Liontrust Special Situations Fund

• Ongoing macroeconomic and geopolitical uncertainty fuels investor risk aversion and weak sentiment towards mid and small caps.
• Defensive, large-cap names lead quarterly contributors, followed by strong gains in small cap holdings Everplay, Fevertree Drinks and Mortgage Advice Bureau.
• Many high quality but out-of-favour businesses – particularly in the small cap space – now trade at extreme low valuations, representing a latent source of pent-up value which will be released when sentiment turns.

The Liontrust Special Situations Fund returned -4.9%* in Q1. The FTSE All-Share Index comparator benchmark returned 4.5% and the average return in the IA UK All Companies sector, also a comparator benchmark, was 0.2%.

Mounting geopolitical instability and uncertainty over US trade tariffs defined the market environment in Q1.

President Trump’s approach to the Ukrainian conflict included calling for a swift end to the war, criticising President Zelensky and indicating an unwillingness to continue financial and military assistance. As a result, investors factored in higher expectations of military spending in Europe from governments attempting to fill the void and deter Russian aggression – leading to a sharp rally in defence sector stocks.

At the same time, investors struggled to price in the impact of Trump’s trade tariff threats. While it initially seemed that the threatened levies could be negotiating tools to win concessions from trade partners, Trump showed little sign of backtracking ahead of his promise of a further batch of reciprocal tariffs in early April – prompting significant investor nervousness.

In this environment, large-caps and defensive areas held up best. Beneath the FTSE All-Share’s solid quarterly gain is substantial variation in returns to different size segments. While the FTSE 100 was up 6.1%, both the FTSE 250 and FTSE AIM All-Share lost around 5%.

Due to the Fund’s long-term high-conviction overweight position in mid and small cap stocks versus the FTSE All Share Index, this trend was a drag on relative performance

As the managers have stated on a number of occasions, this underperformance of mid and small caps – driven itself by risk aversion stemming from macro events – has opened an opportunity to invest in these companies at generational valuation lows.

The portfolio also exhibits a strong bias towards the quality style factor as a result of the investment process, which targets companies with enduring competitive advantage stemming from intangible asset strengths, resulting in high cash flow returns on capital. However, value style characteristics outperformed quality and growth in the quarter.: the MSCI UK Value Index rose 7.5% and the MSCI UK Growth Index returned 5.0%, compared with the MSCI UK Quality Index’s 2.9% return.

Within the traditional value sectors, banks extended their run of very strong performance, a trend worth highlighting given  the portfolio has zero exposure to the sector. The FTSE All Share banks sub-sector delivered a gain of 16%. The managers remain convinced of the view that banking stocks – with their high business model exposure to factors such as interest rates, which are beyond their direct control, as well as substantial regulatory pressures and competitive threats from innovative fintech start-ups – are unattractive compounders of capital over the long run.

While recent market trends have been tough for relative portfolio performance, there is mounting potential for outperformance from some of the more unloved areas of the market as and when sentiment recovers and valuations revert towards long-term averages.

During Q1, one of the portfolio exposures to see depressed sentiment and share price de-rating was its sizeable allocation to industrials.

This area of the market has historically provided fertile conditions for the application of the Economic Advantage process due to the large numbers of IP-rich engineers with global distribution networks. However, the inherent cyclicality of these businesses has weighed on share prices so far this year as confidence in the resilience of the global macroeconomic backdrop wavered.

Countering this, the portfolio experienced strength in its more defensive, large-cap names such as global pharma groups AstraZeneca (+9.1%) and GSK (+9.8%) and energy giants Shell (+15%) and BP (+13%).

Newsflow among this cohort of stocks was also largely supportive. For example, AstraZeneca recorded 25% constant currency growth in Q4 sales to take its 2024 total to over $ 54 billion – up by 21%. The performance was ahead of consensus expectations, driven by a 41% expansion in oncology sales. For 2025, AstraZeneca expects a high single-digit percentage increase in revenues, with earnings per share rising by a low double-digit percentage.

Shell saw a positive investor response to its new strategic goals unveiled at a capital markets day. While the energy giant will look to generate growth through a focus on its liquified natural gas division – seeking 3% to 5% annual growth through to 2030 – it is also stepping up its focus on cost control, lowering capex and raising its structural cost cutting targets. As a result, it expects free cash flow to rise at over 10% a year through to 2030. Shell also announced that a greater proportion of cash flow will be returned to shareholders via share buybacks and dividends – 40% to 50% of cash flow from operations, up from 30% to 40% previously. 

