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.

• Earnings updates throughout November provided us with good insight into how companies are balancing current market conditions with longer-term structural opportunities 
• Tesla, Affirm and Upstart were among the top contributors to strong Fund performance in November.
• 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 7.3% in November, placing it in the 1^st quartile of peers, ahead the IA Global sector average of 4.2% and the MSCI All-Country World Index which returned 4.9% (both are comparator benchmarks).

Longer term performance also remains strong, with the Fund having returned 82.1% since manager inception (30.06.19), in the 1^st quartile of peers, and ahead of the IA Global sector return of 60.6% and in-line with the MSCI All-Country World Index return of 78.2%.

Market Backdrop

November began with a flurry of consequential macro events, most notably the US presidential election on 5^th November. The quick, decisive outcome served as a major risk-clearing event for markets, fostering an unwinding of crowded shorts and driving a retracement in the VIX volatility index. Trump's victory, alongside a broader Republican sweep, bolstered US stocks given expectations around deregulation and the potential for corporate tax cuts, helping the S&P 500 rally over 5.7% in November − its biggest monthly gain of 2024. “Trump-trade” stocks proved key beneficiaries, including small caps, cryptocurrencies, speculative technology stocks, and financials (particularly regional banks). Despite some concerns around the US deficit and inflation implications of potential Trump administration policies, bond yields remained relatively stable following October's significant backup, providing a supportive backdrop as we enter the final month of the year.

Policy developments also proved supportive, the U.S. Federal Reserve implementing another 25 basis point rate cut, while Chairman Jerome Powell moved to quell speculation about potential political interference by reaffirming the Fed's independence. Elsewhere, China's National People's Congress unveiled a substantial 10 trillion yuan stimulus package. While the scale of the package was largely in-line with expectations, there was some disappointment in the composition – focused on local government debt relief rather than direct consumption and fiscal support – leading to subsequent softness in Chinese stocks. Nonetheless, this stimulus represents an important step in Beijing's efforts to reinvigorate growth, with additional support measures anticipated in early 2025.

Elsewhere, spending data from November's major shopping events, including Black Friday and China’s Singles Day, provided insight into consumer patterns. Against a backdrop of economic uncertainty and technological change, consumers demonstrated a clear preference for discounted offerings while accelerating their shift toward online platforms. US retail spending rose 3% year-on-year over the Black Friday period, driven by double-digit e-commerce growth (Mastercard SpendPulse). In China, where consumers have been particularly weak, recent stimulus efforts − notably trade-in subsidies − supported consumption through the Singles Day period, though earnings season updates continued to highlight China as an ongoing area of weakness.

The third quarter earnings season otherwise proved broadly positive, with market sentiment buoyed in particular by companies continuing to validate the artificial intelligence growth narrative. Most notable was Nvidia (held in the portfolio), a bellwether for broader market sentiment, which delivered impressive results with data centre revenues increasing 112% year-on-year. Management provided strong guidance for their next-generation Blackwell processors, helping allay market concerns around AI growth going in to 2025 and beyond.

Company updates

Earnings updates throughout November provided us with good insight into how companies are balancing current market conditions with longer-term structural opportunities, our analysis supported by our recent research trip to global innovation hubs of Silicon Valley and Boston. Importantly, we continue to see good investment opportunities in innovative companies across sectors, with new winners emerging as we enter a new innovation cycle driven by AI.

Financial ‘fintech’ firms were particularly strong contributors to performance in the month, with updates from several of our disruptive innovators highlighting how they continue to leverage AI and machine learning to challenge incumbents and forge new markets. Affirm, the leading US buy-now-pay-later (BNPL) provider, rallied following an impressive earnings update that demonstrated the growing scale and improving economics of its lending platform. Its unique approach, leveraging AI models to underwrite individual transactions rather than extending blanket lines of credit, is helping it to continue to take share in the BNPL market, while strongly outpacing e-commerce peers (GMV rose 35% year-on-year, four-times faster than the broader US e-commerce market). As the company scales, it is increasingly benefiting from network effects (both customer and merchant growth accelerating 21% year-on-year) and operating leverage (margins expanding well ahead of guidance). Management expect to achieve GAAP profitability in Q4, and to remain profitable thereafter.

Similarly, Upstart posted a strong beat and raise, benefiting from improved operational efficiency and the investments made to improve its AI-driven lending platform throughout recent challenging market conditions. Upstart now fully automates over 90% of loans and is delivering significant value by reducing processing times in auto refinancing from 19 to 9 days while maintaining strong credit quality − enabling car owners to save an average of $800 per year. This is helping drive strong loan volume growth (up 64% year-on-year and 31% sequentially), supporting top-line growth of 20%. Meanwhile, margins are expanding thanks to a combination of higher conversion rates on personal loans (22%), improved automation in borrower onboarding, and general cost reductions across the business. With improved operational efficiency, expanding partnerships, and stabilising consumer credit conditions, the company appears well positioned for the improving rate environment ahead.

