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Liontrust SF Defensive Managed Fund

Q1 2021 review
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 Fund returned -1.0% over the quarter, underperforming the IA Mixed Investment 20-60% Shares sector average of 0.9% (which is the comparator benchmark)*.

As vaccine rollouts continue around the world, pace of economic recovery, inflation and interest rates will be on the minds of investors but we continue to believe a well-diversified portfolio with multiple thematic drivers and high-quality companies is the best way to navigate any economic backdrop that emerges. We welcome the ongoing recovery in some of our more cyclical names but lagged the peer group over the quarter given our higher-quality exposure in a period where performance continues to be driven by ‘value’ companies and parts of the market benefiting most from economic reopening.

In recent months, we have also seen bubbles begin to emerge in certain areas, including some IPOs in the technology space, special purpose acquisition companies (SPACs) and, to a degree, stocks where investors are buying without any regard for valuation, such as Tesla and Sunpower. Stage four of our process, valuation, has always ensured we can protect our portfolios from these types of bubbles. Market moves over recent weeks have been fairly indiscriminate, which is similar to the latter part of 2016. Ultimately, we feel fundamentals will drive higher-quality names back up, leaving behind those buoyed by emerging bubbles, and having a process that has been running for two decades does help when dealing with periods of rotation in the market.

Despite a tougher backdrop for our favoured high-quality, high-return businesses, asset allocation was positive overall. We carried a pro-cyclical, pro-risk assets position into the quarter, which we maintained throughout. We were overweight equities and underweight cash and government bonds, all of which were positive contributors to performance. Over the period, successful vaccine rollouts shifted the market narrative to focus on when policymakers may need to raise rates if better-than-expected growth leads to higher inflation, causing a selloff in bond markets. Against this backdrop, our overweight credit detracted from performance, as did our overweight infrastructure.

Our process tends to be growth focused but we are looking for structural rather than transient trends and also largely avoid crowded trades such as the mega-cap FAANG names. Again, that fourth stage of our process ensures we avoid stocks trading at levels that have lost touch with underlying fundamentals.

Of the FAANGs, only Alphabet is currently investable for us and the stock was 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 think Alphabet stands out because the core Google Search business makes the internet a more efficient place through its indexation and democratisation of information. This is provided free to the vast majority of users and has become an integral part of everyday life, which is why the company sits in our Providing education theme. As a sector, technology emits more than airlines, both in the US and globally, and Alphabet also stands out here, ensuring it has energy-efficient data centres and as one of the biggest buyers of renewable energy.

Over Q1, several financials, including Schwab, First Republic Bank and Prudential, also remained among our top names as the sector continued to enjoy a strong spell of performance as a ‘value’ part of the market. As we wrote last quarter, Schwab is a long-term holding under our Saving for the future theme as the largest investment platform in the US, offering low-cost products to the mass market. It has benefited from higher bond yields over the period, growing its earnings from cash balances held on its balance sheet as yields rise. This part of the company’s earnings power had been wiped out during the pandemic and normalisation of yields has led to growth from this area of the business. Schwab is also a beneficiary of the accumulation of savings over the pandemic in the US, with lockdowns reducing the amount spent on big ticket consumption items such as holidays. These savings have driven AUM growth for Schwab and an acceleration in earnings: by the end of  December, total client assets reached a record of $6.69 trillion spread across 29.6 million brokerage accounts, up 66% and 140%, respectively, from a year ago.

We also continued to see strong performance from Q3 2020 addition Avanza, under the same theme: we have covered this investment platform in recent commentaries but note its 2020 results showing net inflows and customer growth more than doubling over the course of last year. The company releases data monthly on new customer numbers, inflows and trading volumes, and continues to surprise us with its growth and engagement levels of the customer base. We suspect trading in January and February was unsustainably high, however, driven by the unusual GameStop/Wall Street Bets narrative and expect this to normalise through the year.

Elsewhere, semiconductor names ASML and Infineon kept their place among the best performers. ASML published Q4 and full-year results in January, with fourth-quarter sales of €4.3 billion, above previous guidance, due largely to additional DUV shipments. For 2021, the company said it expects another year of strong growth, with the buildout of digital infrastructure and continued technology innovation.

In our UK portfolio, it is little surprise to find GW Pharmaceuticals as the top performer in Q1. This is the global leader in developing cannabinoid-based treatments, changing the lives of many people with epilepsy. Recognising this expertise, Jazz Pharmaceuticals recently agreed a $7.2 billion cash-and-stock deal to acquire GW and expand its neuroscience portfolio, which is expected to close in Q2 and will see the company leave the portfolio. In many ways, GW encapsulates three core elements of our approach, producing a positive outcome for society and our clients, exemplifying the need for a long-term investment horizon, and requiring courage to stray from the herd. GW’s history also shows the patience often required in healthcare investing: it has taken nearly two decades for the company to reap the rewards of its investment in science and manufacturing.


Softcat, exposed to our Enhancing digital security theme, remains among our top holdings as it continues to grow its market share. Public sector growth remains resilient, with healthcare, education and local authorities looking to increase efficiency and safety through digitisation of services, and this was coupled with a strong rebound in IT spend from SME customers. This outlay on hardware, software and, in particular, security, is not discretionary; the economy continues to digitise and businesses must spend to compete, and given its obsession with customer satisfaction and unique culture, Softcat is best placed to help its customers thrive.

