The Liontrust GF Sustainable Future US Growth Fund faced headwinds in 2024 due to extreme market concentration of US returns in a few mega-cap stocks. The team remains committed to structural growth themes, particularly among mid-caps where they are finding lots of opportunities and believe relative performance is due a reversion.
Chris [00:00:13] The Liontrust GF Sustainable Future US Growth Fund returned negative 0.6% in US dollar terms in Q4. This is compared with a 2 7% return from the MSCI USA Index. Now this topped off a disappointing year for the portfolio, which although it posted a positive return of 10.7%, it lagged the MSCI US Index by 13 9%. Since launch in July 2023, the portfolio has risen 24% compared to the MSCI USA index of 36 4%, with the underperformance primarily stemming from 2024. Now, benchmark returns in 2024 remained heavily concentrated in a few mega-cap names, resulting in one of the most concentrated periods in market history. The US market, which now represents 74% of the MSCI World, despite accounting for only 26% of global GDP, saw significantly reduced breadth. Typically, about half of US stocks outperform the S&P 500 index in a given year, but this figure was less than one third in both 2024 and 2023. Such limited market breadth has only occurred twice in the past 70 years. And this was in 1998 and 1999, during the late 1990s tech bubble of course. More than half of the S&P 500's approximate 25% return in 2024 was driven by just seven stocks, the 'Magnificent Seven', of which we hold just two, Microsoft and Alphabet. Remarkably, Nvidia alone contributed around 20% of the index's total returns for the year, and not owning this name was a major drag on the relative performance of the strategy. Now this has left the benchmark in a rather concentrated state with the top 10 holdings representing 37% of the entire index. One might suggest that the benchmark is now starting to resemble the concentration of an actively managed fund.
Simon [00:02:21] One theme we are particularly excited about now is 'Improving the Management of Water'. Water shortages are a huge problem across the globe and none more so than in the US, the world's largest economy. US water infrastructure is made up of more than two million miles of underground pipes which need upgrading. The average age of this infrastructure is 45 years and the US loses $2 trillion gallons of water a year, which is around 15% of total drinking water which is treated. Core & Main is a new idea in the Funds, and they're the leading distributor of pipes, valves and fittings to help control the flow of water. Increasingly, they are also distributing technology such as digital metres, which help ensure leakages are minimised. The structural driver of their growth remains very strong, but the cyclical exposure they have has translated to weaker near-term earnings, as a lot of water infrastructure tends to be upgraded when tied to construction projects which have been really depressed over the past 12 months. We expect these markets to recover into 2025 as the new Trump administration enacts policies which aim to stimulate growth in both residential and non-residential construction. We see the combination of cyclical and structural tailwinds. as a powerful driver for the Core & Main stock as we enter 2025. 'Improving the Management of Water' is a theme which we continue to find great ideas in. The combination of structural growth and high-quality companies which can deliver solutions to the acute problems of widespread water shortages across the US economy.
Chris [00:04:15] Our focus on sustainability and identifying companies that are exposed to structural growth trends, such as the global push for a cleaner, healthier, and safer society naturally steers us away from these mega-caps and towards a strong, small, and mid-cap bias. This bias clearly hurt the relative performance of the strategy in 2024. But there are positive signs so far in 2025 to suggest that this cannot continue forever. And in the long run, it is the mid-caps that have delivered the best returns in the United States. We strengthened the portfolio throughout the year by adding innovative names within healthcare, such as West Pharmaceutical and IRadimed, and in technology through the additions of KLA, ServiceNow, and Broadcom, and in industrials in Core & Main. And the link between all of these companies is that they each provide useful products to society, driving our conviction that they will experience strong demand for their products in the coming years. As such, we believe the portfolio is well positioned for 2025 and beyond.
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.
The Funds managed by the Sustainable Future Team:
- Are expected to conform to our social and environmental criteria.
- May hold overseas investments that 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 a Fund.
- May hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay.
- 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 smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the 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 the 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, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
- Do not guarantee a level of income.
The risks detailed above are reflective of the full range of Funds managed by the Sustainable Future 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.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. 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.
This 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. It contains information and analysis that 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 of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
