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.

• December capped a volatile year shaped by post-Covid recovery, inflation, policy shifts, geopolitical events, and rapid advancements in AI and machine learning.
• Nvidia, Broadcom and energy equipment manufacturing and services company, GE Vernova were among the top performers over the month, while Lululemon and MongoDB led the detractors.
• The strong fundamentals demonstrated by our holdings throughout 2024, coupled with their strategic positioning to capitalise on these emerging opportunities, instil us with great confidence in the portfolio's potential heading into 2025.

Performance overview

The Liontrust Global Innovation Fund returned -1.6% in December, placing it in the 3rd quartile of peers, ahead the IA Global sector average of -1.8% and behind the MSCI All-Country World Index which returned -0.9% (both comparator benchmarks).

For the fourth quarter of 2024, the Fund returned 10.9%, placing it in the 1st quartile of peers, ahead of the IA Global sector average of 3.5% and the MSCI All-Country World Index which returned 6.0%.
This rounded out 2024, where the Fund returned 25.7% for the year, placing it in the 1st quartile of peers, ahead of the IA Global sector average of 12.6% and the MSCI All-Country World Index which returned 19.6%.
Longer term performance also remains strong, with the Fund having returned 79.2% since manager inception (30.06.19), in the 1st quartile of peers, ahead of the IA Global sector return of 57.7% and the MSCI All-Country World Index return of 76.5%.

Market Backdrop

December rounded out a year characterised by high volatility and swings in consumer, business and investor sentiment off the back of an ongoing recovery from Covid-era disruption and inflation, shifts in central bank and government policies, significant geopolitical activity, and persistent noise surrounding rapid advancements in artificial intelligence (AI) and machine learning (ML).

2024 was an unprecedented year for global democracy, with approximately half the world’s population voting in elections across more than 70 countries worldwide. Outcomes of these elections suggested a generally difficult year for incumbent parties globally, with economic challenges a consistent theme across elections. December marked a particularly volatile end to this politically heightened year, with an ongoing South Korean political stalemate culminating in significant upheaval early in the month, ultimately resulting in Choi Sang-mok stepping in as both acting President and Prime Minister shortly before year-end. Similarly, the French parliament passed a no-confidence vote against Prime Minster Michel Barnier’s government, forcing its collapse after just three months in office and leading to François Bayrou heading up France’s fourth government in 2024 alone. While unlikely to impact the fundamentals of high quality businesses operating across these regions, these sort of geopolitical developments speak to a complex landscape of political uncertainty which could influence global markets and international relations heading in to 2025.

In the US, we continued to see reverberations from Donald Trump and the Republican Party’s decisive November election sweep, largely regarded as supportive of US businesses and ‘American Exceptionalism’ thanks to anticipated pro-business policies and corporate tax cuts. However, the implementation of further trade restrictions in December from the current Biden administration – focused primarily on Chinese imports and semiconductor equipment – led to more mixed views on the potential impact of an even stricter tariff regime under the incoming Trump administration. Throughout December, the President-elect continued to announce key cabinet appointments, largely in-line with Trump’s more hawkish approach to international policy, though also supportive of relatively new assets and technologies such as cryptocurrency (resulting in a spike in Bitcoin, briefly surpassing the $100,000 level mid-December) and importantly ongoing advancements in AI.

Meanwhile a broad trend of softening inflation data enabled most key central banks to pivot to a loosening phase throughout the course of the year. As anticipated, this trend continued in December with both the US Federal Reserve and European Central Bank cutting interest rates a further 25 basis points to each total 100 basis points of rate cuts over the course of 2024. However, commentary regarding the path of future rate cuts caught more bullish market participants somewhat off-guard as the Fed indicated that it would likely implement only two interest rate reductions in 2025, down from the four cuts it had forecast in September. The VIX volatility index, which briefly spiked to near-crisis levels back in early August following the infamous unwind of the Yen carry trade, jumped again as markets digested this news before settling to more normalised levels by year-end.

Elsewhere, the Bank of England opted to maintain interest rates at 4.75% at its December meeting, for a more cautious total of 50 basis points of cuts in 2024 as officials seek to balance softening inflation against ongoing economic sluggishness. Meanwhile in China we heard additional supportive policy commentary around the time of their annual Central Economic Work Conference in early December, supportive of a larger fiscal deficit and easier monetary policy, underscoring a drive to resolve property issues which have been an overhang on consumer and business sentiment. This commentary was well received and adds further weight to the incremental stimulus program the Chinese Government started rolling out throughout the latter half of the year, though substantial evidence of broad-based economic recovery has remained elusive so far.

