Liontrust Global Innovation Fund

The Liontrust Global Equity Fund returned 8.2% over the quarter, versus the MSCI AC World Index which returned 7.3% and IA Global Equity sector average of 6.9% (both comparator benchmarks)*.

We invest the Fund in innovative businesses and we do so because we believe innovation is the biggest driver of shareholder value. This is especially so in an era such as ours where disruptive change in almost every industry is the central feature of the economy. In these conditions, only businesses that can innovate, as a form of both attack and defence, stand a good chance of competing and thriving over time.

While the final quarter of 2020 and first quarter of 2021 saw strong share price performance for many businesses that we would consider lacking in the capabilities we value, we believe this was mainly attributable to the relief afforded to them by the much-needed recovery in demand as economies reopened. Nevertheless, we would stress that the pandemic has tested almost every business to its very fibre and not only have innovators proven much more adaptable and robust, but their ability to innovate has proven crucial to the functioning of the economy during this time. This only strengthens our conviction in the operational excellence of the businesses in which we invest and the potential of the Fund to deliver strong returns in the years ahead.

Yet not every innovation is a great investment. Valuations matter and we have been hard at work exercising our valuation discipline during this period of extreme market movements and ensuring that the Fund is positioned with a wide margin of safety. Since the start of 2020, pre-Covid, the global stock market has returned 22%. All of this is attributable to multiple expansion on a price to sales basis, presenting, we believe, some valuation risk for aggregate market returns going forward. Over the same period, the Liontrust Global Equity Fund has returned 42%, but its price to sales multiple today is actually lower than it was at the start of 2020. This is due to the strong sales growth of our businesses and our discipline in selling businesses where valuation risk has arisen. We believe this puts the Fund in an excellent position today with regards to return prospects. Indeed, we currently see 92% upside in the portfolio, more than we have for quite some time.     

The biggest contributors to the performance of the Fund during the quarter were Nvidia (+50.0%) and Alphabet (+18.2%). Nvidia is one of our highest conviction investments in the Fund because we expect the artificial intelligence revolution to generate profits in many industries over the coming years and Nvidia is supplying the picks and shovels. Its GPU semiconductor chips, developed for computer games over the past quarter of a century, are better at the brute force calculations required by AI than any other chips. Moreover, the company announced during the quarter a major move into complementary CPU chips, a market until now dominated by Intel, which will expand Nvidia’s role within the overall process of organising and crunching AI data at large scale, presenting much greater sales potential and integration opportunities in the years to come. Following a period of the stock moving sideways since last summer, the value of this great company is being favourably reassessed by investors once again.

Alphabet highlighted its earnings power in both its YouTube and cloud divisions during the quarter. We believe this is just the beginning of the journey for these two divisions and they will provide engines for growth and shareholder returns over the next decade. Whilst the stock is no longer as cheap as it used to be, we see significant upside from today’s price. Sea is building an Amazon equivalent in Southeast Asia in the form of Shopee. Moreover, it has three separate businesses with strong synergies between them – e-commerce, payments and gaming – which we believe enhances the investment case. 

The biggest detractors from the performance of the Fund during the quarter were Volkswagen (-9.8%) and Coupang (-15.4%). Volkswagen was volatile over the quarter but has contributed well to the Fund since we purchased it last October. We are excited by its continued progress in electric vehicles and believe it offers a much better valuation opportunity than pure electric vehicle disruptors such as Tesla. Coupang – a rising South Korean e-commerce leader– is a new investment in the Fund this year having IPO’d in March. While the stock is perhaps facing post-IPO headwinds from a trading perspective, we believe it is an excellent long-term prospect having built an unrivalled logistics infrastructure across the country and is currently building a strong market share.

We have made several new purchases in the Fund during the quarter, including The Costar Group in the US and Pinduoduo in China, both of which offer exceptional long-term potential. We love businesses that make markets more efficient and capture a slice of the value they create in doing so. Costar is essentially the “Bloomberg” of commercial real estate as a data and analytics provider to the industry and if successful in its plans to build the pre-eminent trading platform for commercial real estate over the coming years, will also become the “Nasdaq” of the asset class. Pinduoduo illustrates China’s global lead in e-commerce innovation. Its business model recognises that shopping and consumption are inherently social activities and by providing the leading model for social e-commerce now has over 800m annual active buyers in China.

The quarter began on a wave of rising economic growth, inflation and bond yields due to re-opening but ended with a question mark over the sustainability of these moves. The benchmark US 10-year government bond yield fell from 1.74% on 31^st March to 1.47% on 30^th June. We are not surprised to see somewhat of a reversal and suspect that big structural macroeconomic forces might be beginning to re-assert themselves.

The most thoughtful analyses of the level of interest rates in recent years have emphasised that demographics, inequality and the “demassification” of the economy through the increasing prevalence of technology and capital-light business models have all acted to gradually reduce the market clearing price of capital over the past three decades or so. These factors are likely to exert even more downward pressure on interest rates in the years ahead and may even have been strengthened by the pandemic. Whilst expansionary fiscal policy may well push in the opposite direction over the next few years, these are strong forces to overcome. It is worth noting that Japan has run extremely expansion fiscal policy now for thirty years, its net debt to GDP ratio rising from 62% in 1991 to 257% today, yet has generally experienced lower bond yields than anywhere else in the world.     

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

*Source: FE Analytics as at 30.06.21

**Source: FE Analytics as at 30.06.21. Quartile generated on 07.07.21.

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.

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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.