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The UK market: IP-rich and undervalued

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

The UK stock market continues to provide a wealth of investment opportunities

We have been investing for almost 27 years in companies with superior competitive advantage that can generate strong returns on capital, compounding growth for many years into the future.

The UK seems to have suffered a crisis of perception in recent years, but it should not be written off. The UK stock market still holds a wealth of businesses which are rich in the intellectual capital our investment process seeks out. And it is still an attractive venue for start-ups.

Fundamentally, the UK provides great conditions for businesses to thrive and prosper. This starts with a strong regulatory framework and robust rule of law; this may sound dull, but they are critical foundations on which the advancement of intellectual property is based. English Law is the foundation of the legal system in just over a quarter of the globe – no wonder companies seek our legal market in order to protect themselves and their inventions.

It also provides a fertile ecosystem to nurture early-stage innovation, allowing businesses to commercialise their innovations. The UK has three of the top 10 universities in the world, the base for some of the most effective science and technology clusters globally.

The WIPO’s (World Intellectual Property Organisation) recently published 2024 Global Innovation Index ranks science and technology clusters by innovation intensity (i.e. research publications and patents relative to population density). This study places Cambridge first globally, Oxford 4th and London also within the top 100.

The startups of today become the listed companies of tomorrow, providing us with the opportunity to compound capital growth by backing these home-grown innovators over the long term.

Indeed Raspberry Pi – this year’s highest profile London stock market flotation – is a direct example of this, having spun out of Cambridge University. Having sold over 60 million units of its innovative single-board computer (SBC) globally, Raspberry Pi is a market leader and is rich with intellectual property.

Let’s not forget, either, the three billion doses of the AstraZeneca vaccine developed with the University of Oxford saving millions of lives during the Covid pandemic.

Intellectual property creation supports strengths in tech, industrials and healthcare

This depth of intellectual property creation has been instrumental in driving economic growth in the UK. Its creation of shareholder value is also clear, especially when you look at some of the most research and development (R&D)-intensive sectors:

  • The UK has the number one tech ecosystem in Europe, with a combined market valuation of $1.1 trillion. Globally, this ranks third most valuable (source: The Tech Nation Report 2024). There was $21 billion invested in UK tech startups in 2023. The UK has created 171 technology unicorns (a private company worth over $1 billion), including the likes of Monzo, Revolut, Darktrace and Deliveroo.
  • Within the industrial sector, home-grown engineering expertise means that the UK still ranks eighth globally by the value of manufacturing output, with the sector contributing £224 billion to the UK economy (source: The Tech Nation Report 2024). A key statistic is that the UK industrial sector accounts for over 40% of business R&D in the country:this is high value-add engineering. Just look within our funds at AB Dynamics or Renishaw for evidence of this. Since 2014, Renishaw alone has spent almost £800 million on R&D.
  • And within the healthcare sector, the UK also punches above its weight on the global stage. We have two of the top ten largest pharmaceutical companies globally: AstraZeneca and GSK. There is a vibrant public funding market for research, ranking second among the OECD countries. Within the subsector of med tech, the UK is the sixth largest market globally, submitting over 470 patent applications in 2021alone (source: Medical technology strategy, GOV.UK). Even the NHS, not usually renowned for being at the frontier of the technological revolution, has embraced the digital paradigm shift. It owns one of the largest and most comprehensive data sets for health data globally and is looking to leverage that via a collaboration signed earlier this year with the government’s Incubator for Artificial Intelligence, allowing it to use AI to improve patient care.

A truly active, multi-cap approach

In our view, hunting down these opportunities requires true active management. We have always been committed to investing across the market cap scale, with varying degrees of exposure to small and mid caps depending on which of our four funds is in the spotlight.

Our approach to investing in smaller companies is to align ourselves with entrepreneurial owner-managers – management teams who hold significant amounts of equity in the business alongside us. We think these managers make decisions which are in the best interests of the business over many years, rather than being overly fixated on the short term.

One area where this manifests time and again is investment in R&D, looking for the product breakthroughs that will support the company’s growth years into the future – the very lifeblood of ambitious businesses.

Investing in those entrepreneurial smaller companies works. Of the top ten performers in the Liontrust Special Situations Fund over the past decade, eight were bought as small caps.

The power of compounding reliable but yet comfortably above-market growth rates year upon year for a decade or more is well documented but often forgotten. It is a simple formula, but over time, it really works.

And when it comes to the compounding heroes of tomorrow, we are as excited as we have ever been about continuing to find intellectual capital-rich businesses which have been the drivers of our funds’ returns for so many years and to champion the fantastic investment opportunities we still see right here on our doorstep.

Unwavering conviction in our process and the opportunity to generate alpha in the UK

The UK public markets have faced challenging times in recent years, but the mood is shifting, with a growing pipeline of IPOs, an increase in M&As, and supportive indications around pension fund allocations, which could have a significant impact.

With the UK market at a clear valuation discount to historic averages and measures of intrinsic value, we think the investment opportunity is compelling. We have unwavering conviction in our process and the opportunity to generate alpha in the UK. We are as enthusiastic as ever about our funds’ ability to compound attractive longer term investment returns supported by a combination of earnings growth and, increasingly, shareholder yield (both dividend and share buybacks).

Understand common financial words and terms See our glossary
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 Economic Advantage Team:

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 a Fund's value than if it held a larger number of investments. 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 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 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. 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. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.

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.

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.

Anthony Cross
Anthony Cross Anthony Cross joined Liontrust in 1997 and started managing Economic Advantage funds in 1998. Before moving to Liontrust, Anthony joined Schroder Investment Management as a graduate trainee, later becoming an equity analyst before joining the Smaller Companies team in 1994. Anthony Cross graduated in 1990 from Exeter University with a degree in Politics.
Victoria Stevens
Victoria Stevens Victoria Stevens joined the Economic Advantage team in June 2015 to analyse investment opportunities primarily across the small cap universe. She was previously deputy head of corporate broking at finnCap and a senior reporter and diary editor at City AM
Natalie Bell
Natalie Bell Natalie joined the Economic Advantage team in August 2022 from the Responsible Capitalism team. Prior to joining Liontrust in February 2021, she was at EY for over six years as part of their Corporate Governance team.

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