Liontrust Special Situations Fund

• Small negative return in Q4 completes a lacklustre second half of the year, after the UK market started 2024 strongly.
• Sage Group and Auction Technology lead the portfolio gainers; negative attribution comes from non-holds in banking sector and weakness in industrials.
• TI Fluid Systems, Hargreaves Lansdown and Keyword Studios all exit due to takeovers. New positions initiated in positions Convatec and Quilter during the quarter.

The Liontrust Special Situations Fund returned -2.0%*in Q4. The FTSE All-Share Index comparator benchmark returned -0.4% and the average return in the IA UK All Companies sector, also a comparator benchmark, was -1.3%.

Q4’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% (US) and 2.6% (UK), 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 15% in Q4. 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.

Additionally, the Fund’s exposure to industrials was a headwind, detracting from performance as confidence in the resilience of the global macroeconomic backdrop wavered. A number of the Fund’s industrials saw share prices soften, including IP-rich engineers Renishaw (-7.9%), Intertek (-8.4%), Spirax Group (-7.1%), Spectris (-7.1%), Rotork (-5.9%) and Coats (-5.3%).

Sage Group (+25%) was the Fund’s top quarterly contributor after the software company announced a resilient set of full year results, accompanied by a £400 million share buyback. Sage delivered double digit growth in underlying annualised recurring revenue (ARR), along with operating margin accretion and strong cash generation. The company expects organic revenue growth of 9% or more in fiscal 2025, along with continued margin improvement.

The Fund’s smaller position in Auction Technology (+31%) registered the largest percentage gain over the period, the shares rallying on evidence of improved momentum in the second half of its year to 30 September. The company operates online auction marketplaces and services across two key sectors: Industrial & Commercial and Art & Antiques. While some of these end markets have been weak recently, Auction Technology commented that gross merchandise value has improved significantly towards the end of the year, while its targeted improvement to profit margins was also achieved.

Among the detractors, the position in Impax Asset Management (-35%), the specialist in sustainable investment strategies, was the costliest. Its shares 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.

Inter-dealer broker TP ICAP (+11%) announced a 10% rise in third-quarter revenue to a record £557 million for the three months ending 30th September, up from £512 million a year earlier. This growth was fuelled by strong performances in its Global Broking and Liquidnet segments. The Global Broking division saw a 9% increase in revenue, with its largest and most profitable franchise, Rates, achieving 14% growth amid recent interest rate volatility. The previously-announced strategic review of options to realise value from the group’s Parameta data and analytics division – which has been a significant catalyst for the shares over the year to date – continues to progress. Options on the table include a potential listing of the division in the United States, with TP ICAP retaining a majority stake.

Intellectual property support services provider RWS Holdings (+12%) 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.

Shifting focus from financial results to takeover developments, TI Fluid Systems (+17%), the automotive fluid systems manufacturer, saw its share price rise sharply following its acceptance of a £1 billion takeover bid from Canada’s ABC Technologies, backed by Apollo Global Management. The offer, endorsed by TI Fluid Systems' board, represented a 47% premium over the company's share price before ABC's interest became public. 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.

In addition to TI Fluid Systems, the Fund’s position in Hargreaves Lansdown was exited in Q4 ahead of the completion of its takeover by a private equity consortium. Keywords Studios, the support services provider to the video gaming industry, also exited the portfolio on completion of its acquisition by Swedish private equity group EQT.

The Fund’s position in cloud computing infrastructure and IT managed services provider iomart was sold. In recent years the managers have become increasingly concerned over the strength of the company’s competitive advantage, as the dominance of hyperscale cloud providers has grown and businesses have increasingly turned to public cloud solutions. For iomart, which owns its own data centres and specialises in private and hybrid cloud provision, organic growth and operating profit margins have trended down and put significant pressure on cash flow returns on capital. Although the company has committed to reshaping its offering, hoping to grow higher margin, faster growing areas of managed service provision such as data and cyber security, we believe the risk of effecting such a transition in the glare of the public markets outweighs the potential reward and have taken the decision to exit the position.

With four holdings exiting the portfolio in Q4, the fund managers have been active in redeploying capital to new investment opportunities. The Fund initiated new positions in Convatec and Quilter during the quarter.

FTSE100 constituent Convatec is a provider of medical products designed to help patients manage chronic conditions, including advanced wound care dressings, ostomy care devices, continence care products and infusion sets for diabetic insulin pumps. The company exhibits strong barriers to competition in the form of its intellectual property, with high levels of patents, R&D innovation and category know-how. It also enjoys market leadership positions in its core categories and has a significant strength in distribution, providing products and services in almost 100 countries around the world from nine manufacturing locations. Meanwhile, although revenues are not technically contracted recurring, there is a high degree of repeatability of sales (>90%) due to the chronic nature of the conditions treated.

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:

Auction Technology Group (+31%), Sage Group (+24%), TI Fluid Systems (+17%), RWS Holdings (+12%) and TP ICAP (+11%).

Negative contributors included:

Impax Asset Management (-35%), Team17 Group (-19%), Savills (-13%), PageGroup (-11%) and GSK (-10%).

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.