Liontrust Global Smaller Companies Fund

The Liontrust Global Smaller Companies Fund returned -9.4% over the quarter, underperforming both the MSCI World SMID Index and the IA Global sector, which returned 6.4% and 3.2% respectively (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.

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.

The recent rise in bond yields has also understandably had a disproportionate effect on high growth companies due to the high duration nature of their future cash flows. The underlying companies have not been materially impacted and have kept executing well, and our valuation of them is not based on perpetually low interest rates, and so is also not materially impacted either.

The price of long-term outperformance is often volatility and given the strength of the Fund’s performance last year, it is somewhat understandable the portfolio has underperformed over recent months. Nevertheless, this recent rotation has been driven by macro factors rather than company-specific issues, per say. The underlying companies in the portfolio have not been materially impacted and have kept executing well, and our valuation of them is not based on perpetually low interest rates, and so is also not materially impacted either. Looking forward, we continue to lean on the process and focus on companies capable of exponential growth via science and intellectual property. It is clear the recent value bounce has largely been driven by mean reversion rather than anything more fundamental. Though economic growth will pick up, the global economy is still in the throes of one of the most seismic shocks to the financial system on record. Therefore, we believe companies that are able to offer the levels of growth we focus on, in a world where growth is scarce resource, will naturally be rewarded over the long-term. Furthermore, the recent market rotation has offered us a fantastic opportunity to buy or top up our holding in very exciting stocks at a considerably more attractive valuation than was on offer late last year.

At the stock level, Stitch Fix was the most significant detractor to returns over the first quarter of the year. Stitch Fix is an online personal styling service in the US. It uses recommendation algorithms and data science to personalize clothing items based on size, budget and style. The retailer posted disappointing results for its fiscal second quarter and trimmed its guidance for the current fiscal year, ending in July, reporting revenue of $504.1 million, up 12% from a year ago, but short of its guidance range of $506 million to $515 million.

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, it was a detractor to overall returns in the first quarter of the year. At the sector level, a notable underperforming segment of our portfolio was in our overweight to IT, and more specifically software, particularly the high growth names like Avalara, Rapid7 and RingCentral. All of these 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 fears 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.

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

*Source: FE Analytics as at 31.03.21

**Source: FE Analytics as at 31.03.21. Quartiles 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.