Liontrust GF Sustainable Future Global Growth Fund

• Market performance was once again driven by mega-cap tech stocks as anticipated policy shifts under the incoming Trump administration fuelled momentum in a narrow segment.
• Quarterly results drove notable share price moves in the portfolio during Q4, with Visa, Spotify, and Paylocity among top performers, while TransMedics, Advanced Drainage Systems, and TopBuild were key detractors.
• Trade activity was fairly minimal in Q4. We sold our holding in Infineon Technologies, while initiating a position in Japanese semiconductor testing specialist Advantest.

The Fund returned -1.7% over the quarter in dollar terms, versus the -0.2% return from the MSCI World Index (which is the comparator benchmark)*.

The global economy ended 2024 in a delicate balance after years of extraordinary events. A once-in-a-century pandemic, surging inflation, and aggressive interest rate hikes have shaped a landscape of higher costs and elevated interest rates. Meanwhile, AI’s rapid adoption has driven massive investment, with firms like Nvidia leading the charge in market performance. Although AI promises long-term productivity gains, we believe 2025 will see heavy investment broaden into technologies addressing AI’s energy demands. As we move into the next economic cycle, investment across our economy will broaden beyond that of AI, which we believe should also translate to more balanced leadership from a stock market perspective.

The return of Donald Trump to the White House introduces new uncertainty. Policies aimed at reshoring manufacturing may boost US industrial growth, leveraging automation to offset higher labour costs. This aligns with broader reindustrialisation themes, but the degree to which tariffs are implemented will be an important determinant of how the global economy grows and how strong stock market returns are. Will Trump use the threat of broad-brush tariffs as a tool to bring his trading partners to the table and make concessions on the wide-ranging areas he is unhappy with, or will he follow through and do as he has promised?

Elsewhere, the urgent need to decarbonise our economy remains as important as ever, and despite some pushback in political circles, the fact that virtually all the technology we need to decarbonise is in place is reassuring. We expect growth in companies which allow us to decarbonise – such as renewable energy and technologies which drive energy efficiency – to deliver strong performance.

Performance for the overall market was once again driven by mega-cap technology stocks, which continued to dominate investor sentiment. Among these, Tesla – a stock we do not hold within the Fund – stood out as the best performer overall. This rally was further fuelled by anticipated winners emerging from policy shifts expected under the incoming Trump administration, which lent additional momentum to a narrow section of the market.

Quarterly results releases were responsible for some of the larger share price moves within the portfolio in Q4. Within the gainers, the Fund’s top performer was digital payments specialist Visa, after the company delivered robust financial performance with net income of $5.3 billion, up 14% year-on-year and revenue growth of 12% reaching $9.6 billion. Key growth drivers included stable payments volume (+8%), cross-border volume (+13%) and processed transactions (+10%). The 13% dividend increase and substantial shareholder returns for the full year demonstrate the company’s strong capital return commitment.

In addition to an encouraging results release, Visa continued to benefit throughout the quarter from a favourable regulatory environment following the Republican party's US election victory and an ongoing rate-cutting cycle, which is reviving capital markets and strengthening consumer confidence.

Spotify, the world’s dominant audio platform, once again managed to exceed investor expectations with its latest quarterly results. Paying subscribers have now risen to 252 million, ahead of consensus analyst forecasts of 250 million, while gross margins were also better than expected, widening to over 31% after cost cutting efforts.

While Spotify primarily fits into our Encouraging sustainable leisure theme, it also contributes to reducing energy consumption and pollution when compared to records and discs which used energy intensive hydrocarbon derived plastics and cause pollution issues at end of life.

Another notable performer was leading human capital management (HCM) software provider Paylocity after reporting total revenue of $363 million, up 14% year-over-year. For FY2025, Paylocity expects total revenue between $1.535 and $1.55 billion, representing approximately 10% growth.

