Liontrust SF UK Growth Fund

• UK equity markets continued to perform well in Q3, driven by the Bank of England’s decision to begin its rate cutting cycle and initial signs of political stability.
• The Gym Group and Haleon were among the top performers, both upgrading financial growth targets for this year. Kainos Group detracted after warning on profits due to clients delaying investment decisions. 
• Portfolio changes were minimal in Q3. We initiated a position in National Grid under our Improving the efficiency of energy use theme.

The Fund returned 4.1% over the quarter versus the IA UK All Companies sector average of 2.3% and the 1.7% return from the MSCI UK Index (both of which are comparator benchmarks)*.

The UK equity market continued to perform well over the quarter. The Bank of England embarked on a rate cutting cycle, and a new Labour government provided some signs that the political turbulence of the past years should begin to recede. Bond yields fell and this provided support for the equity market. Growth in the UK economy continues to be sluggish, but no longer decelerating noticeably, as in the US. This ensured equity markets were more receptive to the news of the rate cut. This benefited smaller cap stocks and was a tailwind for the Fund.

The Fund’s top performer in Q3 was Gym Group, a company held under our Enabling healthier lifestyles theme. Having released an encouraging trading update in July, an interim results release in September reported pre-tax profits for the six months to 30^th June of £200,000, compared with a £6.1 million loss a year ago. Price increases and rising membership have helped the budget gym operator to upgrade its full-year revenue guidance from 4% - 5% to 5% -6%. It is pleasing to see the company rebound to report a profit having announced pre-tax losses for each six-month period since coronavirus shutdowns first affected its business in the first half of 2020.

Haleon, the consumer healthcare business spun-out of GSK, saw its shares rise after a well-received half-year results release. The company upped its full-year guidance to “high-single-digit organic profit growth”, following 6% growth for its power brands cohort, including double-digit rises for Sensodyne, Parodontax and Centrum. Held under our Enabling healthier lifestyles theme, Haleon’s second quarter revenue grew by 4.1%, in line with expectations, with price increases contributing strongly to growth. Underlying operating profit for the first half was up by 11% to £1.3 billion, reflecting revenue growth and easing inflation.

NatWest continued its impressive year-to-date performance, notching a solid gain in Q3. Held under our financing housing theme, the UK-focused bank reported operating profits before tax of £1.7 billion in the quarter, surpassing consensus estimates. NatWest boosted its forecast for full-year revenue, now expecting revenue for the year to be around £14 billion, up from an earlier forecast of £13 billion to £13.5 billion. The bank also lifted guidance for return on tangible equity (RoTE), a key measure of bank profitability, to more than 14%, up from a previous forecast of 12%, boosted by higher retail deposits and credit card lending as well as growth in its commercial bank, which helped offset a reduction of its total mortgage balance.

While the bank’s corporate lending is focused on areas that we view as being most beneficial to economic growth, it also has strong and growing commitment to environmental challenges that go beyond the day-to-day running of the bank whereby it is actively looking to reduce exposure to carbon within their corporate loan book by strengthening policies relating to lending policies. In addition, it is working with customers on initiatives aimed at reducing their carbon usage.

Long-term Fund holding Softcat, the UK’s leading value-added reseller of IT software and equipment, was among the detractors after the company received a broker rating downgrade. Held under our Enhancing digital security theme, the company's competitive advantage is based on the unique culture, which emphasises professionalism, meritocracy, competition and fun. This employee satisfaction drives best-in-class customer experience, high recurring revenues and fast increasing market share. Longer term, we see no let-up in demand for more sophisticated AI-enabled products by SMEs in the UK. This should bode well for the company in the future.

Shares in Mortgage Advice Bureau (MAB), the platform provider for mortgage, have steadily fallen due to headwind of interest rates staying higher for longer than expected at the start of the year. Exposed to our Saving for the future theme, MAB reported that revenue grew by 5% to £124 million while adjusted profit before tax rose 40% to £12.3 million. Looking forward, the company stated that it “expects to see record years in terms of re-financing activity in 2025/2026” and is encouraged by the new government’s focus on housebuilding and other initiatives that will provide a tailwind to the company. While the company has certainly faced some headwinds, we believe it is well positioned for rising mortgage activity and have been modestly adding to our position.

Kainos Group, the technology consulting and software development business held under our
Improving the resource efficiency of industrial and agricultural processes theme, issued a profit warning. Kainos announced that it expects full-year revenues to be below market forecasts, largely due to a tougher trading environment and clients delaying their investments in projects. This was particularly evident in its digital services division, where commercial clients deferred spending, and the UK General Election impacted project mobilisations in the public sector. Additionally, although Kainos's Workday services division maintained a robust win rate, contract wins and values have been lower than in previous periods, and there has been more aggressive pricing among its partners. We believe that investment in digital services is as critical for the public sector as for the private. Done well, it can lead to lower cost and greater efficiency. For this reason we expect stronger prospects for Kainos. 

In terms of trade activity, we initiated a position in National Grid under our Improving the efficiency of energy use theme. National Grid provides the electricity transmission and distribution in the UK and north-east US that will allow for the decarbonisation of our energy systems.

To decarbonise, the economy requires substitution of burning fossil fuels both in power generation, by adding ultra-low renewables (wind and solar to the grid) as well as substituting the internal combustion engine with alternatives such as electric vehicles (EVs), and eventually, natural gas boilers with low carbon alternatives − such as heat pumps. For this to be able to happen, we need to upgrade our electricity grid to be able to handle both increasing penetration of renewables as well as increased new demand from electrification of transport and heat. National Grid is investing significant amounts to do this.

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