Liontrust UK Growth Fund

• Moonpig and Peason rally on upbeat trading updates.
• Amid an environment of macroeconomic uncertainty, the Fund’s engineering groups suffer poor returns in October. 
• Keywords Studios exits portfolio on completion of its acquisition.

The Liontrust UK Growth Fund returned -3.0%* in October. The FTSE All-Share Index comparator benchmark returned -1.6% and the average return in the IA UK All Companies sector, also a comparator benchmark, was -2.1%.

Global equity markets fell in October as the prospect of the approaching US election, weaker-than-expected earnings from US tech titans and ongoing geopolitical instability in the Middle East contributed to a risk-off environment.

In the UK, investors had to contend with an additional source of uncertainty in the form of the Autumn Budget. Ahead of the Budget, speculation had been rife over potential changes to the investment landscape, including the capital gains tax rate or inheritance tax (IHT) status of AIM-listed shares. This contributed to a substantial degree of nervousness from investors in the weeks running up to the announcement, which was most pronounced on the AIM market.

We were therefore pleased to see the Budget clarify that AIM shares will retain 50% IHT relief. By retaining some relief, the government recognises the vital role played by the AIM market in the UK’s economic growth.

In October, a number of the portfolio’s engineering groups saw weak returns as confidence in the resilience of the global macroeconomic backdrop wavered.

Among these Renishaw (-14%) sold off the most as it issued a trading statement showing a continuation of mixed end market conditions, but Spirax Group (-14%), Rotork (-9.9%) and IMI (-8.9%) also fell.

Renishaw’s trading statement saw it give up the gains made in September on the back of full-year results. The specialist in high-tech precision measuring and calibration equipment grew revenue by 6% to £174 million in the three months to 30 September, with adjusted profit before tax rising 22% to £34 million. Within this, the Americas and Europe/Middle East/Africa regions grew, while Asia Pacific was lower due to a comparable period last year that was boosted by orders from consumer electronics manufacturers.

Moonpig Group’s (+22%) latest update was better received, as investors welcomed its commitment to returning excess capital. In a statement released to coincide with a ‘capital markets day’, Moonpig’s management displayed confidence in its balance sheet strength and ongoing cash generation by proposing a £10 million dividend this year, which will thereafter grow in line with earnings per share to maintain 3x to 4x cover. It will also commence its first share buyback programme, starting in November and worth up to £25 million.

Pearson (+12%) issued an encouraging nine-month trading update which reaffirmed full-year guidance. Underlying sales growth accelerated to 5% in Q3, taking the nine-month rate to 3%. The period saw strong expansion in its largest division, Assessment & Qualifications, and a stabilisation in its second-largest unit: Higher Education. This division has seen sales declines in recent periods, but 4% growth in Q3 has taken it to a flat year-on-year performance for the first nine months of 2024.

Having cut forecasts a few months ago due to a slowdown in its high margin Data Products division, it was reassuring to see YouGov’s (+6.2%) results for the year to 31 July coming in slightly ahead of the revised guidance. Revenue of £335 million, up 3% on an underlying basis, was ahead of the £327 - £330 million range, while adjusted operating profit of £49.6 million was also ahead of its revised £43 - £46 million target. However, with continuing weakness in the market backdrop, investors will need to see the company continuing to evidence having a tighter grip of forecasts in the current financial year in order to rebuild trust in the equity story.

Auction Technology (+7.3%) moved higher on evidence of improved momentum in the second half of its year to 30 September. The company operates online auction marketplaces and services across two key sectors: Industrial & Commercial and Art & Antiques. While some of these end markets have been weak recently, Auction Technology commented that gross merchandise value has improved significantly towards the end of the year, while its targeted improvement to profit margins was also hit.

Keywords Studios, the support services provider to the video gaming industry, exited the portfolio in October on completion of its acquisition by Swedish private equity group EQT. The position was added to the portfolio earlier in 2024, but only a few months later was targeted with an opportunistic series of takeover bids, the last of which − at 2450p a share, a c.66% premium to the pre-bid share price - was recommended by Keywords’ board of directors.

Positive contributors included:

Moonpig Group (+22%), Pearson (+12%), Auction Technology Group (+7.3%), Shell (+6.3%) and YouGov (+6.2%).

Negative contributors included:

Renishaw (-14%), Spirax Group (-14%), Future (-13%), Rotork (-9.9%) and WH Smith (-9.5%).

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

*Source: Financial Express, as at 31.10.24, 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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