- Momentum, passive investing and artificial intelligence combine to ensure Q4 completes a year dominated by the US equity market.
- Fund’s strong performance driven by US mega-cap names and technology holdings.
- 2025 should see a rotation into a broader range of market opportunities.
The Liontrust Global Alpha Fund returned 9.7%* over the quarter, compared with the 6.0% return of the MSCI ACWI Index comparator benchmark and the 3.5% average return in the IA Global sector (also a comparator benchmark).
Market backdrop
2024 was the first time the S&P Equal Weighted Index had underperformed the S&P 500 Index by more than 10% for two years running this century. Will this unprecedented run continue in 2025 or will there be a return to broader market participation? We believe the latter is highly likely and, therefore, stock selection will be more critical for 2025.
Equities enjoyed strong returns in 2024, particularly in the US where the combined trends of momentum, passive investing and artificial intelligence (AI) led to a 23% gain for the S&P 500. In fact, US equities contributed 17% or almost 90% out of the 19.5% gain for the MSCI World Equity Index. Frankly, everything else represented a rounding error and so it is easy to see why US and international investors remained entrenched within the US equity wave.
Much of this wave was focused on the very largest companies, with Nvidia and Broadcom driving the biggest percentage gains, up 177% and 119% respectively. These two ‘AI’ titans contributed no less than 22% of total global equity returns. Add in the other mega caps – Apple, Alphabet, Amazon, Tesla, Meta and Microsoft - and together the (now) Magnificent 8 drove 50% of global equity returns.
Portfolio review
Reflecting market dynamics, the Fund’s gains were concentrated in its US mega-cap holdings, with Netflix (+35%, sterling terms) Alphabet (+22%), Salesforce (+31%), ServiceNow (+27%) Amazon (+26%), Nvidia (+18%) among the top contributors. Notwithstanding negative attribution from non-holds in Apple and Tesla, this cohort played a key role in the Fund’s strong relative performance in Q4.
In a reversal of last quarter’s trend, the portfolio’s overweight in technology was a source of strong returns, contributing around a third of the Fund’s outperformance of the MSCI AC World Index. In addition to some of the names above, top US tech holdings included Cloudflare (+43%), Snowflake (+44%) Shopify (+42%).Outside of the US, Taiwan’s TSMC (+22%) and Germany’s SAP (+15%) featured.
Netflix rallied through the quarter after October’s Q3 results showed more resilient subscriber growth than expected. Amid speculation that the subscriber boost from a clampdown on password sharing would soon wane, the company added 5.1 million members in the quarter (taking the total to over 282 million) – well down on the growth seen a year ago but comfortably ahead of consensus expectations for 4.5 million.
CRM giant Salesforce and cloud-based enterprise software provider ServiceNow have both benefitted from AI excitement as they integrate it within their product offerings. In its Q3 earnings release, Salesforce upgraded its full-year revenue guidance range to 8% to 9% growth on the back of strong demand for its Agentforce, its autonomous AI agent platform. ServiceNow beat expectations with 22% year-on-year revenue growth in Q3 and raised 2024 subscription revenue target as it launches products such as Now Platform Xanadu as it looks to position itself as the “AI platform for business transformation”.
Seagate Technology (-15%) was a notable exception to US tech strength. Shares in the data storage company fell after Q1 results which appeared to meet or beat analyst expectations for sales and earnings growth, but included Q2 guidance which was marginally short of consensus forecasts. Having gone into the quarter up over 30% year-to-date, the shares succumbed to profit taking.
Novo Nordisk (-21%) was again among the portfolio detractors, following clinical trial data for its latest weight-loss drug that disappointed relative to elevated investor expectations.
There was also some relative weakness in the portfolio’s consumer sector holdings as poor returns from a handful of holdings – LVMH (-17%), Wayfair (-17%), MercadoLibre (-11%), Alibaba (-14%) – restricting otherwise solid sector returns.
