Liontrust Global Innovation Fund

The Liontrust Global Innovation Fund continues to invest in innovative companies on the right side of AI, buying at cyclically depressed prices ahead of a new innovation cycle.

• October ended with the third-quarter earnings season underway, amid a looming US election that dominated media and markets, contributing to increased volatility.
• TSMC, GE Vernova and Netflix were among the top contributors to strong Fund performance in October.
• We maintain our valuation discipline – trimming into strength where appropriate while remaining alert to opportunities in innovative global businesses positioned on the right side of disruption.

The Liontrust Global Innovation Fund returned 5.1% in October, placing it in the 1^st quartile of peers, ahead of the IA Global sector average of 1.2% and the MSCI All-Country World Index which returned 2.0% (both comparator benchmarks).

Longer term performance also remains strong, with the Fund having returned 69.8% since manager inception (30.06.19), ahead of the IA Global sector return of 54.1% and in-line with the MSCI All-Country World Index return of 69.8%.

October wrapped up with the third quarter earnings season in full swing, companies reporting against a backdrop of a looming US election which has overshadowed both media and markets and contributed to heightened volatility as we came into the end of the month.

More constructively, we saw continued evidence throughout the month of a coordinated global dovish shift in monetary policy following September's decisive 50 basis point rate cut by the US Federal Reserve. While markets in China faced pressure early in the month after no new fiscal stimulus was announced at the NDRC’s press conference, subsequent Politburo and cabinet statements suggest potential for incremental stimulus ahead, with some firepower possibly being reserved for November given US election-related trade risks. This broader policy pivot should support economic growth and yield curve steepening, benefiting cyclical sectors once election uncertainty subsides. Meanwhile in the UK, we heard our first budget from the new Labour government – while the taxation and spending plans drew mixed reactions, the move reduced uncertainty to the UK market. This ties into a broader theme we're seeing across major economies, where near-term volatility related to key policy events gives way to increased clarity and improved decision-making once we are able to move past these milestones.

Meanwhile, we continued to see evidence of AI acceleration both through company earnings updates and ongoing advances in model capabilities and product releases. Notably October included Anthropic's release of its updated Claude AI 3.5 Sonnet model featuring 'computer use' capabilities – a step towards agential AI, enabling direct computer interaction and task completion through enhanced image understanding and logical reasoning. On the consumer front, Meta announced the expansion of its AI tools to 22 additional countries with multiple new languages. However, like Apple's AI offerings, these services remain unavailable in the EU due to regulatory uncertainty. This is a concerning development that highlights how excessive regulation risks creating an 'AI winter' in Europe as consumers and businesses miss out on transformative technologies.

As ever we remain focused on what our companies are telling us, looking to the ongoing earnings season for tangible evidence of how our innovative global companies are executing. While the US election adds uncertainty, we remain confident that companies are well positioned regardless of the outcome: innovative companies on the right side of the new innovation cycle, driving strong earnings growth in the years ahead.

Early in the month, ASML (not held) sparked concerns around semiconductor demand after posting lacklustre orders and reducing guidance. However, this proved largely idiosyncratic, reflecting a normalisation of Chinese lithography investment following two years of accelerated purchases ahead of sanctions. This dynamic was particularly evident in updates from TSMC, a strong contributor to Fund performance in October. The ‘world's foundry’ rallied 10% after reporting 50% year-on-year earnings growth, demonstrating the ongoing strength in structural demand for AI infrastructure. With competitors Intel and Samsung facing challenges, TSMC is emerging stronger in this technology cycle, well-positioned to capture value across compute upgrades in datacentres, smartphones and PCs. AI-related revenues are expected to grow over 100% in 2025, driven by Nvidia's Blackwell ramp, while the company's geographic expansion continues with its first US fab now entering production.

Further offsetting the ASML concerns, we saw exceptional results from Fund holding Amphenol, a reliable compounder and global leader in high-tech datacentre interconnects. The company delivered outstanding third-quarter results with 26% year-over-year revenue growth and 17% earnings growth, while demonstrating robust operating leverage through a 60 basis point quarter-over-quarter margin expansion. The company is seeing significant content growth as GPU clusters expand, with IT datacom revenues surging 60% year-over-year, reflecting Amphenol's crucial role in enabling AI infrastructure through its high-speed, low-latency interconnect solutions. The company is also expanding its industrial footprint through the strategic acquisition of Lutze Europe, while maximizing copper's capabilities for power transmission in high-bandwidth applications. Beyond AI infrastructure, Amphenol is gaining meaningful traction in next-generation automotive drivetrains, positioning it to capture growing content per vehicle as automobiles evolve into "robots on wheels."

On a similar note, Tesla also delivered a strong quarter that smashed expectations, with shares surging 22% following a 21% earnings beat that highlighted just how pessimistic sentiment had become. The company demonstrated its competitive advantage in EVs through unmatched manufacturing efficiency, achieving a record low production cost of $35.1k per vehicle – a level Western peers cannot replicate. While near-term EV demand has been impacted by higher interest rates, the company is making remarkable progress in autonomous driving: Tesla's current FSD 12.5 (Full Self-Driving) software is already improving at a rate of 5-10x per month, with management revealing that the upcoming FSD 13 is expected to improve non-highway intervention rates by another 5-6x. Based on current scaling laws, this suggests Tesla vehicles could achieve fully autonomous driving capabilities exceeding average human safety standards by Q2 2025. This technology will support Tesla's cybercab robotaxi program, set for volume production in 2026, with autonomous ride-hailing services rolling out in California and Texas next year. Importantly, these capabilities extend across Tesla's entire vehicle fleet – every Tesla on the road today and in the future has the potential for full self-driving capability.