Block was another strong contributor, growing gross profit 19% and generating $1.5 billion in adjusted free cash flow. The company saw strong growth across both its Cash App platform, with gross profit up 21% and average revenue per user increasing 16% year-on -year, and its Square seller business which also grew 16%. The company continues to enhance its product offerings, outlining plans to integrate Afterpay's BNPL functionality into its Cash App card base of 24 million users, while leveraging AI to develop sophisticated underwriting models that use real-time transaction data to better serve its growing ecosystem. The company continues to make good progress towards its 'Rule of 40' target through a combination of mid-teens growth and expanding operating margins.

Platform companies were also strong contributors to performance in November. Shopify, a global leader in commerce technology, delivered another impressive quarter demonstrating the scalability of its integrated platform approach. Revenues rose 26% year-on-year as the company continues to enhance its offering through AI-driven innovations that are delivered at no additional cost to merchants - from automated customer service responses to improved product discovery tools. This value creation is driving continued platform adoption, with particularly strong momentum in B2B where gross merchandise value grew 145%, and international markets which grew 33%. Importantly, this growth is translating into significant operating leverage, helping margins expand 600 basis points year-on-year as the company maintains disciplined cost control. Similarly, Spotify demonstrated how its platform leadership in audio streaming is driving both growth and improving economics. Monthly active users grew to 640 million as the company deepens user engagement through AI-enhanced discovery and expanded content offerings, while gross margins exceeded 30% and free cash flow reached €700 million as operational efficiencies continue to improve. Both companies exemplify how innovative platforms are well positioned to be winners from the AI revolution, driving sustainable growth by consistently delivering enhanced value to users while achieving profitable scale.

Conversely, Chinese companies faced continued headwinds in November, with key detractors to performance including PDD, Meituan, and Anta. PDD, a leading e-commerce platform in China, highlighted the ongoing challenges in the Chinese consumer environment in its mid-month earnings update. While the company continues to grow strongly, with revenues increasing 44% year-on-year and gross merchandise value growth ahead of peers, heightened competition and the need to maintain price competitiveness led to increased investment in merchant support and ecosystem development. As a third-party platform, PDD faced additional pressure during the recent stimulus-driven shopping during festival season, where it had to provide substantial merchant subsidies to remain competitive with peers. Despite these near-term headwinds, the company's strategic focus on strengthening its ecosystem through reduced merchant fees, enhanced support programmes, and improved compliance measures positions it well for long-term growth once markets stabilise.

More positively, Tesla was the top contributor to Fund performance in the month, shares rallying over 40% following the US election outcome. CEO Elon Musk's strategic alignment with the incoming administration helped bolster investor sentiment, particularly regarding potential regulation for the company's autonomous driving ambitions and broader electric vehicle strategy. Tesla remains well positioned with competitive advantages in manufacturing efficiency (where it maintains industry-leading production costs) and artificial intelligence (where its Full Self-Driving technology continues to show rapid improvement), but as shares approach our target price we took this opportunity to exercise our valuation discipline and made our first significant trim of the position this year.

Trade activity

In a similar vein, we trimmed several positions across our portfolio throughout November, including Upstart and Shopify as they approached our target prices following strong runs. We also took advantage of price dislocations to top up positions in high-quality companies that appeared oversold, including Constellation Energy, the world's leading nuclear energy provider. A Federal Energy Regulatory Commission ruling against datacentre co-location weighed on shares early in the month, but we believe there is more to come on this narrow ruling and remain positive on the company after a strong earnings update where they highlighted ongoing nuclear production strength while maintaining industry-leading efficiency. We also topped up Eli Lilly where one-off events in its late-October update masked the underlying strength of its GLP-1 franchise in what remains a significantly underpenetrated market.

Our valuation discipline is underpinned by the strength of our watchlist, with our research trips helping to seed new idea generation. After meeting with management in Silicon Valley we initiated a new position in Planet Labs, a company that was on our watchlist as it is disrupting the satellite imagery market through its innovative low-cost approach. The company's fleet of self-designed satellites captures daily images of the entire Earth, creating a unique and proprietary dataset that can be monetized across multiple customers, supporting an impressive 90% recurring revenue business model with significant potential for AI-enhanced applications.

Looking ahead

As we enter the final month of what has been a dynamic year for markets, attention will likely focus on seasonal consumer data as well as the upcoming US Federal Reserve meeting, where expectations for another 25 basis point rate cut have recently increased.

Though ongoing political turmoil and seasonal impacts may influence markets as we approach year end, we will continue to maintain our valuation discipline, focused on investing innovative global companies at attractive valuations that are on the right side of emerging structural trends such as AI.

We’re excited to share insights from our recent research trip. Wishing everyone a safe and joyful holiday season. Read the full article here.

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.

DISCLAIMER

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.