Liontrust Sustainable Future Managed Fund

• Market performance was dominated by anticipated policy shifts under the incoming Trump administration, with equities moving sharply lower from late February.
• Bond allocation’s overweight UK duration was a slight headwind as yields moved up, but the position is maintained as we expect greater economic weakness than is priced in.
• Strategic asset allocation was adjusted in early March to increase cash and reduce both equity and corporate bond exposure.

The Liontrust Sustainable Future Managed Fund returned -4.8% over the quarter, versus the -1.2% IA Mixed Investment 40-85% Shares sector average (the comparator benchmark)*.

Market review

We started the year strongly, delivering strong absolute and relative returns. However, the first quarter of the year concluded with a sharp shift in equity market direction in late February, driven by escalating geopolitical tensions and increasing concerns surrounding consumer confidence. This shift led to a broad-based equity sell-off, with a notable rotation into more defensive sectors.

Our portfolio's underweight position in the so-called “Magnificent Seven” proved advantageous during this period of market weakness. These stocks, along with other large-cap technology names, experienced substantial declines, and our limited exposure helped mitigate losses.

However, our overweight allocation to small and mid-cap equities was a key detractor from performance, as this segment of the market came under considerable pressure given potential recessionary concerns. This positioning aligned with broader market trends that saw mid-cap equities lagging their large-cap counterparts

Within our equity portfolios, we maintain a bias towards mid-cap companies that are aligned with our Sustainable Investment themes and are delivering growth in line with these objectives. However, in the context of the recent market environment, fixed income assets – although generating positive absolute returns – were unable to fully offset the declines in equities. This led to negative absolute returns for the first quarter overall.

Fixed income

This year has already witnessed a dramatic surge in global policy shifts, driven by complex geopolitical dynamics and unforeseen international developments. The new administration in the US kicked off their policy agenda which has led to a rapid reassessment of global security alliances and fears over the global growth backdrop. Ambiguity surrounding policy has affected both business and consumer confidence, heightening concerns over higher-risk asset classes.

The quarter began with a coordinated sell-off in global fixed income markets, a move which started in November after President Trump's election, and partly attributable to firm economic data in the United States, along with expectations of increased inflation resulting from the proposed policy agenda. Volatility rose as the quarter progressed with numerous tariff announcements and proposals. There was a significant outperformance by US treasuries, particularly towards the end of the quarter, as uncertainty over tariffs further drove recessionary fears and a growing risk-off move. The US 10-year yield fell nearly 40 basis points over the period, while concerns over stagflation linger given the tariff uncertainty. The Conference Board’s consumer confidence measure fell to the weakest level since January 2021 in March, while measures of inflation expectations have moved significantly higher amid the tariff backdrop.

Keeping with recent tradition, the UK has followed much of the US moves. Some differentiation arrived via the Spring Statement, however. Chancellor Reeves was able to rebuild fiscal headroom to same level as the October statement’s level, which had been wiped out by rising gilt yields and weaker GDP growth. Savings were achieved by cutting welfare spending, backloading savings on other expenditure, and a reallocation to defence spending which flatters the narrow ‘fiscal rules’ interpretation of the public finances. Markets responded positively to a revised gilt remit for FY 2025-26, coming in just under £300 billion, with a shift in issuance away from longer-dated bonds causing the curve to flatten. Despite this, risks to fiscal policy and its impact on GDP growth remain. The OBR projects 1% growth for 2025 but the longer-term assumptions seem optimistic at best. Productivity rebounding from 0.3% to 1.0% seems unlikely, while no potential tariff increases were included in the base case in spite of White House rhetoric. Full tariff implementation could reduce UK GDP by up to 1% according to the OBR, negating the entire projected current budget surplus for 2029-30 in their own estimations. Given this uncertainty, it is worth noting that the likelihood assigned to the government achieving a current budget surplus by the forecast's end sits at only 54%. The outlook points to further fiscal consolidation being needed in the future, the form of which we will need to wait to see.

