Liontrust Global Smaller Companies Fund

The Economic Advantage team took over management of the Liontrust Global Smaller Companies Fund on 14 January 2025.

The Fund is managed by Alex Wedge and Bobby Powar, who apply the same Economic Advantage process that has been used to manage the team’s range of UK equity funds, including the UK Smaller Companies Fund since 8 January 1998.

The Liontrust Global Smaller Companies Fund returned -8.4% in Q1, compared with the -6.8% return of the MSCI ACWI Small Cap Index and an average return of -4.5% in the IA Globalsector, its comparator benchmarks.

The Fund was transitioned to our target portfolio at the start of the quarter. The outcome is a diversified portfolio of 55 listed companies across both developed and emerging markets. The team follows a robust investment philosophy, focusing on companies with intangible assets and a consistently strong cash flow return on capital (CFROC). The investment process identifies profitable,

cash-generative businesses with enduring barriers to competition, high returns on capital, and typically low financial gearing. These are not speculative or loss-making investments, nor are they pre-revenue.

Portfolio characteristics

Our process results in a portfolio of high-quality compounders with strong balance sheets. Below data sourced from Quest/Bloomberg as at 31.03.25. Market average refers to MSCI ACWI Small Cap Index or the Quest global small cap universe.

• CFROC 14.0% vs market average 5.3%
• Gross Margin 39.4% vs market average 26.5%
• Operating margin 14.4% vs market average 7.3%
• Gearing (debt/equity) 64% vs market average 108%
• Free cash flow yield 4.4% vs market average 3.8%
• 1 year forward P/E ratio 20.3x vs market average 14.3x

Due to its investment process, the Fund has a natural tilt toward quality growth, with overweights in sectors like industrials, technology, and healthcare. It is underweight in financials, real estate and materials. The weighted average market cap of the portfolio is £3.4 billion (as of 31.03.25).

Stock example #1

Asahi Intecc is a Japanese company, founded in 1976 which originally made ultra-fine stainless steel wire rope for industrial uses. In 1994, it pivoted this skillset to medical devices, particularly guidewires and catheters. Asahi Intecc are now the leading global provider of guidewires, with more than 50% market share. Guidewires are used to treat coronary artery disease by widening arteries or veins to allow the placing of a stent, via a procedure called percutaneous transluminal coronary angioplasty (or PTCA), which is minimally invasive and therefore helps to avoid major surgical intervention. Guidewires are mission critical to these procedures though only cost between £50-100 each.

Asahi Intecc have spent 30 years honing its expertise in this niche segment, designing and manufacturing its products from materials through to testing/prototyping/production all in-house. As a result, its guidewires are able to achieve superior performance, in particular ‘torqueability’ which is essentially the ability for the physician to rotate one end of the wire and the other end to remain in place. This trait is incredibly important to catheter balloon and stent placement, and Asahi Intecc’s widespread adoption by physicians across the world is testament to their leading IP.

As expected, we like the strong IP assets that have delivered a product performance advantage, a large global distribution network and supply chain that is difficult to replicate (these are one-time-use devices so require constant replenishment purchases), and growing use cases outside cardiovascular such as peripheral arteries and neurovascular. The founding family, as well as the executive team, remain meaningful shareholders.

Stock example #2

Advanced Drainage Systems (ADS) is a US business based in Ohio, founded in 1966 and listed on the NYSE in 2014. ADS is the largest manufacturer of plastic piping for stormwater drainage and also sells onsite septic wastewater solutions. Unfortunately, the incidence of severe storms, cyclones, flooding and droughts has been increasing over the past four decades in the US, and around one third of US homes are still not connected to a sewage system. Therefore, in addition to general residential and commercial construction growth, federal policy support is another tailwind for growth of the wastewater industry. Historically, most water piping was made from concrete, steel and PVC, but increasingly ADS’s plastic piping solutions have been replacing these traditional materials, as they are lighter, more durable and often more cost effective and easier to install.

