care system (OCS)’ that keeps organs in a dynamic state – i.e. working in a near physiologic state – versus the current standard of care known as cold storage. Unlike cold storage, the OCS device provides monitoring and evaluation of the harvested organ before delivery and implantation into the patient. This expands the pool of organs that were not able to be assessed and often thrown out, particularly from older donors.

In terms of sales, we exited both Brown & Brown and IQVIA due to both companies’ management teams’ unwillingness to act on the engagement issues we had raised. In the case of IQVIA, the management quality rating was recently downgraded from a 3 to 4, and its reporting on issues related to patient safety and its own environmental footprint was very poor. Brown & Brown has been a good performer, but has been stubbornly rated a 4 in terms of management quality. We had hoped the management team would be more receptive to our desire to improve their ESG reporting, but this was not the case. A key tenet of our process is finding great businesses and helping them improve the way they measure and report on material ESG issues. In both IQVIA and Brown and Brown this improvement did not materialise, so we moved the capital on to new and exciting ideas.

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

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