Liontrust European Dynamic Fund

• European markets rally despite expectations of monetary easing being pared back
• The Fund’s banks were strong, benefitting from a revival of the “higher-for-longer” interest rates theme
• Constructive outlook underpinned by reasonable valuations and falling corporate mal-investment

The Fund returned 2.8% in sterling terms in 2024. The MSCI Europe ex-UK Index comparator benchmark returned 1.9% and the average return made by funds in the IA Europe ex-UK sector, also a comparator benchmark, was 1.7%.

Market Review

European markets rallied over the year despite expectations of monetary easing being pared back. Markets started 2024 expecting between six and seven quarter-point cuts from the European

Central Bank (ECB) in 2024, but only four were delivered (taking the refinancing rate to 3.15%). The ECB maintained its messaging that future rate changes will be heavily data dependent.

Positive sentiment seemed to stem from an increased confidence among investors that central banks’ policy tightening efforts have successfully walked the fine line between bringing down inflation and allowing the economy to maintain some momentum. While inflation is slowly coming down towards target, economic growth is proving more resilient than expected.

Towards the end of the year, politics became the source of some turbulence for European markets, as the US election victory for Donald Trump led to concern that ‘trade war’ policies could be revived with damaging consequences for the European economy.

Finance (+12%) was the strongest sector in the MSCI Europe ex-UK over the period (in sterling terms), followed by industrials (+6.6%) IT (+6.2%) and communication services (+5.9%). Energy (-20%), consumer staples (-19%) fell reasonably heavily.

Analysis of Portfolio Return

With finance sector stocks leading the European market over the period, the Fund’s banks were an area of significant strength, benefitting from the revival of the “higher-for-longer” interest rates theme that dominated for periods of 2023. Banks typically earn larger net interest margins when benchmark rates are higher.

UniCredit, CaixaBank, Deutsche Bank and Mediobanca were all in the Fund’s top ten contributors for the year as strong growth in net interest income was reported and full-year guidance raised.

Outside of financials, Danish jewellery retailer Pandora performed well, particularly towards the end of the year after it reported Q3 results. Organic sales growth of 11% included a 7% like-for-rise, with the remainder coming from store network expansion. Pandora also lifted its 2024 growth guidance to a range of 11% to 12%, the high end of its prior 9% to 12% range.

ASML, the Dutch supplier of photolithography systems for the semiconductor industry, also performed strongly as investment in intelligence has driven demand for semiconductors and the products to make them.

Of the portfolio detractors, Bekaert was a notable faller. Shares in the Belgian steel-wire company lost ground after announcing lower-than-expected Q1 sales – a 14% decrease in consolidated sales compared to the same quarter the previous year.

Tenaris, the manufacturer and supplier of steel pipes for the energy industry, also slid heavily after profit margins were affected by an ongoing decline in OCTG (durable and robust steel) prices in the Americas.

Portfolio Activity

Following the year’s annual review of company report and accounts, the Fund’s bias towards value and away from growth has been largely eliminated in favour of a more stylistically balanced approach.

From a style perspective, value stocks have re-rated from their extreme low levels in recent years but are not yet expensive. However, our indicators suggest a less compelling environment for value compared with prior years where investor nervousness was creating a significant opportunity in value stocks.

Meanwhile, stocks with high forecast growth style characteristics are no longer expensive but are also not compellingly cheap.

Outlook

We remain constructive on European equities, albeit this view is now tempered somewhat by a weaker technical trend. However, market valuation remains reasonable to moderately cheap and corporate mal-investment has again fallen further.

Our style preference remains in favour of momentum. Our momentum efficacy indicator continues to suggest strong returns from momentum both in Europe and the US. We continue to maintain balance in the portfolio, emphasising quality growth and recovering value stocks with positive momentum characteristics.

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

KEY RISKS

Past performance does not predict future returns. You may get back less than you originally invested.

We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.

• Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund.
• 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.
• 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.

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.

DISCLAIMER

This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.

It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.

This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.