ADS has a meaningful distribution advantage versus its competitors, as it operates the largest manufacturing and distribution network in the US for these products. This means ADS can deliver products more quickly to customers, utilising its sizeable truck fleet, as well as benefitting from economies of scale in procurement as a meaningful buyer of both virgin and recycled resin (just under 60% of products are made from recycled plastic). Over the long term, ADS has consistently taken market share in its industry driven by these scale advantages, and its cash flow return on invested capital is now close to 20%. Management is long term-oriented, with just two CEOs over the past 20 years, with the current Chairman Joseph Chlapaty (who was previously CEO for 13 years) having joined the company in 1980. We like the hard-to-replicate distribution network that has delivered scale efficiencies as the business has grown, stewarded by well-regarded management who are aligned with shareholders (nearly 12% of stock owned by management, worth close to $1bn).

Performance commentary

Global equities fell in Q1, following a deluge of tariff announcements, reciprocal tariff measures, and a lack of progress in Russia-Ukraine peace negotiations. Investors are having a troublesome time pricing in the potential impact of tariffs, and therefore equity markets, led by the US, de-risked aggressively - in March particularly.

Our Economic Advantage process leads to us own high quality businesses – often market leaders (69% of the portfolio is invested in companies that have number one market share globally or in their core regions of operation), with high returns on capital well above their cost of capital, strong pricing power, healthy balance sheets, and led by management teams with exceptional track records of capital allocation. Therefore, we are confident that our companies will be able to navigate tariffs and price increases sensibly and maintain their long-term earnings power.

Our more economically sensitive stocks (financials, consumer, industrials) were weakest over the quarter, whilst outperformance was more idiosyncratic.

Largest detractors:

• Donnelly Financial Solutions (-32% total return in sterling terms) made strong progress in its software transition but gave a cautious outlook for its cyclical capital markets business for FY25. We believe the shift to higher quality earnings through software will deliver strong long-term shareholder returns, despite short-term guidance changes.
• Progress Software (-22%), which sells mission-critical IT infrastructure software which underpin, for example, major bank mortgage operations or the transfer of data from relational databases to software applications, missed earnings expectations in January. We felt the market overreacted to the near term, particularly as the underlying performance of the company remains robust, so we added to the position.
• Interparfums (-17%). This company has been stewarded exceptionally over more than 25 years by its two co-founders, signing exclusive deals with luxury brands to develop their fragrance products and then marketing and distributing them across its extensive global network. Fragrance has been a relatively robust category over the past few years amidst a global beauty industry slowdown, and the long-term dynamics remain compelling – particularly adoption in Asia and the ‘wardrobe effect’ as more consumers own multiple fragrances to suit a variety of different occasions. However, as a globally diversified business importing and exporting across many regions, tariffs will be impactful and the CEO pointed to price increases during an interview on Bloomberg more recently. The stock sold off in March and on standard multiples such as price/earnings and EV/EBITDA trades at a decade-low valuation.
  
  

Top contributors:

• OSI Systems (+16%) reported strong quarterly results driven by its security systems business, which is benefitting from increased security spend at the US border. 
• Aris Water Solutions (+11%) reported strong quarterly results and slightly raised its guidance. The company has a network of approximately 790 miles of pipeline for water services to companies in Texas, enabling oil companies to save costs compared to trucking options for water handling and recycling. Along with the operating results, it announced the acquisition of the McNeill ranch for $45 million, which offers additional growth opportunities.
• Ryan Specialty (+5%) reported a healthy set of quarterly numbers, delivering double digit organic growth as insurance markets remain robust in the context of an elevated risk environment over the past several years (driven by increased climate, social, health and cybersecurity risks). Also, as a major specialty insurance broker Ryan Specialty is seen as somewhat of a ‘safe haven’ stock, as companies and individuals are unlikely to cancel their insurance policies even in a recession – and therefore benefitted during the recent sell-off.

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

* Source: FE Analytics, as at 31.03.25, total return, net of fees and income reinvested. The current fund managers’ inception date is 14.01.25.

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.

The Funds managed by the Economic Advantage team:

• May invest in smaller companies and may invest a small proportion (less than 10%) in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, a fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause a fund to defer or suspend redemptions of its shares. 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.
• 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.
• May invest in companies predominantly in a single country which maybe subject to greater political, social and economic risks which could result in greater volatility than investments in more broadly diversified funds.
• Outside of normal conditions, 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.

The risks detailed above are reflective of the full range of Funds managed by the Economic Advantage team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.

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.com 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.