The Liontrust GF Sustainable Future US Growth Fund returned -6.3% in US dollar terms in Q1, compared with the -4.6% return from the MSCI USA Index (its comparator benchmark).
Given the somewhat unusual start to the year, we will provide some more granularity than usual on performance during the quarter. We started the year strongly, with the portfolio up solidly in January in both absolute and relative terms. The Magnificent Seven had stopped their relentless rise upwards and we felt the companies we owned were beginning to be rewarded for their superior quality and growth profiles.
In February, we more than gave up these relative gains as the portfolio fell substantially compared to the index. Several of our holdings posted results that either disappointed the market on the quarterly trading (such as West Pharma) or on guidance for the full year (such as Cadence Designs). There was (rightly, in hindsight) considerable caution being administered by the management teams of many of our holdings when it came to providing forward guidance. Increasingly we are seeing companies being punished for weak guidance when they report.
March was when the White House’s tariff war really gained momentum. 25% tariffs on imports from Canada and Mexico were due to come into effect on the 4th and Chinese levies were doubled to 20%. All three countries retaliated and some tariffs, such as those for US automakers for Canada and Mexico, were granted a one-month exemption. As the month continued, further tariff announcements came thick and fast and the market started to get nervous about the impact on the global economy, particularly heading into ‘Liberation Day’.
Our portfolio performed in line with the benchmark during March, with both declining in absolute terms. Our largest detractors came from our longer duration holdings (companies on relatively high multiples such as Intuitive Surgical and ServiceNow). We also saw Broadcom shares fall nearly 16% in the month due to concerns over the semiconductor industry, given how interconnected it is between the US and China. Globant also fell nearly 22%. Our take on Globant was that it was more an indiscriminate reaction to the fact that more than half of the company’s revenues come from US customers, but its employee base is very much global (Columbia, Argentina, India and Mexico are its largest employee hubs).
We will not spill any more (digital) ink on the topics of tariffs. Chiefly, as Howard Marks rightly puts it, nobody knows. Another issue of course is that whatever we write today may no longer be relevant tomorrow, given how fast things are moving. Suffice to say that our last trade in the portfolio was on the 12th March and importantly, had nothing to do with tariffs. We materially added to one name in the portfolio that fell significantly on results (West Pharma) and we also started a new position in the portfolio: IDEXX Laboratories. Earlier in the quarter, we also added another new holding: Becton Dickinson. IDEXX, Becton and West are all technically in the healthcare sector, an area in the market which has been strongly out of favour following the pandemic, but as is probably clear, an area we are finding ripe for deploying fresh capital.
To fund the above trades we exited our final position in the insurance broker Brown & Brown and our holding in the simulation software company Ansys, which is in the process of being acquired by Synopsis. On Brown & Brown, it was a simple case of a lack of compelling further upside that caused us to exit. On Ansys, we sold before the deal closed at a c.8% discount to the deal price. We are concerned that the current geopolitical dynamics between the US and China could result in China blocking the deal, as both Ansys and Synopsis have large revenue exposure to China.
For the remainder of the update, we wanted to provide some rationale on our decision to add to West Pharma, given the poor performance of the shares in the quarter. But first, a reminder of what the c.$15bn market cap business actually does.
West Pharma designs and produces high quality integrated containment and delivery systems for injectable drugs and healthcare products. It essentially makes rubber stoppers and plungers for the next generation of injectable medicines, called biologics. Key customers include biotech, pharma and diagnostic companies. The focus here is on quality and reliability – excellence in manufacturing, scientific and technical expertise to ensure delivery of safe and efficacious drug products to patients around the world.