The Eurozone also moved in response to the US administration’s policy agenda, particularly with regard to confrontational foreign policy. This includes proposals from European Commission President Ursula von der Leyen for €800 billion on defence spending at the European level. More radically, in Germany, proposals to ease the ‘debt brake’ for defence spending and a new €500 billion infrastructure spending plan caught markets by surprise in March. 10-year Bund yields rose by 30 basis points on the day in response, their largest rise since German reunification. The infrastructure spending in particular is likely to have a positive multiplier, increasing growth and jobs but also increasing inflation. Germany has had decades of restrained fiscal policy and so is in a unique position to be able to implement such measures. The European Central Bank validated the prospect of further stimulus, with the bank’s President Lagarde praising the approach in the last meeting. Otherwise, the bank has progressed as expected. Interest rates were cut twice over the quarter, with a further 60 priced in by the end of the year.

Given the circumstances, investors are looking for insulated assets in which to invest their capital. While tariffs have the potential to temper earnings, many corporates are entering this uncertain period from a solid base, with many having termed out debt while interest rates were low. Corporate bonds have often outperformed in stagflationary environments, which is becoming ever more likely with each geopolitical development.

Changes to our strategic asset allocation

In early March, we made a strategic decision to adjust our asset allocation across the Managed fund range. We reduced exposure to both equities and corporate bonds, while increasing our holdings in cash. This repositioning was implemented to reflect the heightened uncertainty in the macroeconomic and geopolitical outlook and has helped to partially mitigate the impact of the equity market downturn.

Equity performance

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. This has been a rewarding position as we have held the shares for approaching five years now, and experienced a significant drawdown following the pandemic before the shares started to perform.

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.

American Tower (+15%), a leading provider of wireless communications and broadcast infrastructure, delivered strong fourth-quarter results, while management also provided an encouraging outlook, anticipating stable revenue from the U.S. and Canadian operations, driven by resilient data consumption trends. The shares also benefitted from a market sentiment shift towards more defensive companies, given the recurring nature of its revenue streams. As a result, American Tower experienced a re-rating.

VeriSign (+15%), the company that ensures .com websites are running 24/7, also had a strong quarter. After experiencing a period of falling websites using the .com domains in recent years, the company appears to have bucked this trend so far this year, having returned to growth. Similar to American Tower, VeriSign is a highly defensive asset with recurring revenues and contractual price escalators.

Alphabet (-21%) was among the portfolio’s top detractors in the first quarter, with its shares declining, we believe, for two main reasons. Firstly, the company missed expectations in terms of growth in its Cloud business, and secondly the company announced a big step up in capex guidance for 2025.

The broader market backdrop further compounded performance challenges for Alphabet. The first quarter of 2025 presented a difficult environment for the ‘Magnificent Seven’ stocks, shaped by trade policy shifts, persistent inflation, and sector-specific concerns – particularly around the pace and profitability of AI investment. These headwinds weighed on mega-cap tech names overall. Within this group, we hold positions in only Alphabet and Microsoft (-13%), which also had a weak quarter. After two years of highly concentrated returns in the index, we think it is healthy that there are signs of the market broadening out.

Alphabet is exposed to our Providing Education theme and scores a B3 on our sustainability matrix. It’s an unusual case, as we typically take a dim view of advertising – Alphabet’s primary revenue source via Google Search. However, by aggregating the world’s information, Alphabet’s core business provides free access to knowledge. Users can learn virtually anything through Google Search and YouTube – something once limited to the wealthy with access to libraries and top educators. We therefore see clear net societal benefits, justifying a B product rating.

Microsoft is exposed to our Better resource efficiency theme and scores a B1 on the sustainability matrix. Around a third of its revenue comes from the Productivity and Business Process division – mainly Microsoft Office – which scores a B, as it clearly improves efficiency. About 40% comes from the Intelligent Cloud division, which provides scalable, cost-effective computing power and cybersecurity solutions, enhancing operational efficiency for businesses.

PayPal’s (-26%) shares declined sharply following the release of its fourth-quarter results. Although they beat market expectations, they disappointed on guidance. At the end of February, PayPal also had its first investor day under the new management team and announced some ambitious targets. Given the share price reaction and the current valuation, it is safe to say that the market is not giving it any benefit of the doubt here. We also believe the shares sold off with the general shift towards more defensive assets, given the discretionary nature of PayPal’s business.

Fixed income performance

We started the quarter with an overall duration positioning of 0.75 years overweight relative to the benchmark, a slight headwind in the face of gilt yields moving around 10 basis points higher over the quarter

However, we maintain our overall duration position as we believe weakness in the UK economy will feed through and contribute to falling rates faster than the market expects.

