Liontrust Global Innovation Fund

The Liontrust Global Innovation Fund continues to invest in innovative companies on the right side of AI, buying at cyclically depressed prices ahead of a new innovation cycle.

• January saw investors digest President Trump's return to office, significant developments in artificial intelligence and the start of fourth-quarter earnings season.
• Despite near-term market noise, we continue to see excellent opportunities to invest in innovative global leading businesses plugged in to emerging structural growth trends across the industry spectrum.
• Constellation Energy topped the Fund’s positive contributors on improved sentiment for nuclear power generation under the Trump administration, while semiconductor supply chain names including Onto Innovation, Camtek, and Applied Materials rallied as hyperscalers and sovereigns alike confirmed AI datacentre investments.

Performance overview

The Liontrust Global Innovation Fund returned 9.0% in January, placing it in the 1st quartile of peers, ahead of both the IA Global sector average of 5.0% and the MSCI All-Country World Index return of 4.2% (both comparator benchmarks).

Longer term performance also remains strong, with the Fund having returned 95.3% since manager inception (30.06.19), in the 1st quartile of peers, ahead of the IA Global sector return of 65.6% and the MSCI All-Country World Index return of 83.9%.

Market Backdrop

January proved a highly dynamic start to 2025, with markets shaped by President Trump's return to office, significant developments in artificial intelligence that prompted widespread investor reassessment of the sector, and the commencement of fourth-quarter earnings season setting expectations for the year ahead.

US President Trump's return to office on January 20^th was initially well received by markets, animal spirits propelling the S&P 500 to new highs as investors focused on prospects for tax breaks and pro-business policies. While still early in the new administration, President Trump has moved swiftly to implement significant policy adjustments through various mechanisms at his disposal, including executive actions. As expected based on his campaign rhetoric, his "America First" agenda has quickly taken shape through withdrawals from global organisations and a widely forecasted threat of tariffs – initially focussed on key trade partners Canada, Mexico, and China. There is also a heightened focus on improving government efficiency, with the newly implemented Department of Government Efficiency (DOGE), spear-headed by Elon Musk, ramping activity into month end.

This evolving policy backdrop contributed to heightened uncertainty late in the month, and while the Federal Reserve's decision to pause its recent string of rate cuts at its late-January meeting was largely anticipated, the shifting policy environment has added complexity to its outlook. Nonetheless US growth appears healthy, especially compared to regions such as Europe where the European Central Bank (ECB) opted to implement another 25 basis point reduction – its fifth cut since mid-2024 – citing concerns over stagnant growth alongside optimism regarding inflation reduction.

The new Trump administration has also shown strong early support for US artificial intelligence ambitions, declaring a national energy emergency to reduce environmental restrictions and boost US drilling while also aiming to streamline regulatory processes and accelerate energy infrastructure projects to support high demand from AI applications. This was followed by the announcement of "Project Stargate" – a joint venture between OpenAI, SoftBank and Oracle that will invest up to $500 billion over the next four years in US AI infrastructure. Trump framed this initiative within a broader narrative of sovereign AI development and American job creation, positioning it as critical for national security in the technological race with China.

Meanwhile, private sector AI infrastructure spending continued to accelerate in January. Early in the month Microsoft announced plans to spend $80 billion on AI datacentres this year, while Meta, following a $10 billion AI datacentre announcement in December, announced plans for $60-65 billion in CAPEX for the year ahead – a spend increase of over 50% on 2024. Supporting these ambitions, global foundry TSMC also signalled strong demand for next-generation chip manufacturing, raising its FY25 CAPEX guidance well above consensus to $38-42 billion.

This heightened AI infrastructure spending context made market reaction particularly acute when China-based startup DeepSeek released its landmark "R1" model late in the month. Built on the company's V3 mixture-of-experts framework, DeepSeek-R1 reportedly matched the performance of OpenAI's then-frontier reasoning model o1 across maths, coding and reasoning tasks – yet at 90-95% lower cost. This development shocked markets, with leading AI hardware companies – most notably Nvidia – selling off dramatically as investors questioned the existing AI scaling narrative and future infrastructure spending requirements.

However, there were some important nuances beyond the headlines. While DeepSeek’s models have undoubtedly delivered the sort of exciting efficiency breakthrough that we would expect to see in a novel technological field like AI, their headline $5-6 million training cost likely significantly understated the true cost of training and running R1. Further, DeepSeek’s models likely relied heavily on distillation – leveraging existing leading models from the likes of OpenAI to train their own – rather than pushing the frontiers of model intelligence itself.

Importantly, we believe the extreme negative market reaction was both overstated and misdirected. Lower AI system prices are likely to accelerate rather than diminish compute requirements – following the Jevons paradox, where greater efficiency leads to higher overall consumption. In short, as the cost of AI goes down, we need more compute, not less; we need more power, not less; and we need more electrical equipment for data centres, not less. This was reinforced via company earnings updates within days of the DeepSeek news, with both Microsoft and Meta reiterating their substantial AI infrastructure investment plans for the year ahead. As such, we continue to believe that the major structural trends associated with AI development, scaling, and propagation remain alive and well; that we are entering a new innovation cycle driven by AI; and that the winners of this cycle will be different to the last.

Company updates

January wrapped up with fourth quarter earnings season in full swing – these company updates providing us with valuable insights as to how companies across our Fund and watchlist are positioning themselves as we enter the new year. Importantly, in spite of near-term market noise, we continue to see excellent opportunities to invest in innovative global businesses plugged in to emerging structural growth trends across the industry spectrum.

