Liontrust UK Growth Fund

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

The Liontrust UK Growth Fund returned -1.2%* 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.

The Fund’s holdings in pharmaceutical groups GSK (-10%) and AstraZeneca (-9.7%) also weighed on performance, partly due to negative investor sentiment following US President-elect Donald Trump’s decision to appoint Robert F Kennedy Jnr to be the country’s next health secretary. Kennedy has a history of vaccine scepticism and questioning of vaccine safety.

However, in attribution terms the Fund’s healthcare performance was broadly flat versus the index, in large part due to the positive return from its position in Indivior (+39%). The shares had fallen heavily earlier in the year due to adverse market dynamics impacting take-up of Sublocade, a long-acting injectable treatment for opioid addiction which is its key drug, as well as heightened investor concerns over the competitive threat from rival treatment Brixadi. The shares staged a partial bounce back in November after acknowledging criticism by activist stakeholder Oaktree Capital Management for "lack of focus" and poor defence of Sublocade versus the competing product. Indivior commented that it had engaged with Oaktree and welcomed proposals to enhance shareholder value while reaffirming its commitment to its strategic goals.

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.

Auction Technology (+31%) was a smaller position to record a large gain, 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.

Pearson (+27%) issued an encouraging nine-month trading update which reaffirmed full-year guidance. Underlying sales growth accelerated to 5% in Q3, taking the nine-month rate to 3%. The period saw strong expansion in its largest division, Assessment & Qualifications, and a stabilisation in its second-largest unit: Higher Education. This division has seen sales declines in recent periods, but 4% growth in Q3 took it to a flat year-on-year performance for the first nine months of 2024.

Turning to the detractors, Synthomer (-28%) shares slid gradually after a third-quarter trading update confirmed the company is trading “broadly” in line with expectations for the full year amid a backdrop which continues to present demand challenges. Synthomer continues to focus on its self-help initiatives, including a strategic re-focusing on higher margin speciality chemicals, cost savings and working capital discipline.

WH Smith (-18%) shares declined despite the retailer delivering final results that aligned with expectations, increasing its dividend, and reporting a strong start to the new financial year. The company, which operates across high streets, airports, and stations, announced plans for a "year of investment" in its Funky Pigeon online greeting cards platform, with a commitment to higher spending on both the platform and brand compared to 2024. WH Smith also unveiled plans to open 90 new stores in the current year, with 60 of these located in North America.

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 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.

With three holdings exiting the portfolio due to takeovers in Q4, the fund managers have been active in redeploying capital to new investment opportunities. The Fund initiated new positions Convatec, Quilter and Hilton Food 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).

Hilton Food Group is a company that has been held by the Economic Advantage team in the Liontrust UK Smaller Companies Fund for a number of years, having grown from a small cap into a mid cap over that period. The company is a packager of meat, seafood, vegetarian, vegan and convenience food products for large grocery retail customers such as Tesco in the UK and Woolworths in Australia and New Zealand. It typically works in long-term and trusted partnerships with the dominant retailer in a particular geography, ensuring the integrity and transparency of the protein supply chain – a critical factor in maintaining customer trust in the retailer’s brand. Hilton enjoys a key intangible asset strength in distribution, with national logistics and supply chain capability and embedded relationships with customers, as well as competitive differentiation in the level of automation and technology employed within its facilities.

Positive contributors included:

 Indivior (+39%), Auction Technology Group (+31%), Pearson (+26%), Sage Group (+24%) and TI Fluid Systems (+17%).

Negative contributors included:

Synthomer (-27%), WH Smith (-18%), 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.

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.

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. 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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