Liontrust India Fund

• India continued to sell-off in the opening months of 2025, though under the surface there was more volatility than seen at the headline level. A rotation out of mid and small-caps and economically sensitive sectors and into defensive and laggard stocks saw certain sectors suffer torrid market conditions.

• The Fund made several changes through the quarter in order to reflect the new market realities, which in India meant reducing mid-cap exposure in general.

• The outlook for Indian markets, on both an absolute and relative basis remains extremely compelling, particularly after the recent pullback.

Over the quarter, the Liontrust India Fund returned -11.2%*, versus the MSCI India Index return of -5.8% and the -9.2% average return in the IA India sector (both of which are comparator benchmarks).

The first quarter of 2025 was marked by notable volatility – with not only significant equity market gyrations, but also questioning of long-term structural investment themes, which led to significant shifts in markets. Clearly, the most notable driver of returns through the quarter was the inauguration of Donald Trump for his second term as US President at the turn of the year, which led to considerable policy uncertainty. His first day in office saw the announcement of multiple trade reviews, due to report at the beginning of the second quarter. In the meantime, Canada, Mexico and China were hit with initial tariffs on 1 February, with additional tariffs added for China mere days later, and subsequent back and forth between various reprieves and retaliations. Ultimately, markets struggled to keep up with the ongoing barrage of announcements and retaliatory threats, with the potential impact and uncertain outcome of the forthcoming trade reviews weighing on global sentiment. Doubts over supposed US exceptionalism were heightened due to softening economic data out of the US and rapidly falling consumer confidence as price expectations rose, leading to stagflationary concerns. Outside of the US markets the main impact of these developments were the significant depreciation of the US dollar – very unusual given that every correction in US markets has seen the dollar rise (or at a minimum hold its value) – and volatility in the US Treasury market, where yields fell alongside weakening growth expectations. The combination of lower global cost of capital and US dollar weakness was a helpful tailwind for ex-US markets.

Indian markets, however, took a rather different path through the quarter. Having pulled back during the final quarter of 2024, India continued to sell-off in the opening months of 2025, though under the surface there was more volatility than seen at the headline level. Specifically, a rotation out of mid and small-caps and away from economically sensitive sectors and into defensive and laggard stocks saw certain sectors suffer torrid market conditions. The context for the weaker market was both internal and external. In domestic terms, growth has been incrementally slower over the last six months as the effects of extreme weather last year, as well as the upheaval of the general election, weighed on output. Coupled with relatively extended valuations, especially in the small and mid-cap sectors, India took something of a breather. This was further accentuated by the abrupt policy shift seen in China, which has attracted capital that was previously seeking safe havens (such as India). The same was true on a global scale, with sentiment early in the year gravitating towards a more benign tariff scenario, under which investors shifted assets towards more cyclical and value-centric markets, such as in Latin America and Europe. For the quarter, India returned -5.8% in sterling terms, lagging emerging markets in general (-0.1%), but nonetheless managing to outperform the S&P 500 (-7.2%).

The Fund enjoyed an extremely strong fourth quarter of 2024, outpacing the index by more than 7%; as such, a number of positions that had contributed significant positive returns in that quarter saw notable profit taking in the first quarter of this year, hurting relative performance. Taking the two quarters together, the Fund returned -9.2% over the six-month period against an index return of -10.6%.

The biggest individual negative stock impacts to performance came from KFin Technologies and Newgen Software, which (as mentioned above) were stand-out positive performers in the previous quarter. The market sold off hardest in the mid-cap sector, so the Fund's overweight to that area saw a significant performance drag. The Fund made several changes through the quarter in order to reflect the new market realities – which in India meant reducing mid-cap exposure in general.

In sector terms, the Fund continued to add to Financials, an area where valuation support remains the most compelling, especially in the large-cap private sector banks. The weights to HDFC Bank and ICICI Bank were increased further, whilst investments were also initiated in non-bank financial service providers Bajaj Finance, Cholamandalam and Shriram Finance. The asset quality issues that had bedevilled the industry in recent quarters have since abated, and with an interest rate cut cycle beginning, we expect to see improving growth in lending. The other significant sector shift was to reduce exposure in the IT services space, which remains heavily exposed to US economic growth dynamics and also to the US dollar, which dominates the revenue profile of most Indian service providers. With US growth increasingly coming into question and the dollar weakening (highly unusual in periods of equity market corrections), the revenue outlook for this sector has become more challenging.

We believe the outlook for Indian markets, on both an absolute and relative basis remains extremely compelling, particularly after the recent pullback. India's trade surplus with the US (1.2% of GDP) is much lower in comparison to most emerging market counterparts and – whilst Indian reciprocal tariffs are high at 26%, they are still lower than for larger Asian competitor markets, allowing India to continue to take market share from the likes of China and Taiwan. Lower oil prices are beneficial for India given India's status as a large energy importer, thus slower global growth can see a lower import bill through the commodity channel, as well as India's economy being a relative outperformer given its domestically driven nature. With the central bank shifting its liquidity stance to "accommodative" from "neutral" and further rate cuts to come, India is well placed to resume its strong growth path – indeed, recent economic data has shown a clear improvement from the recent soft patch. The recent sell-off has left funds positioned lightly in India and we believe that foreigners will return to this market, which in turn is likely to support large-caps and private sector banks first and foremost. Indeed, after the market turmoil in response to the so-called Liberation Day, India was the first major equity market to recoup all of second quarter losses, showing that in an uncertain world, the visibility of India's growth outperformance remains a highly attractive proposition.

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

 *Source: FE Analytics, as at 31.03.25, primary share class, total return, net of fees and income reinvested. 

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. 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. 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. Investments in emerging markets may involve a higher element of risk due to less well-regulated markets and political and economic instability. This may result in higher volatility and larger drops in the value of the fund over the short term. 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. ESG Risk: In reference to any component (where applicable) of a fund's investment process that uses external ESG data, there may be limitations to the availability, completeness or accuracy of ESG information from third-party providers, or inconsistencies in the consideration of ESG factors across different third party data providers, given the evolving nature of ESG. There is no guarantee that an absolute return will be generated over a three year time period or within another time period.

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