The structural growth here comes from the shift away from small (think pills) to large molecule drugs (typically in liquid form) – the covid vaccines for instance are large molecule drugs, as are the weight loss drugs, GLP-1s. This shift towards these complex biologics is expected to provide a long-term tailwind of ~6% annual growth over the next decade and beyond as more of these targeted drug types are approved. These drugs are highly complex, and, per dose, they are much more valuable given how much more sophisticated and difficult to produce they are. West Pharma operates in a highly regulated and complex environment and its products are built into the design for the FDA approval of the drug in question, so the switching costs are very high. The drugs themselves tend to be high value and the drug delivery mechanism is a small cost in comparison (the drugs can be worth hundreds or thousands of dollars per dose, but the delivery mechanism may cost a dollar). The cost of failure therefore for the delivery mechanism is huge – quality reputation and reliability at scale are key here and West scores highly on both of these metrics.
Coming off the back of huge demand from vaccines in the pandemic, West’s customers had too much inventory and so the company has suffered from destocking trends. We were aware of the potential for share price volatility from this dynamic and so elected to start with a small position in the portfolio in June last year. The shares fell from our initial entry price by some 30% and so we added more to the holding in August last year. The company reported its full year results in February this year and the shares promptly fell 38% on the day. The results had many moving parts – the details of which we will spare you – but management had done a poor job of communicating issues we deem to be short term in nature and this was compounded by the fact that the recovery in demand was taking longer than anyone had expected.
We spent the next month going through the results carefully and cross-checking what management has said with others in the industry before concluding that this likely presented a terrific buying opportunity for those who have a time horizon beyond the next several quarters. Given the negative sentiment surrounding the stock, both the share price and the earnings multiple sit at less than half the levels reached during the heights in 2021. Over the next five years we believe revenues will compound at 7% per year with earnings per share growing at 11%, largely driven by expansion in the company’s gross margins as the higher margin products return to growth. Given the quality of the underlying business and the long-term structural growth it is exposed to, we use an exit multiple of 30x and believe the shares could more than double from where they are today.
Despite the broader macro and geopolitical uncertainty, we remain excited about the opportunity for future returns from our portfolio. Small and mid-caps will not remain out of favour forever; indeed, over the long run they have delivered the best returns. Looking at the companies held in the Fund today, they are trading at a 23% discount to their average five year forward earnings.
Key Features of the Liontrust GF SF US Growth Fund
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The Fund aims to achieve capital growth over the long term (five years or more) through investment in sustainable securities, predominantly consisting of global equities. Typically at least 90% of the Fund will be invested in the shares of global companies, with up to 10% in bonds and cash. The Fund will only invest in companies that meet defined ethical considerations and will benefit from improvements in environmental standards and a shift towards a more sustainable economic system. In normal conditions, the Fund will aim to hold a diversified portfolio, although at times the Investment Adviser may decide to hold a more concentrated portfolio, and it is possible that a substantial portion of the Fund could be invested in cash or cash equivalents. The Fund is not expected to have any exposure to derivatives (contracts whose value is linked to the expected future price movements of an underlying asset) in normal circumstances but may on occasion use them for investment, efficient portfolio management and for hedging purposes including gaining exposure to financial indices. |
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5 years or more |
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6 |
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Active |
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The Fund is considered to be actively managed in reference to MSCI USA (the "Benchmark") by virtue of the fact that it uses the Benchmark for performance comparison purposes. Some of the Fund's securities may be components of and may have similar weightings to the Benchmark. However the Benchmark is not used to define the portfolio composition of the Fund or as a performance target and the Fund may be wholly invested in securities which are not constituents of the Benchmark. |
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The Fund is a financial product subject to Article 9 of the Sustainable Finance Disclosure Regulation (SFDR). |
Notes: 1As specified in the PRIIP KID of the fund; 2SRI = Summary Risk Indicator. Please refer to the PRIIP KID for further detail on how this is calculated.
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Mar-25 |
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Liontrust GF Sustainable Future US Growth B5 Acc USD |
-3.7% |
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MSCI USA |
7.8% |
*Source: FE Analytics, as at 31.03.25, primary share class (A5), in euros, total return, net of fees and income & interest reinvested. 10 years of discrete data is not available due to the launch date of the fund.
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
- All investments will be expected to conform to our social and environmental criteria.
- 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.