Elsewhere, Netflix delivered another exceptional quarter with shares rising 11% after exceeding expectations on both global subscription growth and earnings. The streaming giant has exemplified technology's pivot to profitability, emerging strongly from a bruising 2022 to achieve an impressive 30% operating margin in the quarter. While competitors such as Disney+ and Discovery+ are pulling back from content spend, Netflix has achieved escape velocity and is accelerating investment, announcing plans to increase content spend to $18.5 billion in 2025 (up 11% on 2024). The company is aggressively expanding into live content, with the upcoming Tyson-Paul fight, NFL programming, and 52 weeks of WWE content starting in coming months. Netflix's ad tier also continues to show strong momentum, exiting the third quarter with approximately 30 million subscribers (up 35% quarter-over-quarter). We expect this to drive the next leg of growth, with AI set to enhance marketing efficiency and ad-targeting, potentially enabling the platform to achieve scale economics earlier than anticipated.

In healthcare, Alnylam, the Boston-based biotechnology firm, reported encouraging results that slightly exceeded expectations. The company maintained its annual guidance for both revenue and R&D expenditure, while announcing plans to increase SG&A spending by a double-digit percentage in 2025 to support the launch of Vutrisiran for ATTR-Cardiomyopathy. This breakthrough treatment targets both hereditary ATTR and wild-type TTR – a condition affecting a significant portion of the population, particularly men, with approximately 25% of males over 80 affected by heart issues such as shortness of breath, exercise intolerance, and heart rhythm abnormalities. With Vutrisiran aimed at a global patient population of 200,000 to 300,000, Alnylam is pursuing approval in both the US and EU. Having achieved escape velocity, we expect the company to begin monetising its successful R&D pipeline while continuing to pursue additional orphan treatments

We continue to maintain our valuation discipline, trimming or selling companies as they start to reach our target prices and buying or topping up businesses when we see attractive upside opportunities. For example, L'Oreal reported a rare earnings miss, driven by deteriorating beauty sales in China. The broader Chinese beauty market declined from slight growth in Q1 to high-single-digit declines in Q3, with Chinese consumer confidence at levels last seen during Covid. Despite this cyclical weakness L'Oreal continues to gain market share, and as western markets normalise post-Covid boom, the company is doubling down on innovation with a 'beauty stimulus plan' ready for 2025. Given the dislocation between current macro headwinds and L'Oreal's strong competitive position, we took the opportunity to add to our position during the month, sharing management's confidence that the company will continue to outgrow peers as it has done in 2024

We also initiated a position in Blackstone early in the month, which proved timely as the company later updated the markets with a very confident outlook – lower capital costs set to reignite demand for private assets. The company has been positioning strategically for this cycle turn, counter-cyclically deploying $123 billion over the past year to plant the seeds of future value, much as it did in real estate during the GFC. This strategy is already bearing fruit, notably through the acquisition of AirTrunk, the largest datacentre operator in APAC, which bolsters Blackstone's position as the world's largest datacentre provider. With $70 billion in existing datacentre assets and a further $100 billion pipeline, combined with exposure to structural growth trends in private credit, Blackstone appears well positioned to benefit from both cyclical tailwinds and secular growth opportunities.

On the other side of the equation, we trimmed our position in GE Vernova, a top contributor to Fund performance in October, following a strong run. The innovative renewable energy player delivered a positive update with a slight topline beat, driven by robust order growth across both power (gas turbines, up 30% year-on-year) and electrification (grid solutions, up 19% year-on-year). While the wind division remains an overhang, the company is steadily improving its financial position post GE spin-out, with strengthening free cash flow, balance sheet, and margins. GE Vernova remains well-positioned for key structural trends including increasing power demand from manufacturing growth, industrial electrification, electric vehicles, and emerging datacentres, alongside broader customer investment in decarbonisation. This strong positioning is reflected in the company's impressive backlog, with power equipment at $71.3 billion and electrification equipment reaching $22 billion (up 39% year-on-year), supporting robust growth potential in the years ahead.

We also exited our position in Apple earlier in the month. We remain constructive on the stock: the company's subsequent quarterly report reinforced our longer-term thesis, with the recent US rollout of Apple Intelligence capabilities and further features planned for December and April pointing to significant potential upside to 2025 earnings as this new AI refresh cycle takes hold. However, while the quarter itself was solid, with earnings slightly above expectations and management guiding for higher growth and margins, we currently see more attractive growth opportunities for the fund on our watchlist, though we will continue to monitor this positioning going forward.

November has started at pace, with several key events – the US presidential election (November 5th), the US Federal Reserve meeting (November 7th), and likely further Chinese stimulus following a conclave of the Standing Committee of the National People’s Congress – all falling in the first week of the month. The resolution of these key overhangs should provide welcome clarity for markets, allowing fundamentals to come more fully to the fore, and we believe the Global Innovation Fund remains well positioned regardless of outcomes. The ongoing earnings season continues to demonstrate broadening opportunities, with growth expanding well beyond Nvidia and the traditional technology leaders. While major technology companies are signalling increased capital expenditure for 2025, we're seeing new winners emerge as we enter this new innovation cycle that extend beyond the winners of the last cycle.

Against this backdrop, we maintain our valuation discipline –trimming into strength where appropriate while remaining alert to opportunities in innovative global businesses positioned on the right side of disruption. With our companies plugged into attractive structural growth trends and entering a new innovation cycle, we believe the combination of earnings growth and disciplined valuation will continue to drive earnings growth through market volatility ahead.

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

*Source: FE Analytics, as at 30.09.24, C accumulation share class, total return, net of fees and income reinvested. Fund inception date is 31.12.01; the current fund managers’ inception date is 01.07.19

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.

Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. The Fund may invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of the fund over the short 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. 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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