Liontrust UK Growth Fund

• Speculation around possible fiscal changes in upcoming Autumn Statement have affected sentiment towards UK Shares. 
• Positive catalysts could emerge in the form of pension market reform and/or further M&A activity; the Fund’s holdings in Rightmove and TI Fluid Systems were targeted in September.
• The Fund’s September fall can be attributed to weakness in energy and pharma sectors – overweight positions for the Fund – and in Next 15 Group.

The Liontrust UK Growth Fund returned -3.6%* in September. The FTSE All-Share Index comparator benchmark returned -1.3% and the average return in the IA UK All Companies sector, also a comparator benchmark, was -1.3%.

While global equity markets were focused on the US interest rate decision – which delivered the increasingly anticipated 50 basis point cut – before being buoyed by a raft of stimulus measures in China, UK markets drifted during the month of September. The UK general election in July initially prompted enthusiasm at the prospect of greater political stability over the coming years, aided by the Labour government’s explicit agenda of driving economic growth. However, with the Autumn Statement approaching at the end of October and a negative slant to the rhetoric coming from the Treasury, concerns have been rising about the fine balance to be struck between resetting expectations but also avoiding a self-fulfilling spiral of negative sentiment weakening business confidence.

Very little has been trailed by the Chancellor about possible changes to the fiscal landscape ahead of the Autumn Statement, though speculation has been rife. Without adding to such speculation within the scope of this commentary, the we maintain our passionate belief in the long-term advantages of investing in companies across the market cap scale with strong barriers to competition and high returns on capital, and that the quality of such businesses will ‘out’ over time. With extreme compression of valuation multiples of listed companies having occurred over the past few years – a dynamic felt more acutely at the small and mid cap end of the size spectrum – our view is that any short-term disruption from the Autumn Statement should present an opportunity.

On the other hand, the event could well produce a powerful positive catalyst to UK markets in the form of pension market reform. Much has been written about the potential for concrete policy initiatives to reverse decades-long flows out of UK equities from domestic pension funds, and any such move would undoubtedly send a strong signal that the UK recognises the vital importance of its capital markets to economic growth and prosperity.

We have also commented at length in recent reviews on the high prevalence of inbound takeover interest for UK stock market listed companies, given their attractive absolute and relative valuations. While it is frustrating to see long-term Fund holdings targeted in opportunistic fashion at share price premia which fall short of their full valuation potential, M&A may well be a key mechanism through which the significant undervaluation of UK equities is both highlighted and closed out.

On top of the approaches seen so far in 2024 for Hargreaves Lansdown, Keywords Studios and Wood Group, September saw two further portfolio holdings targeted: Rightmove and TI Fluid Systems.

Rightmove (+12%) shares leapt 27% on the first trading day of September following confirmation of bid interest from REA, before falling 8% on the last day as the approach was rejected and then withdrawn. REA Group is an Australian property specialist owning several residential, commercial and mortgage broking websites in its domestic market. It also has stakes in digital property portals in the US and Asia. Rightmove labelled REA’s initial cash-and-share proposal worth in the region 705p highly conditional and highly opportunistic. Although REA increased its indicative offer on three occasions to finish at a cash-and-shares package valued around 775p, Rightmove stood firm in its view that the offer materially undervalued its standalone prospects.

TI Fluid Systems (+25%) received two takeover offers from ABC Technologies, a Canadian electronic components distributor owned by private equity group Apollo. The automotive fluid systems specialist rejected both all-cash offers, pitched at 165p and 176p, a move that was welcomed by the fund managers given that the approach looked highly opportunistic, coming at a trough point in the economic cycle. The shares have hung on to their gains, trading at over 160p to reclaim the losses following a disappointing full-year results release in March.

Wood has been subject to two separate drawn-out rounds of takeover bid activity over the past two years. In 2023, the engineering and consultancy group received five takeover proposals from private equity group Apollo, rejecting the first four but agreeing to enter discussions following the final cash proposal of 240p before Apollo dropped its interest. In a similar turn of events, Wood Group this year rejected three successive takeover proposals from Dubai-based group Sidara before agreeing to enter discussions over a fourth and final offer at 230p, only for Sidara to walk away in August citing rising geopolitical risks and financial market uncertainty. The Fund had been actively selling down its position ahead of Sidara walking away, due to persistent concerns over weak cashflow metrics, accounting ‘red flags’ and a high debt burden, and completed its exit during September.

Away from takeover activity, the Fund’s fall in September can be broadly attributed to weakness in energy and pharma sectors – where the Fund is overweight relative to the index – and its holding in small cap stock Next 15 Group (-47%).

The Brent crude oil price dipped 9% to finish September at $71.7 a barrel as oversupply concerns rose in light of plans by the OPEC+ group to increase production from December in combination with an uncertain global economic growth outlook. The raft of measures introduced in China to boost its economy made little impact on the oil price, while the extra geopolitical risk from events in the Middle East – usually reflected in higher oil prices – also failed to stem the slide. The Fund’s positions in Shell (-9.6%) and BP (-8.8%) were affected.

Within healthcare, where the Fund has 16% exposure (4% overweight versus the index), there were drug development disappointments for Indivior (-21%) and AstraZeneca (-13%) in their respective treatments for cannabis use disorders and lung cancer.

Next 15 Group (-47%) was a standout disappointment during the month, as it issued a shock September profit warning which was triggered by the loss of a significant contract and a softening of client spending from its technology sector customers in particular. As a result, it expects profits for the financial year to 31 January 2025 to be significantly below its prior expectations. The data-driven growth consultancy’s Mach49 agency lost its largest customer, which unexpectedly terminated a contract that had been expected to continue for a further two years. The fund managers have since engaged at length with the company to form a better understanding of the factors at play, as well as steps that will be taken to return the company to a solid trading footing.

Meanwhile, WH Smith (+14%) moved higher after a trading update confirmed its seasonally busiest final quarter to 31 August saw strong trading that has left it on track to meet market expectations for the year. It also disclosed a £75 million cash rebate as a result of transferring away responsibility for its defined benefit pension scheme. As a result, the company is planning to return around £50 million of surplus capital to shareholders via a share buyback scheme.

Half-year results from Gamma Communications (+9.3%) were also well received as the business telecoms provider commented that good growth in all business units leads it to expect full-year profits to be at the top end of analysts’ current consensus range. Gamma has demonstrated extraordinary resilience in trading of late against a tricky market backdrop, which has led the shares to perform well. These most recent results also included commentary that the board are considering moving the business’ listing to the main market of the London Stock Exchange after almost a decade listed on AIM. It is a move which serves as a timely reminder of the important role that the London junior stock market is able to play for ambitious growth businesses at the right stage of their journey.

Positive contributors included:

TI Fluid Systems (+25%), WH Smith (+14%), Rightmove (+12%), Gamma Communications (+9.3%) and Weir Group (+8.0%)

Negative contributors included:

Next 15 (-47%), Indivior (-21%), AstraZeneca (-13%), Shell (-10%) and BAE Systems (-9.2%).

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

*Source: Financial Express, as at 30.09.24, total return (net of fees and income reinvested), bid-to-bid, institutional class. **Source: Financial Express, as at 30.09.24, total return (net of fees and income reinvested), bid-to-bid, primary class.

^† Julian Fosh is on a leave of absence. The Economic Advantage funds continue to be managed by the other members of the team in Julian’s absence.

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.

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. The Fund may invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing. 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.

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