Looking at credit, we remain reasonably constructive on the outlook for corporate bonds based on attractive all-in yields and the carry from spread currently on offer.

However, we are cognisant of the tightening we have seen over from the wides over the last couple of years as well as the moderation of overall credit fundamentals, such as interest cover metrics. As such, we have been taking opportunities to increase credit quality and reduce spread duration.

We think that corporate credit performance from here will be driven by selection, an area which has been positive for the portfolio over recent years.

Trade activity

During the quarter, we initiated a new position in Becton Dickinson, a c.$60 billion market capitalisation business in the healthcare sector, listed in the United States. The company’s products enhance medication management, patient safety, infection prevention, surgical procedures, drug delivery, anaesthesiology care, disease diagnosis, and cellular research. Becton Dickinson is committed to providing high-quality products at very low cost, which aligns well with the shift towards value-based care, given its emphasis on safety, efficiency, and infection prevention. These low-cost items are used daily to such an extent that, without them, modern medicine could not be practised. Approximately 61% of revenues are exposed to the theme of Enabling innovation in healthcare, while 39% are aligned with Providing affordable healthcare.

After five years of a flat share price, sentiment has deteriorated. Ten years ago, the company traded at a premium to the MSCI World, S&P 500, and the US Healthcare Index. Fast forward to today, and it now trades at a discount to all three. To summarise why we believe this has happened: the company’s earnings have not grown meaningfully for around five years. In my view, this has been largely due to capital allocation decisions. However, we believe this has created an excellent entry point into a business that should grow organically at mid-single digits, with earnings per share expected to increase close to double digits. We acquired the shares at just 15x earnings.

Given Becton Dickinson’s defensive characteristics and the competition for capital within the Fund, we decided to exit our longstanding holding in Roche to finance the purchase. Roche is a Swiss pharmaceutical company that faces significant patent-cliff risks in the coming years. We concluded that our capital would be better utilised in Becton Dickinson. We sold our Roche shares at a multi-year high, driven by enthusiasm surrounding its investments in a new GLP-1 drug – the success of which presents a clear risk in exiting the position today.

Avanza is a company we first purchased in the funds during the summer of 2020. It is aligned with our Saving for the future theme by providing a low-cost platform for individuals to manage their savings. We have been gradually exiting our position in Avanza, as rising markets and high interest rates in Sweden have cyclically boosted its earnings. We are also cautious due to the level of management turnover observed over the past 12 months.

We also added Howden Joinery, the UK’s largest kitchen manufacturer with a vertically integrated trade-only business model. They have over 800 depots across the UK and account for over 40% of kitchen installation. Exposed to our Leading ESG management theme, Howden uses its scale advantages to drive sustainability in the supply chain in terms of timber, and have industry leading employee and customer satisfaction rates. The company provides an example to others in the consumer sector in terms of managing its ESG impacts.

We also initiated a new position in US-listed IDEXX Laboratories, a $30 billion market cap company that dominates the animal diagnostics market. It offers diagnostic testing equipment, reference laboratories, consumables for these instruments, and the software that integrates all these products for veterinary clinics. IDEXX’s technology enables vets to better diagnose and treat pet health issues, which aligns with our Healthier lifestyles theme. Pet ownership is directly linked to improved physical and mental health through increased exercise, social connections, and emotional bonds. IDEXX is a technology leader with strong growth, high returns, and a long runway for expansion over the next decade. The shares have underperformed in recent years due to what we believe is a cyclical slowdown in veterinary visits. We expect this to recover as the large number of pets adopted during the pandemic begin to age.

To fund our investment in IDEXX, we exited our remaining position in simulation software provider Ansys. Ansys is a high-quality business and an excellent fit for our investment process, but in January 2024, Synopsys announced its acquisition. The deal was a combination of cash and Synopsys shares, and we sold our holding when the Ansys share price reflected an approximate 8-9% discount to the deal value. The transaction is expected to complete in the first half of this year; however, there remains a non-zero probability that China’s competition authority could block it. Given the current geopolitical climate, we decided to exit at a small discount to the deal price.

Lastly, we sold GSK, driven by the availability of more compelling opportunities elsewhere in the portfolio and the company’s persistent long-term underperformance.