Held under our Enabling SMEs theme, Paylocity contributes to a sustainable economy by ensuring businesses can pay their employees on time, and can accurately collect taxes. It is important for businesses to be able to engage with their employees to enhance worker wellbeing. The company’s simple technology offering is also targeted towards small and medium enterprises (SMEs), which ensure this potentially complex task is simplified and outsourced effectively. This helps smaller business owners focus on running their business and their customers, confident that employees are being paid and taxed correctly and on a timely basis.

Among the detractors, US medical device company TransMedics experienced a significant decline primarily due to disappointing third quarter financial results, with revenues of $109 million, up 64% year over year but still falling short of expectations. The shortfall was attributed to a national decline in transplant volumes and reduced service component charges, which impacted margins and overall financial performance. Furthermore, the company's aviation operations faced challenges with unscheduled maintenance, reducing the number of operational aircraft and causing missed revenue opportunities.

We remain confident in the underlying business fundamentals of TransMedics, despite the company’s volatile nature. Given its potential for sharp price swings, it is essential to evaluate this investment with a long-term perspective, focusing on a five-year horizon to fully capture its growth potential and value creation.

Advanced Drainage Systems saw weaker demand from non-residential markets in its latest quarter, which led it to trim full-year financial targets. While the company has dealt with tepid end markets for the last year or two, any government impetus to revitalise industrial America could spark an inflection for end market demand. A holding in our Improving the Management of Water theme, Advanced Drainage Systems is focused on developing solutions for water management, while keeping plastic out of landfills. Its products keep waterways safe from pollution and prevent excessive stormwater runoff. 

As a critical enabler for new construction, Advanced Drainage Systems’ products are foundational to reshoring efforts. While recent market conditions have been challenging, a shift in US industrial policy under the incoming administration could catalyse growth for this essential player.

Despite posting reported solid Q2 2024 results, shares in TopBuild, the US installer and distributor of insulation products, fell after it revised 2024 guidance downward. Exposed to our Improving the efficiency of energy use theme, TopBuild now forecasts 2024 sales of $5.3 billion to $5.5 billion, assuming mid-single digit residential growth and low single digit commercial/industrial growth for the year, while noting that the revision largely reflects timing of demand, rather than any underlying changes in the business.

We believe TopBuild exemplifies the potential of energy efficiency. As the leading US insulation supplier, it drives sustainable housing solutions. Despite a 2024 slowdown, management remains confident that state-level building codes will uphold energy standards, independent of federal policy. With strong fundamentals, TopBuild is well-positioned for growth in 2025 and beyond.

Though the US housing market faces challenges, long-term drivers like undersupply and demographic demand remain strong. Companies like TopBuild are set to benefit from improving residential activity and a focus on energy-efficient solutions. As cyclical pressures ease, we believe TopBuild is likely to benefit from the gradual rebound, underscoring the sector's enduring potential for investors.

In terms of trade activity, we initiated a position in Advantest under our Better monitoring of supply chains and quality control theme. Advantest provides equipment that tests semiconductors for defects, ensuring that electrical components meet strict safety requirements in markets such as autos, as well as reducing waste in the semiconductor fabrication process.

We sold our position in Infineon Technologies, the German producer of efficient power management chips. We have concerns around competition and pricing pressure in its auto businesses, particularly in China, which is becoming increasingly crucial in the growth in electric vehicle  production. The Connected Secure Systems and Power & Sensor Systems businesses have been ex-growth now for a few years, and if autos also begins to slow, the investment becomes increasingly risky as the company has limited exposure to the significant growth occurring in the semiconductor industry, which is now heavily focused on advancements in AI. 

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

*Source: FE Analytics, as at 31.12.24, primary share class (B5) in dollars, total return, net of fees and income reinvested. 10 years of discrete data is not available due to the launch date of the fund.

KEY RISKS

Past performance does not predict future returns. You may get back less than you originally invested.

We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments

• All investments will be expected to conform to our social and environmental criteria.
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