Big Technologies (-47%) was the largest faller on news, as reported by the company on 31 March 2025, that its CEO and founder, Sara Murray, has been dismissed by the company over concerns around her conduct during the legal case brought by a small number of former shareholders in its Buddi subsidiary. The company announced that it has concluded that Murray, who personally holds around 27% of Big Technologies’ share capital, failed to disclose interests in four entities with substantial shareholdings in the company at the time of the company’s IPO and subsequently. Big Technologies has issued legal proceedings of its own against Murray. The company commented that current trading is in line with market expectations, and it has a robust balance sheet position of £101.1 million of net cash as at the end of February.

The largest quarterly riser was everplay group (+26%), formerly Team17. It rallied following a full-year trading update indicating that both revenue and adjusted EBITDA are expected to slightly exceed market expectations. The video game specialist, which also announced its rebrand, noted that strong performance in the second half of the year was driven by robust sales from new releases and a solid back catalogue, with momentum continuing into January after a strong Christmas trading period. At the end of last year, we spoke with everplay’s founder Debbie Bestwick MBE as part of our Stock Exchanges podcast series.

Fevertree Drinks (+20%) released 2024 results which showed revenue growth acceleration to 7% in the second half of the year, taking the 12-month rate to 4% – healthy growth against what the company describes as a subdued consumer environment. It also announced a strategic partnership with Molson Coors, which should accelerate US growth. Fevertree has maintained 2025 guidance – low-single digit revenue growth – in what it sees as a transitional year ahead of stronger medium-term growth. To hear more about Fevertree’s rapid growth and future prospects, listen to our conversation with CEO Tim Warrilow.

Intellectual property support services provider RWS Holdings (-31%) gave back last quarter’s gains. Following a tough 2024, RWS has been confident in its ability to integrate AI into its portfolio of services, and full-year results show these products contributing to a return to growth in the second half of the year. Organic constant currency (OCC) revenue growth in the second six months was 2%, resulting in a flat performance for the year as a whole. Within this, around 25% of revenue came from AI-related services such as TrainAI and Language Weaver, a category which grew at 7% in OCC terms over the year.

GlobalData (-21%) also lost ground despite announcing 2024 results which were largely in line with expectations. Last month GlobalData announced a £50 million share buyback programme and its intention to move from the junior AIM market to the London Stock Exchange’s Main Market in order to access a larger pool of potential investors. In the short term, an overhang from inheritance tax (IHT) investors may weigh on the shares due to the fact that tax relief status is lost when the shares move to the main market. However, following the move (expected to occur in the second quarter of the year), greater liquidity and investor interest is likely to catalyse a reversal of this dynamic, particularly as the company’s size is likely to earn it a place in the FTSE250 index at the next rebalance.

Similar dynamics affected Gamma Communications (-21%), the provider of cloud-based enterprise communications, which is also set to complete a move from the AIM market to the London Stock Exchange Main Market in Q2 of this year, a move befitting its size (current market cap over £1 billion). Gamma, too, is likely to enter the FTSE250 index.

Within the quarter, Gamma announced a €165 million cash acquisition of Starface, a company specialising in proprietary business communication and collaboration software for small and medium-sized enterprises (SMEs) in Germany. Starface boasts a nationwide distribution network with over 2,000 channel partners, which Gamma intends to leverage to expand its SME presence in this key market. Additionally, Gamma confirmed that it anticipates its financial performance to meet market expectations, reflecting strong year-on-year growth for the year ending 31 December 2024, driven by organic expansion and strategic acquisitions.

Positive contributors included:

Everplay Group (+26%), Mortgage Advice Bureau (+23%), Fevertree Drinks (+20%), Shell (+15%) and BP (+13%).

Negative contributors included:

Big Technologies (-47%), RWS Holdings (-31%), Midwich Group (-29%), GlobalData (-21%), and Gamma Communications (-19%).

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

*Source: Financial Express, as at 31.03.25, total return (net of fees and income reinvested), bid-to-bid, institutional class. **Source: Financial Express, as at 31.03.25, total return (net of fees and income reinvested), bid-to-bid, primary class.

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.

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DISCLAIMER

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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.

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