Liontrust GF UK Growth Fund

• December’s decline completes a lacklustre second half of 2024 for the UK market. 
• RWS Holdings and Moonpig bookend portfolio returns as both see a reversal of recent share price trends.
• Quilter and Hilton Food Group initiated as a new fund positions following the recent takeovers of TI Fluid Systems and Hargreaves Lansdown.

The Liontrust GF UK Growth Fund returned -1.7%* in December. The Fund’s comparator benchmark, the FTSE All-Share, returned 1.2%.

December’s fall completed a lacklustre second half of 2024 for the FTSE All-Share Index. After a strong start to the year which saw an 8.7% total return in the first five months, the UK market largely moved sideways over the remainder of the year, with the 0.7% total return since the end of May comprising a 1.1% price fall offset by dividend income.

July’s UK election result initially looked as if it would clear the path for stronger gains, with political uncertainty removed and the prospect of positive policy catalysts imminent. However, this confidence gave way to some uncertainty around possible changes to the fiscal landscape ahead of the Autumn Statement, with investor sentiment also proving vulnerable to shifts in the global macroeconomic outlook.

US and UK inflation data released during December ensured investors finished 2024 discussing the year’s dominant theme: the paring back of expectations for interest rate cuts. Data for November showed consumer prices still rising at a rate of 2.7% and 2.6% respectively, in line with expectations but stubbornly higher than the target rates.

Persistence in inflation led to around 100 basis points (bps) fewer interest rate cuts in 2024 than were expected at the start of the year. When combined with the expected inflationary impacts of the Trump presidency in the US and Labour budget commitments in the UK, only a couple of 25bps cuts are now forecast for 2025.

One of the side effects of this shift in expectations has been the very strong share price performance of banks, whose net interest profit margins normally benefit from higher rates. The FTSE All Share banks sub-sector delivered a gain of 43% over the year, including 5% in December. This presented a considerable headwind for the Fund, which has zero exposure to high street banks as they typically possess few of the intangible assets the investment process seeks.

Turning to Fund holdings making an impact in December, the month saw notable share price reversals for two stocks, as RWS Holdings (+18%) rallied following a difficult year and Moonpig (-15%) gave up some ground having gone into the month as one of the Fund’s stronger year-to-date performers.

Intellectual property support services provider RWS Holdings (+18%) has previously faced headwinds in the form of macro-related delays in decision-making among some customers and market concerns about the impact of generative AI models. However, RWS has been confident in its ability to integrate AI into its portfolio of services, and full-year results show these products contributing to a return to growth in the second half of the year. Organic constant currency (OCC) revenue growth in the second six months was 2%, resulting in a flat performance for the year as a whole. Within this, around 25% of revenue came from AI-related services such as TrainAI and Language Weaver, a category which grew at 7% in OCC terms over the year.

Online cards and gifts platform Moonpig (-15%) saw the release of its interim results trigger some profit-taking. Current trading is in-line with the company’s expectations and on track for its target of mid-to-high single digit percentage revenue growth in the year to 30 April 2025, while Moonpig also upgraded its medium-term EBITDA margin target. Nevertheless, with the shares having been very strong into the print, investors focused on a degree of ongoing macro-related softness in its gifts divisions and a non-cash impairment of the carrying value of goodwill related to that business.

Auction Technology Group (+6.6%) continued to move higher on robust full-year results released in late November which also gave a positive update on trading in the first weeks of its new financial year (since 30 September). Auction Technology is a leading operator of online auction marketplaces and services across two key sectors: Industrial & Commercial and Art & Antiques. It is a business which truly exploits the power of network effects, with an increasing audience of bidders participating in auctions driving higher prices for auctioneers and greater volumes of items listed on the company’s marketplaces. Share price strength in December was sustained as its largest shareholder, private equity group TA Associates, sold its remaining 13% stake in the company, removing any potential perception of an overhang.

Having rallied last month on the confirmation of full-year earnings guidance, Domino's Pizza Group (-7.5%) lost ground in December as it highlighted higher medium-term costs. Firstly, it estimates that the Autumn Budget has increased labour costs to the tune of £3 million a year. Additionally, it has reached a new framework agreement with its franchisees around the store growth programme and investments. This is important as it removes some of the uncertainty that builds up periodically as each framework expires. While this new agreement increases visibility to five years, compared with the prior three-year arrangement, it does include higher-than-expected investment costs – around £3 million to £4 million a year more than previously guided.

Bunzl (-7.4%) slid due to a trading update which flagged ongoing product price deflation. The outsourced procurement and distributor of everyday items said it expects 2024 revenue to be around 3% higher in constant currency terms due to the effect of acquisitions, but that the underlying trend is a small decline due to price deflation outweighing volume growth. Shares in the company had previously performed well in the second half of 2024 after an August upgrade to profit guidance.

Late last month, TI Fluid Systems recommended an improved offer of 200p-a-share from ABC Technologies, a Canadian electronic components distributor owned by private equity group Apollo. With shares in the automotive fluid systems trading close to the 200p level but several months away from expected completion, the managers chose to redeploy the capital during December.

This year the Fund has also lost holdings in Keywords Studios and Hargreaves Lansdown due to takeovers. Proceeds from these sales funded the addition of chronic medical care products business Convatec last month and two new holdings in December: Quilter and Hilton Food Group.

Quilter is a UK focused wealth management business catering to both ‘mass affluent’ and high net worth clients, with solutions spanning multi-asset portfolios, bespoke investment portfolios and financial planning. The group also owns an investment platform hosting assets for the clients of both ‘tied’ and independent financial advisers. The company was bought for the Fund on the strength of both its recurring revenue model (with the majority of income derived from ongoing percentage-based fees levied on client assets) and its distribution strength (with significant scale and breadth to its offering, one of the largest networks of tied financial advisors in the UK, and the largest investment platform in the industry by assets under management).

Hilton Food Group is a company that has been held by the Economic Advantage team in the Liontrust UK Smaller Companies Fund for a number of years, having grown from a small cap into a mid cap over that period. The company is a packager of meat, seafood, vegetarian, vegan and convenience food products for large grocery retail customers such as Tesco in the UK and Woolworths in Australia and New Zealand. It typically works in long-term and trusted partnerships with the dominant retailer in a particular geography, ensuring the integrity and transparency of the protein supply chain – a critical factor in maintaining customer trust in the retailer’s brand. Hilton enjoys a key intangible asset strength in distribution, with national logistics and supply chain capability and embedded relationships with customers, as well as competitive differentiation in the level of automation and technology employed within its facilities.

Positive contributors included:

RWS Holdings (+18%), Indivior (+16%), Renishaw (+8.2%), Diageo (+7.9%) and Auction Technology Group (+6.6%).

Negative contributors included:

Moonpig (-15%), Domino’s Pizza Group (-7.5%), Bunzl (-7.4%), BAE Systems (-6.4%) and Rotork (-5.8%).

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

*Source: Financial Express, as at 31.12.24, total return (net of fees and income reinvested), sterling terms, C3 institutional class. Non fund-related return data sourced from Bloomberg. **Source: Financial Express, as at 31.12.24, total return (net of fees and income reinvested), primary class. Investment decisions should not be based on short-term performance.      

Key Features of the Liontrust GF UK Growth Fund 

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.

DISCLAIMER

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