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Liontrust UK Ethical Fund

Q1 2021 review

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.

The Fund returned 4.3% over the quarter, underperforming the IA UK All Companies sector average of 5.8% and the MSCI UK Index’s 5.2% (both of which are comparator benchmarks)*.

In the near term, markets continue to be driven by the path of the Covid-19 infection rate, new variants and the race between the vaccine rollout and the pandemic. Pace of 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 challenging macroeconomics.

As expected, we have seen a recovery in some of the more cyclical sectors of the market and, as a consequence of our growth and quality focus, the Fund has lagged the peer group over the quarter. For the long term, however, we are confident our process of investing in high-quality, high-return businesses with a tailwind from enabling a cleaner, healthier and safer economy will continue to produce superior results. Over the track record of the Fund, we have seen many periods of ‘value’ outperforming and our job is to stick to the process and block out short-term noise.

While turnover remains low, we have continued to top up companies that have struggled more in the Covid environment and trim those that have been able to withstand it better and therefore enjoyed greater share price appreciation. Over recent months, this has seen us add to names including National Express, DFS, Legal & General, Trainline and Countryside Properties, many of which have rallied hard in the broad recovery post November’s vaccine announcements, and trim Softcat and Ceres Power. 

Softcat, exposed to our Enhancing digital security theme, remains among our top holdings as it continues its strong demand and market share gains. 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. The company announced strong six-month results to end January, with a 10.1% increase in revenues and gross profits up 20%. CEO Graeme Watt acknowledged the market has remained resilient during the pandemic and highlighted that engagement with customers and employees, reflected in improving net promoter scores across both cohorts.

Elsewhere, several financials, including Prudential and St James’s Place are among the top contributors as the sector continued to enjoy a strong spell of performance as a ‘value’ part of the market.

National Express has also been one of our best-performing names, under our Making transportation more efficient theme, and we believe growth may accelerate for the company in the coming five years, driven by increased outsourcing and failing competitors in the wake of Covid-19. The environmental advantages of public transport are an important factor in reducing emissions, which, along with urbanisation, should drive growth in the longer term.

Another of those recent top ups, DFS, has also rewarded us with a strong Q1, releasing interim results to the end of 2020 that showed what it called a ‘strengthening leadership position in a resilient upholstery market’. The group announced revenues of £572.6 million over the period, up 17.3% year on year, despite showroom closures and a significant amount of external disruption in supply chains.

Exposed to our Leading in ESG management theme, the company has experienced strong demand from customers looking for new sofas and home furnishings; we feel this is driven by both growing saving levels during lockdown and people spending more time at home and, as a consequence, looking to re-style their living room. DFS has gained market share, accounting for roughly one in three sofas sold in the UK, due largely to its industry- leading customer satisfaction score (driven by choice, fast delivery, quality and price) as well as sustainability credentials, offering sustainable materials, sofa recycling and a partnership with the Woodland Trust that plants a tree in the UK for every sofa purchased. The company has recently announced the expansion into complementary adjacent categories such as beds and home furnishing, driving more footfall with minimal incremental capex or working capital requirements.

Natural extracts and ingredients manufacturer Treatt is also among our top positions, with the market reacting well to a positive update in January that highlighted a solid start to the new financial year. A long-term holding under our Delivering healthier foods theme, the company continues to benefit from growing demand for its sugar reduction solutions and on top of its traditional citrus, health and wellness, fruit and vegetables and tea categories, new growth is coming from the alcoholic seltzer business.

Among weaker holdings, Learning Technologies Group saw its shares flatten off after a strong fourth quarter, another business that benefited from the lockdown environment and has given back some of its gains as the UK continues down the path to reopening. LTG is exposed to our Providing education theme, with a collection of e-learning, compliance, training and Human Resources software and content brands. The company continues to consolidate the e-learning space with a number of acquisitions designed to access new technologies, geographies and cross sell to new customers. Poor performance in Q1 was partly due to the focus on more value areas of the market and away from technology, as well as a lack of guidance upgrades. Long term, we are excited about the prospects for this founder-led business.

This pullback in tech-related names also hit Avast, which provides security services to over 400 million people, a position we added in Q3 last year under our Enhancing digital security theme. The main product is free, with only 13 million taking the premium service, and this freemium model is an economic way of acquiring customers with ample opportunity to upsell other services. It is consistently rated one of the best anti-virus and privacy protection services and estimates it prevented 1.5 billion malware attacks in the last year. We believe the company can continue to grow and, as evidence of this, it released 2020 results in March, highlighting strong top-line organic growth, high levels of profitability and cashflow generation.

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. We believe the management team has been unfairly punished for doing the right thing – investing in their digital infrastructure, people and portfolio of solutions. Short-term investors wished to see near-term earnings accretion at the expense of the long-term sustainability and growth of the business.

As a recap, the Refinitiv acquisition has made LSE the global scale provider of financial data and analytics, moving the business further towards a resilient recurring revenue business model and less reliant on trading volumes. 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. We have since added to the position.

In terms of our own recent purchases, we have added Home REIT under our Building better cities theme, a company looking to provide property to help alleviate homelessness in the UK. This addresses a critical need, with an increasing homeless population, from women fleeing domestic abuse, people leaving prison, individuals suffering from mental health or drug and alcohol issues and foster care leavers, but a lack of available and affordable housing to accommodate them. At present, local authorities are struggling to meet the cost of providing accommodation to the homeless, with the worsening shortage meaning they are forced into using more expensive bed and breakfast hotels and guesthouses. These relationships with local authorities and housing associations will provide stability of rent for Home REIT, offering long-term leases at cheaper levels.

We also added First Derivatives under our Increasing the efficiency of industrial and agricultural processes theme: this is a company focused on organising and making sense of complex data sets, often in circumstances where time is of the essence such as trading platforms. It has an extremely committed customer base because of how transformative it can be: for one South American telecom client for example, First Derivatives was able to take its time sensitive-data and make the company’s response five times quicker and reduce the number of energy-hungry servers to process this from 80 down to two. With energy for data now accounting for 1% of world electricity usage, making processes more efficient this way is a huge part of reducing emissions.

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








Liontrust UK Ethical 2 Acc












IA UK All Companies













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