Against this noisy backdrop, December culminated a year of significant advancements in AI and ML, with progress evident across a broad range of applications from drug discovery and mathematics to content recommendation systems. In the creative space, OpenAI's Sora text-to-video model – first previewed in February – was made publicly available across a range of geographies in December. Autonomous driving technology also made steady progress throughout the year, with Waymo expanding its robotaxi operations across the US, while Tesla announced plans to enter this market in a meaningful way in the coming years supported by its ongoing advances in Full Self Driving (FSD) technology − the company released its FSD 13.2 model in December, a substantial 5-6x improvement from its predecessor in terms of necessary human intervention. 2024 also highlighted the disruptive potential of AI-native businesses in domains such as software and web search, with both Google and OpenAI bringing new AI-search products to market to compete with startups like Perplexity. This competitive disruption is likely to accelerate following the key AI breakthrough of 2024 – reasoning – as first demonstrated by OpenAI's o1 model (released in preview in September), which advanced from intuitive to analytical thinking capabilities. This development has enabled more sophisticated use cases, notably AI agents capable of completing tasks end-to-end without human intervention. December proved particularly active on this front, with the likes of Google releasing Gemini 2.0 with enhanced reasoning capabilities, and OpenAI launching both the full version of its o1 model and announcing its next-generation o3 model – another huge leap forward in terms of model intelligence. Both companies have since expressed confidence in achieving Artificial Super Intelligence (ASI) in the near future. These significant advances into year-end reinforced several key themes which look set to continue in to 2025: ramping demand for compute to support AI model training and inference (hyperscalers  planning to scale to million-plus GPU clusters in the near future, with Microsoft pledging $80 billion for AI datacentres in 2025 alone); growing energy requirements to support this power-hungry technology; and the continued propagation of AI across the economy, creating new markets and kicking off a whole new innovation cycle.

Company updates

December rounded out the tail-end of the final earnings season of 2024. These updates - alongside our quarterly research trips to innovation hubs such as Silicon Valley, New York, and Boston - provide us with valuable insights into how companies across our fund and watchlist are balancing a dynamic market environment alongside long-term structural growth opportunities.

Throughout 2024, 24 different companies contributed 50 basis points or more to fund performance, reflective of the broad-based investment opportunity set we continue to see in innovative global companies well-positioned as emerging winners in the new innovation cycle. Unsurprisingly, given the rapid ongoing build-out of infrastructure to support next-generation AI models, the top contributors to fund performance in 2024 were Nvidia, Broadcom, and GE Vernova.

After a stellar 2023, Nvidia – the top contributor to performance − continued its remarkable trajectory through 2024, its market cap expanding from just over $1 trillion at the start of the year to over $3 trillion by year-end driven by incredible demand for its leading AI accelerators (GPUs) and associated hardware and software products. Nvidia’s latest Blackwell architecture – unveiled at its GTC conference earlier in the year and which began shipping by year-end – marks a significant leap-forward in terms of compute performance and energy efficiency, while delivering a 30% faster inference performance versus the previous Hopper standard. This is crucial in facilitating the trajectory of next-generation large multi-modal AI models due to the higher compute intensity required for reasoning and inference-time training. Importantly, demand for Nvidia’s leading products remains healthy, with CEO Jensen Huang reassuring markets that scaling laws – which underpin GPU demand − remain intact, supported by synthetic data generation for pre-training and AI reinforcement learning for post-training. Meanwhile the shift from Software 1.0 (lines of code) to Software 2.0 (AI-based) represents a fundamental change in how software itself is created and operates, and is driving demand not only for Nvidia’s latest compute architecture for large-scale reasoning tasks but also previous generations of chips for less computationally intensive inference workloads. Furthermore, the company is positioning itself as the operating system for agentic AI through its NIMs and NeMo solutions, with enterprise AI adoption already exceeding previous expectations and industrial deployment beginning to ramp. All in all this suggests the company remains incredibly well positioned coming in to 2025, and while we have opted to take profit on occasion, Nvidia remains a key holding in the Fund.

Broadcom was another top contributor to Fund performance in 2024 after delivering a stellar fourth quarter earnings update that proved reminiscent of the "Nvidia moment" in May 2023. The stock jumped over 40% in the final month of the year as it showcased incredible AI momentum and raised guidance well above expectations, AI revenues growing 220% year-on-year to reach $12.2 billion in 2024, with AI connectivity revenues quadrupling through strong adoption of its Tomahawk and Jericho products, while AI XPU shipments to its three key hyperscaler customers (Alphabet, Meta, and ByteDance) doubled.

Looking ahead, management expects this momentum to accelerate into 2025 as they capitalise on Broadcom’s first-mover advantage in shifting to next-generation XPUs on 3 nanometre nodes. The company highlighted its serviceable addressable market for these three ASIC customers alone will reach $60-90 billion by 2027, as all three customers embark on multi-year journeys to scale to clusters of 1 million XPUs. Broadcom also continues to win new business, announcing it was selected by two new hyperscalers – widely speculated to be Apple and OpenAI – for ASIC development. And while some market participants have focused on potential competition between Broadcom and Nvidia, there is room for both to succeed as they serve distinctly different use-cases: ASICs are primarily targeted at hyperscalers with the necessary software stack to optimise chips for LLM deployment, while enterprises and sovereigns continue to require Nvidia's silicon paired with its software ecosystem. CEO Hock Tan further highlighted that the company’s leadership in networking positions it incredibly well to capitalise on the cluster scaling trend, as the ratio of networking to XPU/GPUs increases "exponentially" as clusters scale. This of course all supports strong earnings growth potential in the years ahead, facilitating ongoing investment in innovation and underpinning continued strong shareholder returns.

