Liontrust UK Ethical 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 Genuit 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 2.2% over the quarter versus the IA UK All Companies sector average of -1.3% and the MSCI UK Index’s -0.2% (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.

Turning to the detractors, the largest faller over the quarter was Genuit (-19%), the UK's largest provider of sustainable water, climate, and ventilation products for the built environment. Genuit reported revenue fell to £471.7 million for the 10 months ending on 31 October 2024, representing a 7.1% decline compared to the prior year on a like-for-like basis. The company's Water Management Solutions division was particularly affected.

The revenue shortfall was primarily attributed to several project delays in an uncertain business environment, as noted by the company. These delays have disrupted workflows and slowed revenue recognition across key projects, highlighting the challenges posed by broader economic uncertainty and sector-specific headwinds.

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.

Ashtead (-14%), the equipment rental company, reported a downward revision in its revenue growth forecast for the year ending April. The company now expects revenue growth in the range of 3% to 5%, a reduction from its earlier projection of 5% to 8%. This revision reflects softer-than-anticipated market conditions and moderating demand in key segments. As a result of the revised revenue expectations, Ashtead also indicated that profit for the year ending April 2025 will fall below prior forecasts.

Ashtead is the embodiment of the sharing economy, renting out industrial, commercial and general equipment across the US, UK and Canada. It maximises the utilisation of equipment that would otherwise sit idle for long periods, and offers assurance that equipment is serviced and maintained properly and is reliable. In doing so, it allows the businesses it rents to, to concentrate on their core competencies and to reduce their inventories of capital equipment.

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.