Constellation Energy, the world’s leading nuclear provider, was the top contributor to Fund performance in the month, a beneficiary of improved sentiment for nuclear power generation under the Trump administration – including support commentary regarding localised generation for AI data centres that had faced regulatory hurdles under the last administration. The company remains incredibly well positioned to benefit from structural demand for clean energy, with ramping AI datacentre demand adding to already robust requirements from broader electrification trends and an over-arching supply/demand imbalance. Conversely, the same policy backdrop proved a headwind for Brookfield Renewable partners, a key detractor to performance in the month, selling off on concerns regarding potential policy changes negatively impacting renewable energy providers. We believe these regulatory concerns are overstated – tariffs and any changes to tax credits (which we don’t expect) would simply be passed onto customers. Brookfield has the negotiating power, and its underlying fundamentals remain incredibly strong – the company is seeing unprecedented demand from technology companies seeking reliable, low-cost power sources, with an established development pipeline of 200,000 megawatts representing a significant competitive advantage at a time when advanced, ready-to-scale capacity remains scarce. This was evident in its fourth-quarter update, where funds from operations grew 21% year-over-year, well ahead of expectations. We see financials accelerating in to 2025, and took the opportunity to top up our position in the month.

The Fund also benefited from strong performance from semiconductor supply chain names, with Onto Innovation, Camtek, and Applied Materials rallying through January as hyperscalers and sovereigns alike confirmed ramped AI datacentre plans. As AI workloads become more complex, we are seeing a significant shift from individual chips towards larger integrated systems, with chips themselves becoming larger and more complex to drive AI performance gains. This transition is altering value capture across the semiconductor value chain, introducing more process steps and requiring new supply chain innovations in materials engineering and advanced packaging. Onto Innovation and Camtek, leaders in inspection and metrology solutions, remain particularly well positioned as their capabilities become increasingly vital for advanced packaging processes necessary for these advanced AI chips and systems. Similarly, Applied Materials' leadership in major WFE areas, notably deposition and etch, positions it to benefit from this exponential increase in tooling intensity, with peer updates in the month highlighting how new architectures like High Bandwidth Memory chips require three times more tools than traditional memory chips.

Another beneficiary of the expanding AI infrastructure landscape is Arm, also a top contributor to Fund performance in January. Having dominated the smartphone market for the past decade, the company is now emerging as the default choice for CPU workloads across data centres and cloud infrastructure. This is evidenced by Arm's success in customising advanced silicon for major hyperscalers like Microsoft (Cobalt), Google (Axion), Nvidia (Grace), and AWS (Graviton) – with more than half of AWS's newly installed CPU capacity now Arm-based, and 90% of AWS's top 1,000 EC2 customers running on its Graviton processors. The company's efficiency strengths position it well for the next wave of AI infrastructure spending, notably as CPU partner of choice in the massive Stargate initiative alongside SoftBank, OpenAI, Oracle, and Nvidia. Meanwhile, Arm's transition to v9 architecture is driving strong growth in licensing and royalty streams, as smartphone makers and device manufacturers commit to their latest designs, motivated by increasingly sophisticated AI and compute requirements.

Elsewhere, Spotify was another strong contributor to Fund performance as shares continued their momentum through January. Like other leading platform businesses (including Netflix, Shopify, Uber and Airbnb), Spotify is embedding AI across its operations to accelerate product innovation and strengthen network effects. Indeed, the company is in many ways proving to effectively be a younger version of Netflix – both companies having built best-in-class entertainment platforms with unmatched distribution footprints, and both are now leveraging AI to drive operating leverage and enhance user engagement. The pace of Spotify's product innovation has been particularly impressive, with rapid deployment of new features such as video podcasts and AI customisation tools feeding through to improved financials and positioning the company well for accelerated execution in 2025.

Meanwhile, companies most acutely caught up in the DeepSeek related sell-off proved key detractors to Fund performance in January, with Nvidia the largest detractor on an absolute basis. In addition to our previously stated views regarding the DeepSeek sell-off, we see the negative market reaction towards Nvidia as overlooking two key developments. Firstly, the Stargate announcement has effectively introduced a new $500 billion customer prepared to purchase approximately a third of Nvidia's annual GPU production. Secondly, DeepSeek has actually ignited widespread demand for inference using Nvidia's Hopper chips, evidenced by rental prices for H100s and H200s on AWS rising sharply since the announcement. Throughout the month we continued to take advantage of this volatility to increase our position in the fund.

More broadly we maintain our strict valuation discipline, allocating capital to innovative global businesses where we see the greatest upside opportunity. Throughout January this saw us top up positions in Palantir, Affirm, and Upstart, as well as those hit hardest by the DeepSeek related market dislocation including key large holdings of Broadcom and Amphenol. Conversely, we continue to reduce or exit positions in companies when they reach our target prices or when we see better upside opportunities on our watchlist, which in January meant trimming recent top performers such as Constellation Energy, Onto Innovation, and Arm, as well as exiting our position in Datadog after it achieved our target price.

Looking ahead

Entering February we are likely to continue to experience near-term noise from evolving policy dynamics under the Trump administration – especially trade policy and the efficiency-focused actions of the newly-formed DOGE. Nonetheless, we believe underlying fundamentals will continue to drive returns for companies across our Fund and watchlist, and thus remain focused on the ongoing fourth-quarter earnings season, where companies continue to provide insights into structural trends and their positioning for the year ahead.

Meanwhile the AI landscape looks set to remain dynamic, with incumbent players expected to respond to the recent DeepSeek developments. More broadly, we expect to see the AI acceleration and propagation story continue apace, with competitive advantages accruing to leading early adopter across sectors.

Despite this dynamic backdrop, we remain optimistic about the opportunities for innovative global leaders as we enter this new innovation cycle. As always, we will maintain our valuation discipline, focusing on companies that can deliver strong earnings and dividend growth by capitalising on structural trends while trading at attractive valuations.