Among the weaker names, shares in London Stock Exchange were down around 25% over the quarter, with the vast majority of this fall coming when the company released its final-year results on 5 March, on concerns over higher-than-expected expenses to integrate the Refinitiv purchase. On the positive side, LSE has finally completed the acquisition a full 18 months after announcing the $27 billion deal in the summer of 2019; on the negative, results and, more importantly, guidance for the coming financial year disappointed versus expectations. Some analysts were hoping for an increase to the previously announced synergy targets and most were caught off guard by the increase in investment required, around £1 billion this year, to digest the acquisition and drive sustainable revenue growth for the future. The Refinitiv deal has made LSE one of the largest companies on the FTSE 100 and moves the business to a recurring revenue data operation, which we see as vital to making the financial sector more resilient. Data businesses have to continually invest in their platforms to ensure functionality is optimal and the required financial outlay to do that has worried the market in the short term. As long-term investors, however, we see investment for growth and ensuring a strong customer experience as positives underpinning future earnings and would be concerned if LSE were not doing this.

Puma, exposed to our Enabling healthier lifestyles theme, had a tougher period despite reporting resilient performance in 2020. Remarkably, the company narrowly grew revenues overall despite some months being down over 50% relative to 2019. This is really due to one factor – respect for the supply chain. Puma’s management team decided not to cancel orders for the first half of the year, instead honouring all its orders, paying suppliers in full for their products and ensuring people in the supply chain were not let go as a consequence. This paid dividends in the second part of the year with rebounding demand in Asia and America as well as in the e-commerce channels. The company has been cautious in its outlook for 2021 profits with rolling lockdowns impacting sales; this contributed to some of the selloff in Q1, as well as the rotation into perceived value areas of the market. We remain confident in Puma’s prospects and have added to our position.

Elsewhere, Japanese industrial automation company Keyence was among the detractors over Q1, after growing to become the country’s second-largest stock last year. Its Machine Vision and sensors are increasingly important to ensure defective products are spotted in factories, providing intelligence to automation lines. The company continues to deliver on growth ambitions, with its products key to capital investment opportunities across the industrial sector. As stated, the stock performed well over 2020 despite weakness in the global economy, with manufacturing less impacted by Covid than other service-type industries. Keyence also benefited from being more skewed to Asia and Japan, which were less affected by the pandemic than Western economies.


Poor performance over the first part of 2021 was purely down to market rotation, which saw many companies that did well over 2020 experience a sharp reversal. The vaccination program is expected to bring short-term relief to parts of the economy most challenged by Covid, although many of these are facing long-term structural challenges in future. The unlocking of the economy may also give a short-term boost, which was reflected in recent market moves. We see Keyence’s opportunities in the next five years as increasingly exciting, as its technology becomes more and more important to manufacturing facilities across the world.

Autodesk also fell over the quarter, the global leader in software designed to digitalise the manufacturing and, importantly, construction sectors. Its software is increasingly used to ensure construction projects are updated in real time from the site, through the use of cloud computing and data analytic technology. The company performed well over 2020 but its guidance for 2021 was conservative and, given how well the business has navigated the pandemic, this led to some disappointment over its leverage to an improving global economy. Despite this, we feel Autodesk is in a strong position, as its software is still in the early stage of its adoption curve. While construction and manufacturing are both cyclical end markets and have been affected by the pandemic, they have been less impacted than other sectors. The structural nature of demand for Autodesk’s products will drive growth and therefore performance, and we remain happy with our position.

In terms of trading over Q1, we added Bright Horizons, the US market leader in corporate-sponsored childcare, which offers a range of products to support parents of young children in getting back to work. This is a company built on the goal of partnering with employers to help ensure work-life balance and reduced stress in the early years of parenting, where juggling work and other responsibilities can cause anxiety. At the core of its offering is high-quality early childhood education, while innovative products such as back-up care provide additional high-margin growth.


We also introduced Knorr Bremse to the portfolio, a German leader in safety technology for rail and trucks. The business is split roughly evenly between the two, with trucks providing more cyclical exposure and rail tied to infrastructure spending. Safety equipment across the transportation sector is increasingly important as regulation and technological improvements drive adoption, and Knorr also benefits from a large after-market business, which helps produce high returns on investment.


As for sells, we exited US pet insurance specialist Trupanion and healthcare name PerkinElmer over the quarter. Sell decisions are driven by the deterioration in any of the four pillars of our process (thematic, sustainability, business fundamentals and valuation) and it will not be surprising to hear our favourite reason to sell is the last on that list. This is why we exited Trupanion after holding it for just two years. Since we added the stock in early 2019, the shares did very little for a year before going on to double twice over in a very short period from May to December 2020.

Clearly, we felt the shares were undervalued when we initially invested and the business has so far proved resilient during the pandemic. However, the rapid rise in value the market ascribed to the company left us with no upside on a five-year view, even after accounting for the progress the business made throughout 2020. Two years falls short of our minimum investment horizon of five years, and considerably short of our ideal horizon of forever, but competition for capital in the Fund remains as fierce as ever. We will continue to follow Trupanion closely in the hope the market gives us the opportunity to become shareholders again.

With Perkin Elmer, this was another strong performer over 2020, as well as for the last few years and, after reviewing the price target, we felt valuation upside was limited on a five-year view. We also noted 40% of earnings in 2020 came directly from Covid testing, which we expect to become more nuanced in the future. Finally, this is a business with a management rating of 4 and we have concerns around improvements we have requested relating to ESG issues. When changes do not happen, we tend to sell and move the capital to new opportunities.

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







Liontrust Sustainable Future Defensive Managed
2 Inc






IA Mixed Investment 20-60% Shares













* Source: Financial Express, as at 31.03.21, primary share class, total return, net of fees and income & interest reinvested.

Understand common financial words and terms See our glossary

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. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well-regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move 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 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.

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