Liontrust Sustainable Future European Growth Fund

• European equities performed well as January’s DeepSeek news prompted investors to rotate away from concentrated US exposure.
• However, this rally was focused on large-caps and the Fund’s relative performance was impacted by its structural tilt towards small and mid-cap companies.
• We believe the tide is set to turn; the portfolio trades at a 23% discount to its five-year average price/earnings ratio, suggesting significant re-rating potential.

The Fund returned -0.4% over the quarter, compared with the 7.4% return from the MSCI Europe ex-UK Index and the 5.6% IA Europe ex-UK sector average (both of which are comparator benchmarks)*.

Eurozone equities posted strong gains in Q1. The rally began in January as news surrounding DeepSeek prompted investors to reassess their concentrated exposure to US large-cap stocks, triggering a rotation into other global regions, including Europe. In February, optimism rose following the German elections, where the new administration signalled a potential pivot toward pro-growth policies, with broad implications for sectors such as construction, engineering, and defence. However, this positive momentum was somewhat tempered in March as markets pulled back on renewed concerns over potential US tariffs.

Despite the broader rally in European equities, the Fund underperformed its benchmark due to its structural tilt toward small and mid-cap (SMID) growth companies. With an average market capitalisation of €48 billion, the portfolio is significantly underweight in mega and large caps and overweight in SMID caps. These segments have experienced a historic period of underperformance, exacerbated by post-Covid interest rate hikes and a prevailing risk-off sentiment amid economic and geopolitical uncertainties. Since 2022, rising rates aimed at curbing inflation have weighed heavily on “long duration” assets such as growth-oriented SMID caps – precisely the type of companies in which the Fund is positioned.

Despite persistent headwinds, we believe the tide is poised to turn. The combination of easing inflationary pressures and a potential peak in interest rates could revive investor appetite for growth and SMID caps. Currently, the portfolio trades at a 23% discount to its five-year average P/E, suggesting significant re-rating potential. This is further underpinned by strong fundamentals: consensus forecasts from Bloomberg indicate average sales growth of 10%, earnings growth of 32% for the next year, and a robust 24% average return on equity. With both valuation and earnings growth acting as dual engines, we are confident in the long-term prospects for strong performance as macroeconomic conditions normalise.

Turning to portfolio performance, Spotify Technology (+19%) was the Fund’s top performer over the period under review, driven by another strong quarter of better-than-expected subscriber growth in Q4. The Swedish streaming giant reported its first-ever annual profit, a major milestone fuelled by rising user numbers and strategic cost-cutting efforts. Monthly active users climbed to 675 million, exceeding analyst expectations, while the company added a record number of new subscribers. Paying users grew 11% year-over-year to reach 263 million, also beating forecasts.

Spotify’s profitability reflects its push to streamline operations – through layoffs and price hikes – and broaden its offerings beyond music. Its growing presence in podcasts, video, and audiobooks has helped attract a wider audience and reduce its dependence on traditional music streaming.

While Spotify primarily fits into our Encouraging sustainable leisure theme, it also contributes to resource efficiency as it has effectively dematerialised much of the physical material consumption used to listen to music such as CD players or vinyl.

DNB (+27%), Norway’s largest bank, reported a fourth-quarter net profit of NOK 9.4 billion, down from NOK 10.1 billion a year earlier but slightly ahead of analyst expectations. The bank also proposed a larger dividend increase than forecast, signalling confidence despite the earnings dip. A price target upgrade during the period further supported the share price.

With regard to its positioning within our sustainable investment themes, c. 41% of DNB’s loan book comes from providing mortgage products to individuals, and so this part of the business is exposed to our Financing housing theme. 10% of the loan exposure comes from lending to small and medium-sized businesses that drive innovation and job growth within the Norwegian economy. This part of the business is exposed to the Enabling SMEs theme.

Siemens (+17%) shares surged as strong demand for its electrification products boosted revenues, while factory automation sales showed signs of recovery. Revenue rose 3% in the three months through December, with full-year growth projected at up to 7%. Demand for electrification products, driven by US infrastructure investments in AI, offset weaknesses in factory equipment and mobility units.

Leading the detractors was German sportswear manufacturer Puma (-49%) with shares falling considerably after it warned that trade uncertainty and geopolitical tensions z weigh on 2025 sales and profits. It expects low-to-mid single-digit currency-adjusted sales growth and EBIT of €445-€525 million – impacted by €75 million in one-off efficiency costs – well below expectations and the €622 million it made last year. Weaker demand in the US and China, driven by constrained consumer budgets and new tariffs, has further dampened the near-term outlook.

We are disappointed by the progress Puma’s management team has made with the new premiumisation strategy at a time of acute consumer weakness. The CEO has since resigned and been replaced by a seasoned Adidas executive; we look forward to hearing his plans for the company and will review our long-term position with respect to this outlook.

ASM International (-25%) reported strong Q4 results, with revenue of €809 million at the top end of guidance and margins coming in a head of expectations. However, shares fell as new orders missed estimates, driven by weaker demand from China. While management reaffirmed 2025 revenue guidance of €3.2–3.6 billion, it flagged uncertainty in H2, which weighed on investor sentiment. Q1 revenue is expected at €810–850 million, slightly ahead of consensus, with a seasonal uptick anticipated in Q2.

Held under our Improving the efficiency of energy use theme, ASM is the market leader in Atomic Layer Deposition (ALD) manufacturing tools for the semiconductor industry. ALD is a critical process for customers to produce chips in a Gate-All -Around (GAA) architecture, which enables an improvement in energy efficiency of approximately 25%.

We believe the long-term growth outlook and competitive position for ASM remains intact. While the market remains volatile and a demand recovery in semiconductors is pushed out, we are confident that ASM will deliver strong profit growth in the coming years.

Novo Nordisk (-23%) extended its run of weak short-term performance into Q1, with shares posting a sharp drop following more perceived disappointing data for its next-generation diabetes and obesity drug, CagriSema. The company reported weight loss of 15.7% over 68 weeks in patients who adhered to the treatment, but this fell to 13.7% when including all participants – below the ~20% weight loss many investors had anticipated. While this trial disappointed investors, the real-world comparability with main competitor drug Mounjaro remains to be seen. Additionally, the company has a pipeline of new obesity drugs and indication trials to coming including Amycretin and the neurological EVOKE trial.

If we step back from the trial data and competition, the obesity and diabetes markets remain vast and growing, with <1% and 10% penetration respectively. This large unmet medical need provides an important runway of growth, with many improvements required on this nascent drug class.

With regards to trade activity, we initiated a position in Asker Healthcare Group, a healthcare distribution company focusing on Scandinavia and northern Europe. Added to our Providing affordable healthcare theme, the company aims to improve patient outcomes, reduce costs, and ensure a fair and sustainable supply chain. The premise behind Asker is to use its increasing scale advantage in procurement to reduce the cost of sourcing medical supplies, devices and equipment and pass part of this saving onto hospitals, GPs, care homes and other healthcare users.

We also added Dutch information services company Wolters Kluwer under our Leading ESG management theme. The company provides data for the healthcare, legal, business, tax, accounting, finance, audit, risk, compliance markets. Its services typically provide a mission critical function for its users and help them to make better decisions, remain compliant with regulations and save time.

We sold SAP after nearly a decade of ownership. The company exceed our five year price target after an incredible and rapid re-rating in the valuation of the shares. The proceeds were used to fund our new position in Asker Healthcare Group, and SAP returns to our Watchlist of potential candidates, should the valuation provide us with 10% of annualised on a five-year basis.