Liontrust Sustainable Future UK Growth Fund

• The final quarter of 2024 was a strong one in terms of relative performance, concluding a good year for the strategy
• Notable performers over the quarter included Wise, Trainline and Sage Group, while Kingspan and Molten Ventures were among the detractors.
• We believe the share prices of the high-quality, sustainability-aligned companies we support have been undervalued. This year showed some progress, but we see significant potential ahead and look forward to further growth in 2025.

The Fund returned 0.4%* over the quarter versus the IA UK All Companies sector average of -1.3% and the -0.2% return from the MSCI UK Index (both of which are comparator benchmarks).

The final quarter of 2024 was a strong one in terms of relative performance, concluding a good year for the strategy with an annual return of 11.2%, ahead of both peer group and benchmark. We have long felt that the share prices of the high-quality companies that we back – with their alignment with strong sustainability trends – have been depressed. This year saw some of that promise being recognised. However, we believe there is still a long way to go for the businesses in our portfolio, and so look forward to 2025 building on the past year.

Over the quarter we note: Transfer platform Wise (+58%) reported 32% year-on-year growth in active customers (to 7.2 million) and a 22% rise in revenues (to £260 million) in Q3. It also upgraded its full-year income growth guidance from 28% - 33% to 33% - 38%. Wise is held under our Transparency in financial markets theme and its mission is to bring transparency and fairness to into moving money around the world. This covers pricing of products and sharing the economies of scale. Our conviction is reinforced by recent news that Morgan Stanley and Standard Chartered will be using the Wise platform for their own FX proposition.

Trainline (+31%) reported strong first-half growth, with net ticket sales up 14% and revenue rising 17% year-over-year. Trainline's strong performance and improved outlook have boosted investor confidence. The company, which is held under our Making transport more efficient or safer, previously set its FY25 guidance in May before improving it in September and raising it once again in October. The company now forecasts full-year net ticket sales growth of 12-14%, up from 8-12%, and revenue growth of 11-13%, up from 7-11%. Trainline explained that its strong performance is driven by a number of factors, including increased demand for rail travel, the continued rollout of its digital platform, and the benefits of operating leverage as it scales.

Sage Group (+24%) was also among the top performers, most notably announcing a £400 million share buyback, while also reporting strong sales in its Cloud business which boosted annual revenue.

The company, which provides financial, HR and payroll software for small and medium-sized enterprises and is held under our Enabling SMEs theme, reported a 51% increase in pretax profit to £426 million for the year ending 30 September, up from £282 million. Underlying operating profit rose 21% to £529 million, with its operating margin improving to 22.7% from 20.5%. Revenue climbed 6.8% to £2.33 billion, driven by new customer acquisitions, increased adoption of additional products by existing customers, and strong growth in North America, its fastest-growing region.

Shares in Kingspan (-17%) slid in November after the company suggested soft recent demand could lead 2024 revenues to be at roughly similar levels to last year. However, Kingspan commented that next year’s sales should benefit from a high level of order backlog. Kingspan is held under the theme of Improving the efficiency of energy use. Its products will help to decarbonise our economies by reducing the energy required to keep our buildings at the correct temperatures. 85% of its products provide superior insulation, up to twice as effective as mineral fibre.

Venture capital firm Molten Ventures (-21%) led the detractors for the period despite delivering a relatively stable first-half performance, with a gross portfolio value of £1.34 billion, slightly down from £1.38 billion in March. The company reported £76 million in cash realisations, with an additional £48 million expected post-period from the anticipated M-Files transaction, exceeding its full-year guidance for realisation proceeds.

Held under our Enabling SMEs theme, Molten Ventures provides early-stage capital and backing for entrepreneurial companies linked to improving resource efficiency in industrial processes, and innovation in healthcare. It tends to nurture companies until IPO or private sale at which point it realises its investment and recycles into new ventures. Valuing early stage companies is an inexact exercise but we continue to believe that there are several very successful businesses in the portfolio and these justify a much higher share price and will also demonstrate Molten Ventures’ success in selecting winners.

AstraZeneca (-9.7%), one of the higher conviction weightings in the Fund, experienced a notable drag on performance following disappointing results from a late-stage clinical trial for its antibody-drug conjugate cancer treatment, Dato-DXd. The trial results fell short of market expectations, raising concerns about the drug's commercial potential and casting uncertainty over future revenue contributions from this treatment.

Adding to the downward pressure on the company's share price, AstraZeneca faced additional headwinds after it was revealed that the president of its Chinese operations is under investigation by local authorities. While the specifics of the investigation remain unclear, the news has heightened investor concerns about potential regulatory and operational risks in one of AstraZeneca's key growth markets.

In terms of trade activity, we initiated a position in Berkeley Group, the builder of homes in London and the Southeast, under our Building better cities theme. Berkeley is a specialist in urban regeneration and in providing high quality energy efficient houses, and has ambitious targets for improving resource efficiency and lowering greenhouse gas emissions in the construction and use of its homes.

In October, we exited the position in Spectris, having initiated a small position in this company in November 2023. We felt the prospects would be good for the analytical equipment it sold. However, the company proved to be less predictable on revenues where the life science end market was particularly weak and on leverage where three acquisitions had brought net debt-to-EBITDA to above 2x. This led to us exiting the position and investing the proceeds in existing holdings: Sage and Spirax, both of which we have higher confidence in.

We made the decision to exit Rentokil after a trading update in September where it downgraded its growth expectations for 2024 and cited some issues with integrating the Terminix acquisition. Our original thesis was that Rentokil’s management has a track record of integrating acquisitions well and delivering strong employee and customer retention that Terminix required. However, despite some improvement in these KPIs, the business has been underperforming prior to the commencement of some of the more complex stages of the integration process – something we had not anticipated to happen as soon. We feel that management have lost credibility given numerous assertions made over the past year  and we have therefore lost confidence in their ability to execute a turnaround in the US pest control business.