Liontrust GF SF US Growth Fund

The Liontrust GF Sustainable Future US Growth Fund returned 15.9% in US dollar terms in Q4, compared with the 11.8% return from the MSCI USA Index (its comparator benchmark) and the 12.0% return from the IA North America reference sector.

The largest positive contributors to this were TopBuild (+49%), American Tower (+33%) and Charles Schwab (+26%). The biggest detractors were Markel (-3.6%), Paylocity (-9.3%) and DocuSign (-7.4%).

As a reminder, the Fund aims to grow capital over the long term (five years or more) with the MSCI USA Index as its comparator benchmark. This goal in essence requires us to invest differently to the index. So we expect the Fund to behave differently in both volatility and return profile. The Fund is concentrated, with 42 positions and the top 10 representing over 36% of NAV. As such, the Fund may be volatile, so understanding our process will hopefully make this volatility easier to stomach.

This has indeed already proven to be the case. Readers of the first update might recall that the portfolio had fallen 3.3% during the previous quarter, underperforming the benchmark by 1.2% during that period. If the performance clock had been stopped at the end of October, the underperformance would have further widened to over 2.5%. So where does this all leave us since the short period from inception? The fund is now up 12.0% compared to MSCI USA Index at 9.5%.

The Fund’s first major trade occurred at the small end of the market capitalisation spectrum. We decided to exit our position in Hingham Institution for Savings. Hingham is a family-run bank where the major shareholders sit on the board of directors and sign off on any large loans. The result has been remarkably low credit losses through the cycle and a consistent, and impressive, return on equity. The problem currently, however, is that it isa small regional bank that does not enjoy the benefits of having large deposit franchises that the major banks in the US have. It is therefore reliant on wholesale funding, which has caused its funding costs to rise notably as interest rates have risen. Without getting too technical here, the shape of the yield curve inhibits the bank from earning the sort of returns it has done in the past. When this changes, we would be happy owners of the shares once again.

Hingham made way for another financial called Trupanion. Trupanion is a pet insurance company operating predominantly in the US with a market capitalisation of c. $1.2 billion. Unlike the UK and much of Europe, US pet insurance penetration remains remarkably low, at 2% - 3% and Trupanion is one of the largest operators in the space. We believe the company offers the best value product in the market and has a huge runway of potential growth given the low penetration rates.

This is a company we know well, first owning shares in the SF Global Growth Fund back in 2019 before selling at the start of 2021 following a strong run up in the share price that left us with limited upside. The shares went on to climb further still throughout 2021 but more recently, it has had a tough 18 months, causing the share price to fall back to those 2019 levels. It appears to be a controversial name, with the highest short interest for a stock in the Fund at over 30% of the shares outstanding (this means there is a lot of people betting against the company). If Trupanion continues to produce improving operating results, those shorts will have to liquidate their positions, resulting in upward pressure on the shares. These dynamics lead us to expect the shares to remain volatile for some time and so we have sized the position accordingly.

We also exited our position in DocuSign in October. After meeting with the new management team, we were impressed by their communication of their strategy and focus. We did, however, decide that reversing the current trend of stagnating sales growth would take many years to unfold and that the return to growth was anything but a sure thing. With the shares languishing at such a low valuation, there was always a risk that a potential bidder may be interested in acquiring the shares. Indeed, in December the company announced that it was exploring a potential sale. This, combined with the changes in the bond market detailed earlier, has caused the shares to rebound strongly after we had sold the position.

With the proceeds of the DocuSign sale, we started a new position in a company called Veralto. Veralto has a market capitalisation of $20 billion and has two main segments. About 60% of sales come from its water analytics and treatment business and the remainder in consumer packaging and printing. The company is therefore exposed to the theme of Improving management of water.

We had been following this company for some time and Veralto was finally spun out of its parent company Danaher at the end of September. As is often the case with spin-offs, many investors chose to sell the shares and the valuation became sufficiently attractive to meet our return hurdles. The core businesses are high margin and defensive but the bull case is that Veralto can use the cash generated by these businesses to reinvest and acquire other smaller businesses, following Danaher’s playbook. However, it remains to be seen how well management will allocate capital, so this is a company we will be watching closely.

The last major trade of the quarter was exiting our holding in the thrift franchise operator Winmark. Due to the capital light nature of franchises, they can be wonderful businesses and Winmark is indeed a wonderful business. The shares rose over 30% in a matter of months and this left us with limited upside over the next five years. We therefore exited the position and recycled the capital into other ideas within the portfolio. We look forward to owning the shares again once the valuation becomes more compelling.

Finally, given the third quarter results season fell in the last quarter for most of our holdings, we thought it would be helpful to provide some summary figures for the portfolio, using simple weighted averages of the position sizes to compare them with the MSCI USA benchmark.

Source: Liontrust and Bloomberg as at 31.12.23. All figures are weighted average. The MSCI USA Index is a comparator benchmark.

The companies in the Liontrust GF SF US Growth Fund are growing revenues faster than those in the benchmark, but the difference in adjusted earnings per share (EPS) is stark; the portfolio companies grew their EPS 22% on average compared to the benchmark whose shrank 6% year-over-year. The average return on invested capital for the Fund was nearly four times larger than that of the benchmark. Of course, a selection of businesses as wonderful commands a premium – the portfolio’s price to earnings ratio is 50% higher than that of the benchmark. Warren Buffett once quipped that time is the friend of the great business and the enemy of the mediocre. We believe we own a portfolio of terrific businesses whose competitive advantages should enable them to continue to compound their earnings at a high rate. Our job is to continue to assess these competitive advantages and do our best not to interrupt this compounding.

Thank you as always for your time in reading this update and for your continued support.

Key Features of the Liontrust GF SF US Growth Fund

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.

All investments will be expected to conform to our social and environmental criteria. Overseas investments 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 the Fund. This Fund may have a concentrated portfolio, i.e. hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the Fund's value than if it held a larger number of investments. The Fund 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. Outside of normal conditions, the Fund 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. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.

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.