Liontrust UK Ethical 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 PRS REIT were among the top performers, following respective announcements of upgraded financial forecasts and a strategic review. Kainos Group detracted after warning on profits due to clients delaying investment decisions.  
• Portfolio changes were minimal in Q3. We sold the position in Intertek as we believe that other companies in the portfolio offered a better risk-adjusted return profile.

The Fund returned 5.2% over the quarter versus the IA UK All Companies sector average of 2.3% and the MSCI UK Index’s 1.7% (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 noticeably decelerating, 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 first half of 2024 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 growth 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.

After a difficult period for companies within the real estate space, the combination of lower bond yields, less selling pressure and corporate activity combined to create a supportive environment. Against this improving backdrop, PRS REIT delivered a strong set of results, reporting double-digit growth in rents for its mid-year update. PRS also announced the board had embarked on a strategic review aimed at closing the discount to NAV, which sent its shares higher.

Shares in investment platform AJ Bell moved higher after it reported a 5% quarterly increase in customer numbers and a 13% annual rise, reaching 528,000 customers. Held under our Saving for the future theme, assets under management for the quarter rose 4% to end the period to 30^th June at £83.7 billion, driven by strong net inflows of £1.7 billion. The company stated that customers were engaging in greater dealing activity, especially in overseas markets, thanks to the stronger performance of global stock markets.

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. 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 advisers, have steadily fallen due to the 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, while 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. 

Intertek was the only portfolio position sold in a quiet period for trade activity. While we like the long-term structural drivers in increasing transparency and quality in supply chains, we believe that other companies in the portfolio offered a better risk-adjusted return profile.

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.