Liontrust Special Situations 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 initiated as a new fund position following the recent takeovers of TI Fluid Systems and Hargreaves Lansdown.

The Liontrust Special Situations Fund returned -2.0%* in December. The FTSE All-Share Index comparator benchmark returned -1.2% and the average return in the IA UK All Companies sector, also a comparator benchmark, was -1.4%.

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.

Impax Asset Management (-26%), the specialist in sustainable investment strategies, fell heavily on news it had lost the second and larger of its two mandates with St James’s Place. The £5.2 billion Sustainable & Responsible Equity Fund is being reassigned by St James Place in an effort to diversify the fund across investment styles. The mandate loss is expected to result in lost revenues of around £12.7 million for Impax, in the context of last year’s total revenue of £170 million.

September’s conditional 100p-a-share approach for Learning Technologies Group (+7.8%) from US private equity vehicle General Atlantic was highly opportunistic. At the time, the fund managers commented they were amazed and dismayed that the board of LTG was “minded to recommend unanimously” at that level and they retain this view following official agreement of terms in December.

Recent trading has undoubtedly been beset by short term headwinds due to the impact of macroeconomic pressures; nevertheless, LTG were keen to emphasise – as recently as in its interim results published just ten days prior to the approach being made public – that “the structural drivers of the learning and talent development market remain intact and support our belief that LTG will return to growth when market conditions improve”.

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.

Following TI Fluid Systems’ recommendation of an improved takeover offer late last month, the position was sold in December. With shares in the automotive fluid systems trading close to the 200p offer from private equity group Apollo but several months away from expected completion, the managers chose to redeploy the capital. TI Fluid Systems joins Keywords Studios and Hargreaves Lansdown as Fund holdings lost this year due to takeovers.

The Fund initiated another new holding in December, following the addition of chronic medical care products business Convatec last month. This month, it was the turn of wealth manager Quilter to join the Fund. 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).

Positive contributors included:

RWS Holdings (+18%), Renishaw (+8.2%), Diageo (+7.9%), Learning Technologies Group (+7.8%), Alpha Group International (+6.9%).

Negative contributors included:

Impax Asset Management (-26%), Moonpig Group (-15%), Craneware (-12%), Integrafin (-12%) and Domino’s Pizza Group (-7.5%).

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

*Source: Financial Express, as at 31.12.24, total return (net of fees and income reinvested), bid-to-bid, institutional class. **Source: Financial Express, as at 31.12.24, total return (net of fees and income reinvested), bid-to-bid, primary class.

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.

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This Fund may have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the Fund's value than if it held a larger number of investments. 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. 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. 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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