Rounding out the Fund’s top contributors for the year, GE Vernova highlighted how opportunities from the AI revolution extend beyond the technology sector. The company, which generates around 30% of global electricity and leads in both gas turbines and US onshore wind, is emerging as a key beneficiary of growing power demands from AI infrastructure expansion. Like other fund holdings in the power generation space, GE Vernova is well-positioned to benefit from multiple structural drivers, including not only ramping renewable power demand to support AI datacentre build-out, but also increasing power requirements from manufacturing growth, industrial electrification, and electric vehicles, alongside broader customer investment in decarbonisation. The company's innovative grid automation solutions are proving particularly valuable, reducing network outages by 18% and speeding up restoration times by 40% − capabilities that are especially critical for data centres. This strong positioning is reflected in the company's impressive backlog, with power equipment at $71.3 billion and electrification equipment reaching $22 billion (up 39% year-on-year at its last update). Since its spin-off from General Electric, GE Vernova has successfully pivoted towards profitability, with EBITDA margins expected to climb above 10% within three years from 5-7% today, supported by a robust backlog that covers 50% of 2025 revenue.

Conversely, key laggards impacting Fund performance in 2024 were Lululemon and MongoDB. We exited Lululemon during the year as competitive pressures started to ramp in its key US market, moving it back to our watchlist where we will continue to monitor its competitive positioning going forward. On the other hand, while MongoDB ultimately had a disappointing year, we remain confident in the company's strong underlying business performance so took the opportunity to top up our position during periodic share price weakness. Its December earnings update reinforced this view: while management maintained characteristically conservative guidance, the company demonstrated significant business momentum and, importantly highlighted that AI applications are increasingly being built on MongoDB's databases − most just haven't reached scale yet.

More broadly we continue to maintain our valuation discipline across the Fund, trimming or selling companies as they start to reach our target prices and allocating capital when we see attractive upside opportunities. In Q4, we reduced exposure to large-cap outperformers in line with our valuation discipline and emerging watchlist opportunities. Notable actions include exiting Meta and ServiceNow after they achieved our price targets; trimming Tesla to 3% after its strong November bounce; and pushing against Broadcom's sensational post-results run. On the other hand, we continued to allocate capital to lagging names with compelling structural growth catalysts, such as Brookfield Renewable Partners in energy, Danaher and Eli Lilly in healthcare, and Synopsys and Applied Materials in the tech sector.

Looking ahead

Despite the ongoing backdrop of macro and political uncertainty heading into 2025, we remain confident that fundamentals will continue to drive investment returns, particularly as we witness the accelerating adoption of transformative innovations across sectors. The once-in-a-generation technology platform shift associated with AI has potential to eclipse its predecessors by an order of magnitude, and we believe 2024 marked the beginning of a golden period for investing in innovation that will be multi-year in nature.

While this year saw the infrastructure build-out to support AI advancement, with new computing architectures replacing traditional systems in data centres globally, 2025 looks set to witness the meaningful diffusion of this technology across sectors. We are already seeing early adopters building stronger competitive moats and moving faster than peers as software is fundamentally re-architected. This shift from Software 1.0 to 2.0 represents a paradigm shift away from traditional programming towards machine learning-based software development, while the scaling of inference time-reasoning - unlocked by breakthrough models capable of advanced multi-step thinking - continues to drive compute demands higher.

Meanwhile the rising power requirements of AI deployment have become the main constraint for mass AI adoption, with AI data centres proving 10 times more energy-intensive than their traditional counterparts − creating opportunities across the energy and industrial landscape, as well as in companies developing energy efficient technology solutions.

Elsewhere, we are particularly excited about B2C platforms entering a golden era as AI integration turbocharges their network effects. Companies like Netflix, Spotify, and Shopify, having pivoted to profitability in recent years, are now leveraging their unique platform data and user scale to create new AI-driven revenue streams in ways that traditional enterprise software cannot match. Similarly, in healthcare, despite typical election-year headwinds in 2024, we see significant multi-year potential from innovators driving down the cost of care, particularly through breakthrough treatments such as GLP-1 medications and gene editing technologies which should benefit from greater policy clarity in early 2025.

As we look ahead, we remain focused on identifying and investing in innovative global companies positioned on the right side of disruption across sectors. The strong fundamentals demonstrated by our holdings throughout 2024, coupled with their strategic positioning to capitalise on these emerging opportunities, instil us with great confidence in the portfolio's potential heading into 2025.

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

*Source: FE Analytics, as at 31.12.24, 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.

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