Liontrust Global Technology Fund

Market backdrop

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 global leaders and disruptors on the right side of the new AI-driven technology cycle, driving strong earnings growth in the years ahead

Company updates

Early in the month, ASML (not held) sparked concerns around semiconductor demand – and AI demand more broadly – 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, the top 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 fabrication plant now entering production.

Further offsetting ASML concerns, Cadence shares jumped 12% following strong earnings and raised guidance for 2024. The company designs the software that creates Nvidia and AMD's chips, holding the number two market share in electronic design automation (EDA) and operating in an effective duopoly with Synopsys. As the innovation backbone of the semiconductor industry, Cadence shows remarkable resilience through cycles – 85-90% of revenues are recurring, with customers unable to cut R&D spending even in downturns. The company is well-positioned for generational trends accelerated by the AI super-cycle, from hyperscale computing to autonomous driving, which continue to fuel strong design activity. This positioning becomes increasingly valuable as chips grow in size and complexity, with Cadence's EDA software essential for driving progress in these crucial innovations.

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.

Apple also reported quarterly results, with earnings slightly above expectations driven by iPhone sales and management guiding to higher growth and margins than anticipated. While the stock dipped on what some viewed as conservative AI messaging, this reflects Apple's characteristically measured approach – Apple Intelligence capabilities only began rolling out to US iPhones in recent weeks. We see this as the start of a distinctly different iPhone refresh cycle, with AI features and capabilities being introduced gradually rather than in one big launch. This more staged approach to stimulating demand, with key milestones in December and April, is not yet reflected in investor sentiment. With consensus numbers for 2025 factoring in minimal upside from Apple Intelligence, we see significant potential as this new AI-driven refresh cycle takes hold

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, Meta delivered another strong quarter, clearing high expectations with 20% year-over-year revenue growth and even stronger earnings growth of 30%. This operating leverage exemplifies what we expect from AI leaders: using the technology to drive both top-line growth through enhanced user experiences and bottom-line improvements via internal efficiencies. The return on AI investment this company has been making is increasingly evident – AI-powered feed and video recommendations have increased time spent on Facebook and Instagram by 8% and 6% respectively this year, while over one million advertisers using Meta's GenAI tools are seeing a 7% increase in customer conversions. Behind these achievements lies world-class compute infrastructure, with Meta's next-generation Llama 4 model being trained on over 100,000 Nvidia H100 GPUs. Despite delivering exceptional results, and MetaAI being on track to become the world's most used AI assistant by year-end, the stock fell 4.5% on what we viewed as crowded positioning. Having reduced our exposure in September, we took advantage of this weakness to add to our position.

On the other side of the equation, recent strength in several holdings has provided opportunities to trim positions in line with our valuation discipline. Amphenol, a reliable compounder and global leader in high-tech datacentre interconnects, 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 maximising 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." Having added to our position in recent months, we took the opportunity to trim off the back of this strength.

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. Having increased our position during recent weakness, we took the opportunity to take some profit following this sharp recovery. The company demonstrated its competitive advantage in electric vehicles (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 – showcased earlier in the month and 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.

Looking ahead

November has started at pace, with several key events – the US presidential election (November 5^th), the US Federal Reserve meeting (November 7^th), 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 Technology 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 extends 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 technology cycle, we believe the combination of earnings growth and disciplined valuation will continue to drive earnings growth through market volatility ahead.