Portfolio Changes
We sold ICON due to concerns that spending on clinical trials will likely remain under pressure, given the uncertainty surrounding US healthcare policy and the budget constraints faced by large pharmaceutical companies. Sensata was sold because the global automotive industry, a key market for its sensors, continues to be under strain. Our holdings in LVMH and Wayfair were sold as we anticipate a subdued growth environment, with their end consumers continuing to experience pressure.
In contrast, we bolstered our portfolio with the addition of Essilor, the global leader in eyewear. This market shows stable growth, and we have been particularly encouraged by the success of their partnership with Meta on the latest generation of smart glasses. Expedia, the travel platform, was another strategic addition; it continues to expand into new markets while enhancing its margin profile. Furthermore, Pinduoduo was included for its innovative Teemu platform, which remains a key driver of growth. Lastly, we invested in Sysmex, the leader in haematology machines, which benefits from a strong network effect and a razor-and-blade business model, where consumable reagents must be purchased from the manufacturer.
Outlook
We believe the opportunity set in equities will differ in 2025 from the momentum-driven landscape of 2024. Two factors make the US slightly less straightforward than last year: firstly, increased volatility resulting from uncertainty over the exact path and timing of inflation and interest rates along with the early period of the new Trump regime and, secondly, the concentration risk in the US market.
Add in peak expectations on AI infrastructure, and we believe that 2025 will see a rotation into a broader range of US market opportunities as well as a better backdrop at the margin for equites in other geographies.
In the US, our key selection criteria revolve around finding companies that will utilise the newfound benefits of AI effectively as well as those companies set to benefit from Trump policies on tax cuts and spending priorities. We specifically reduce exposure to the AI infrastructure build cycle, as well as to mega cap names, and favour sectors like healthcare, industrials and fintech.
In portfolio construction terms, we have increased exposure to healthcare and industrials where the use of AI creates a clear differentiated opportunity or where the digital lenses that we apply across the investment universe find moats that are hard to cross. For example, in robotic surgery, Intuitive continues to benefit from the network effect in a way that the market underappreciates.
One additional theme that is likely to play out in 2025 is that of mobility including autonomous driving and last mile delivery. We have for some time talked about the demise of traditional auto manufacture and we would expect to see this accelerate with a shift towards structural consolidation like the year-end announcement of the Honda/Nissan merger. This will not be restricted to the traditional OEM’s - we see consolidation likely to build potential ride sharing and autonomous platforms with a significant moat. Waymo and Tesla both need to accelerate their positioning so we think it is likely that broader tie-ups will occur, such as an attempt to take over Uber to turbo boost access to customers.
Elsewhere, the Trump administration’s support for crypto and digitalisation also makes digital fintech a clear opportunity for 2025.
The wild card may prove to be China, where shares have been crushed by the poor growth outlook and continued tensions on a geopolitical level. If measures to stimulate growth align with a less aggressive stand from the new Trump administration, China could offer a very cheap and well diversified equity opportunity. In addition, any push to weaken the US dollar would add further support for investing in China and emerging markets more broadly. Given the unique nature of emerging market economies because of their rapid and comprehensive use of digital technologies, we can see a scenario in which diversification away from the very concentrated US exposure could generate significant relative returns.
Discrete years' performance (%)* to previous quarter-end:
|
|
Dec-24 |
Dec-23 |
Dec-22 |
Dec-21 |
Dec-20 |
|
Liontrust Global Alpha C Acc GBP |
19.7% |
20.5% |
-33.6% |
19.9% |
43.6% |
|
MSCI ACWI |
19.6% |
15.3% |
-8.1% |
19.6% |
12.7% |
|
IA Global |
12.6% |
12.7% |
-11.1% |
17.7% |
15.3% |
|
Quartile |
1 |
1 |
4 |
2 |
1 |
* Source: FE Analytics, as at 30.09.24, total return, net of fees and income reinvested
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. This Fund may have a concentrated portfolio, i.e. hold a limited number of investments or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on the Fund's value than if it held a larger number of investments across a more diversified portfolio. 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 will invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. 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. 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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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.
