Liontrust GF European Strategic Equity Fund

The Fund’s A4 share class returned 2.1%* in euro terms in September. The Fund’s comparator benchmarks, the MSCI Europe Index and HFRX Equity Hedge EUR Index, returned -3.0% and -0.6% respectively.

The macroeconomic landscape appeared to shift in September, as demand surges and supply shortages across the global economy raised concerns about reflation. The continued emergence from the pandemic meant that demand for goods and services spiked higher, resulting in prices squeezes in several corners of the economy. One of the most notable examples of this was natural gas, which surged to its highest price since 2008.

Meanwhile, staff shortages across industries, most notably for heavy goods vehicle drivers, meant supply was limited. This was acutely seen in the UK fuel market, where panic buying and Brexit disruption exacerbated the petrol shortage and resulted in staggering queues at the pumps.

In its September monetary policy meeting, the Bank of England noted the material rise in wholesale gas prices, adding that it represented an upside risk to its inflation projections, but these cost pressures will ultimately prove transitory. Nevertheless, the Monetary Policy Committee agreed that some modest tightening of policy will be required to meet its inflation target in the medium term.

The Federal Reserve similarly indicated a hawkish change to policy. Chair Jerome Powell signalled that the central bank would announce a tapering of its $120bn a month asset purchase programme in November, given the strength of US economic recovery. There was also a shift in the Federal Open Market Committee’s expectations for future interest rates, with nine of the 18 person committee now expecting interest rates to rise in 2022, from seven members in the June meeting.

While the European Central Bank also moderately reduced the pace of its net asset purchases, President Cristine Lagarde maintained that this change was not an indication of tapering. Lagarde said the ECB’s decision was a recalibration of its emergence asset purchase programme, rather than a signal to wind it down.

The inflationary pressures and change in rhetoric from central banks weighed on markets, causing the MSCI Europe Index to break its seven month streak of gains. The Fund’s short book shone in this environment, falling by more than the wider market and thus contributing to overall performance. The long book was also notably resilient. With opportunities emerging on both the long and short side, we recently increased the Fund’s gross exposure to its highest ever level. Its net exposure stood at XX% at the end of September.

The sector breakdown of returns reflected the supply squeeze, with the energy sector (+14%) by far the biggest riser in the MSCI Europe Index in euro terms. As well as the spike in natural gas prices, oil prices also continued its recent rise, with Brent crude hitting its highest level since late 2018. This meant the likes of Tethys Oil (+21%) and Lundin Energy (+25%) ended the month amongst the long book’s biggest gainers.

Cruise operator Carnival (+5.5%) saw its shares rise as it continued to resume operations, having had to completely halt its business for over a year due to the pandemic. The company said that voyages for the third quarter of 2021 were cash flow positive and it expects this trend to continue. Revenue per passenger cruise day was also higher compared to 2019. However, bookings in the third quarter were not as strong as the second due to the spread of the Delta variant, impacting August bookings.                                           

Pandora (+3.5%) was another long book holding to perform well. The Danish jeweller said it is targeting a CAGR (compound annual growth rate) of 5%-7% for organic revenue between 2021 and 2023 and a total revenue CAGR of 6%-8%. It also aims to expand its manufacturing output by 60%, which will help it achieve its long-term ambitions to double its US revenue and triple its revenue in China.

Within the Fund’s short book, a contributor was a Swedish biotech company which said a study found no conclusive difference between its treatment and the control group, causing its shares to plummet. Another contributor was a London-listed battery manufacturer which reported a widening of its interim operating loss.

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

*Source: Financial Express, as at 30.09.21, total return (income reinvested and net of fees).

**Source: Financial Express, as at 30.09.21, total return (income reinvested and net of fees).

KEY RISKS

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in Funds managed by the Cashflow Solution team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. Some of the Funds may invest in derivatives. The use of derivatives may create leverage or gearing. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. Some of the funds may hold a concentrated portfolio of stocks. If the price of one of these stocks should move significantly, this may have a notable effect on the value of the respective portfolio.

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