Liontrust UK Growth Fund

• Large-caps and defensive areas of the market outperform as macroeconomic uncertainties remain heightened.
• BAE Systems – the portfolio’s largest overweight position – rallied alongside the wider sector on outlook for higher military spending in Europe.
• Amid weakness in cyclicals, Spectris and Spirax Group fell.

The Liontrust UK Growth Fund returned -2.9%* in March. The FTSE All-Share Index comparator benchmark returned -2.2% and the average return in the IA UK All Companies sector, also a comparator benchmark, was -3.3%.

A subdued market environment persisted in March as Donald Trump showed little sign of backtracking on his promise of a further batch of reciprocal tariffs in early April and geopolitical tensions surrounding the Ukraine conflict remained elevated. European markets continued their year-to-date outperformance of the US – a reversal of prior years’ established trend – as Germany’s plans to expand borrowing and unleash hundreds of billions of investment in defence and infrastructure promised a large fiscal boost to the region.

On the UK market, defensive areas such as telecoms and utilities held up best, while more cyclical areas like consumer discretionary, industrials and financials found themselves in negative territory. The FTSE 250 mid-cap segment’s underperformance of large-caps was extended – down 3.9% compared to a 2.0% fall for the FTSE 100 – as it was for the FTSE AIM All-Share index, which returned -3.0%.

For the year to date there is now a conspicuous gap between the performance of the FTSE 100 – up 6.1% - and of companies further down the market cap scale, with both the FTSE 250 and FTSE AIM All-Share losing around 5%. As the managers have stated on a number of occasions, this relative performance trend – driven itself by risk aversion stemming from macro events – has opened an opportunity to invest in small and mid cap companies at valuations which are at generational lows.

For a second consecutive month, BAE Systems (+11%) was the top portfolio riser as defence stocks continue to price in an era of structurally higher military spending in Europe. BAE is one of the Fund’s largest overweight positions versus the index.

Amid cyclical weakness, the portfolio’s holdings in industrial engineers Spectris (-19%) and Spirax Group (-15%) were affected.

Spectris shares fell during 2024 as demand softened, particularly from China. Having managed investor expectations lower through the year, Spectris prompted a brief share price rally in January as it commented that 2024 profit would be ahead of consensus expectations.

However, these gains were given back in March following the publication of full 2024 results on the last day of February. While the 2024 performance was largely in line with recent company guidance, there wasn’t sufficient positive outlook comment to sustain share price momentum. Sales for the year were 7% lower, with operating profit dropping 20%. While Spectris saw some signs of demand improvement in the final quarter, it stated that it is too early to predict a sustained recovery in end markets. Faced with a subdued demand outlook, the company is focusing on cost base rationalisation in order to return to profit growth in 2025.

Spirax Group, the specialist in niche industrial and commercial steam systems, released 2024 results showing 4% organic revenue growth – an outperformance of global industrial production, which was weaker than expected at 1.7%. However, adverse exchange rate movements had an impact on both sales and profits during the year; a five percentage point sales impact pushed reported growth to -1%. As an industrial engineering group, Spirax’s long-term growth path remains subject to shorter-term cyclical fluctuations in demand. Spirax is cautious on the outlook for industrial production, with Chinese demand expected to remain weak, although it expects to maintain a similar level of organic growth in 2025.

For outsourced procurement and distributor of everyday items, Bunzl (-12%), a lack of fresh catalysts allowed its shares to slide. Results for 2024 were in-line with expectations – with flat underlying revenues and profit growth driven by margin improvement – and 2025 guidance was unchanged.

By contrast, Shell (+7.2%) 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.

Although WH Smith (-13%) shares rallied in January on confirmation that it was exploring a sale of its High Street division, the transaction subsequently announced in March fell slightly short of investor hopes. It will sell 480 stores to Modella Capital for a cash consideration of up to £52 million, from which net cash proceeds of £25 million are expected following transaction and separation costs. Private equity investor Modella already owns the Hobbycraft retail chain and will rebrand WH Smith’s high street stores to TGJones.

The transaction leaves WH Smith focused solely on its faster-growing Travel division comprising stores in transport hubs such as airports and train stations. With over 1,200 Travel stores across 32 countries, the business retains the distribution network strengths which we believe provide a valuable barrier to competition.

Indivior (+3.7%) regained some ground after last month’s slide, potentially showing some signs that activist investor Oaktree Capital Management’s strategic intervention could be giving investors greater confidence in the investment outlook. Oaktree has prompted a strategic refocusing around Indivior’s core opioid use disorder (OUD) products and pipeline assets, as well as significant board and executive management change. Having changed its Chair and CEO in recent months, the company announced in March that its Board will be further overhauled this year, trimming down to seven directors at its upcoming AGM before an eighth will be appointed subject to Oaktree approval.

British American Tobacco exited the portfolio in March. The managers believe that over time, the company’s competitive advantage is likely to be eroded as it executes a business shift from legacy combustible products towards smokeless products such as vapes, where competition from areas such as China is fierce. The position has been actively sold down in recent months as the stock’s extreme undervaluation versus peers reduced over 2024.

Positive contributors included:

BAE Systems (+11%), Shell (+7.2%), Indivior (+3.7%), Unilever (+2.7%) and British American Tobacco (+2.5%)

Negative contributors included:

Spectris (-19%), Future (-19%), Spirax Group (-15%), WH Smith (-13%) and Bunzl (-12%).

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.

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.