Liontrust Global Alpha Fund

The Liontrust Global Alpha Fund returned -5.1 over the quarter, underperforming the MSCI AC World Index, which returned 3.6% and its average peer in the IA Flexible Investment sector which returned 2.2% (both comparator benchmarks)*.

Broadly, global equities have steadily driven higher in 2021 as the global economy continues to show signs of recovery from the Covid crisis. Under the surface, however, the picture has been more mixed. US equities continued the strong, cyclical, reflationary rally that began in earnest in the summer of last year fuelled by continued fiscal stimulus and evidence that US economy is bouncing back quicker than many thought it would. At the beginning of March, a $1.9tn stimulus bill, the American Rescue Plan, was signed off, sending more stimulus cheques to the American public. This took the total amount of stimulus from the 3 major stimulus packages since the onset of Covid-19 to around $5tn or 25% of US GDP. And there is likely to be more stimulus, in the form of an infrastructure bill, later in the year. The combination of stimulus and evidence of inflationary pressures rising (in both wages and supply chain shortages) meant the market began to question whether the Fed would stick to their outlook of not raising interest rates until 2024. Chair Jerome Powell and the other FOMC members have been at pains to reiterate whenever possible that they remain extremely accommodative and are targeting average inflation in an important regime change.

Technology, and US based growth equities in general, had a very strong start to the year up to January when their fortunes reversed (with the technology heavy Nasdaq composite hitting a peak on the 12^th of February) with fears of inflation seeing treasury yields begin to rise significantly for the first time since the start of the pandemic nearly a year earlier as the 10-year Treasury yield rose from under 1% at the start of the year to end the quarter at 1.74%. The fear of a rise in inflation and subsequent interest rates resulted in a so-called value rotation as investors began to favour lower duration assets. This rotation has been very widespread, with the general rule of thumb being that the strongest performing areas of the market last year have lagged in 2021, while many of the worst performing stocks in 2020 have rallied back strongly.

While disappointing to underperform the average peer in the IA Flexible investment sector, the Fund’s positive contributors over the period included Alphabet, CME Group and Horizon Therapeutics. Horizon Therapeutics completed its acquisition of Viela Bio, which develops treatments for rare diseases. Viela's portfolio includes various treatments as well as technology that Horizon says will aid in developing new medicines. CME, the Chicago Mercantile Exchange, has effectively cornered the market in various financial instruments, notably including various forms of oil derivatives. CME not only benefits from the network effects associated with providing the sole liquid market for these instruments, it also gains from exclusive access to some of the richest associated data sources in the financial sector. Furthermore, the Covid-19 pandemic has given many derivatives traders more time to work the market, and volatility in many stocks over the course of the year has encouraged trading activity. Alphabet was also among our best performers over the period. This was largely driven by stronger-than-expected fourth-quarter results, with revenues growing 23% year-over-year to $46.7 billion, comfortably ahead of consensus.

We continue to focus on technology-related stocks or those companies utilising technology to gain a competitive advantage versus their industry peers. While this overweight to the technology sector has been significantly additive in previous quarters and years, it was the major detractor to overall returns in the first quarter of the year.

At the stock level, the largest underperforming segment of our portfolio was in our overweight to software, particularly the high growth names like Avalara and RingCentral. RingCentral provides business with an easy-to-use cloud communications platform for employees, while Avalara is a leading provider of tax compliance automation for businesses. Both of these companies were substantial outperformers over the past year, and a substantial pullback from high valuations is not surprising. These high growth (and high duration) stocks were put under pressure from rising long term yields on inflation fears that triggered the aforementioned value (low duration) rally and further buffeted during the Archegos Capital collapse. Critically, however, we have seen no degradation of the underlying companies, their operations, execution, competitive advantages, and most importantly, their investment case.

The outlook on equity markets continues to be optimistic as the global economy continues its recovery from the pandemic with the successful rollout of vaccination programs in the developed world (particularly the US and UK with the EU and others to hopefully follow). A slight wrinkle however is now fear of inflation, caused by the huge increase in money supply during the Covid-19 crisis now meeting a recovery in demand as well as potential supply shortages. We believe, like many, the best protection against inflation is to own strong companies with competitive advantages and pricing power allowing them pass inflating costs down the chain.

We believe now more than ever it is important to actively seek and discern high performing companies from those whose value is more speculative and that by focusing on a company’s key financial metrics supporting a strong investment narrative and a discounted cash flow valuation we can continue to provide long term outperformance through careful and attentive active management.

Discrete years' performance (%), to previous quarter-end:

*Source: FE Analytics as at 31.03.21

**Source: FE Analytics as at 31.03.21. Quartile generated on 13.04.21.

KEY RISKS

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

DISCLAIMER

The information and opinions provided 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. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.