Liontrust SF UK Growth Fund

The Fund returned 4.2% over the quarter, outperforming the IA UK All Companies sector average of 2.7% and 2.2% from the MSCI UK Index (both of which are comparator benchmarks)*.

Equity markets grew more volatile throughout the third quarter, with the Federal Reserve discussing a start to tapering in November, supply chain blockages, spiralling raw material prices, a new standoff over the US debt ceiling and concern around contagion from the collapse of debt-plagued Chinese property giant Evergrande. With a weak pound and strong oil price, the UK was one of the stronger performers against this backdrop.

We have never been keen to focus on short-term performance and Q3 highlights exactly why. Given our quality growth focus, the portfolio underperformed earlier this year with expectations of imminent rate hikes to control inflation resulting in a value rotation into more cyclically sensitive and optically cheaper companies. This reversed in July/August as the Fed indicated it would let the economy run hot without raising rates until late 2022 or 2023, refocusing markets on reliable growth and causing a fast move back into our favoured names.

More hawkish central banks in September drove another turnaround and a selloff in technology, however, and all this has been without any underlying change in the prospects for our selected companies. The market remains volatile and often disconnected from fundamentals in the short term, and we focus on long-term positive shifts in our economy and high-quality businesses driving, and benefitting from, these changes.

IP Group was among our top holdings over the quarter, with this developer of intellectual property-based businesses benefitting from the IPO of its Oxford Nanopore holding. The latter is behind a new generation of nanopore-based sensing technology, with its products enabling scalable analysis of DNA and RNA, and the IPO valued the company at £3.4 billion. IP Group has generated £84 million of proceeds from the deal and retains a holding valued at £348.8 million.

We took the opportunity to partake in the IPO on the last day of the quarter, with the shares climbing more than 40% in the first hour of trading and ending up as London's biggest biotech listing. The company, which provides Covid-19 test kits to the NHS, plans to move into the applied genomics market, including agriculture, pharmaceuticals, food and water, and safety, as well as infectious disease, immune profiling and cancer diagnostics, and is therefore another strong fit for our Enabling innovation in healthcare theme.

Staying in Oxford, Oxford BioMedica also remains among our strongest positions, continuing to benefit from announcing an update to the 18-month Covid-19 vaccine supply agreement signed with AstraZeneca in September 2020. The company reported a 139% increase in revenue over the first half and 223% growth in its bioprocessing and commercial development division, largely driven by that vaccine agreement. As we have said before, while the vaccine grabs the headlines, the case for Oxford BioMedica’s shares is primarily based on other conditions its gene and cell therapy technology can treat, varying from lymphoma to Parkinson’s.

Digital security business Avast also had a good quarter, boosted by the announcement of a potential merger in July, but we are now exiting the position after it was subsequently sold to US rival Norton LifeLock in a deal worth up to £6.2 billion. We added the stock under our Enhancing digital security theme in the third quarter of last year, expecting it to benefit from a tailwind of more people working from home, and this merger reflects the strength of its market-leading products.

Perennial outperformer Croda registered another strong period, with the speciality chemicals business posting record first-half results on the back of global recovery in demand, accelerated implementation of strategic priorities and increased investment. With recent acquisitions opening up new fast-growth markets, the company expects continued strong demand for lipid systems and has increased guidance for sales this year to at least US$200 million.

Elsewhere, Trainline also had a solid Q3 after a volatile period, with shares rising on the back of September results showing a recovery in the first half of the year as rail passengers return and increasingly shift to online and digital tickets. Group net ticket sales in Q2 recovered to 71% of same period in 2020, their highest level since the start of the pandemic, and the company highlighted growth across its top four international markets, France, Italy, Germany and Spain. CEO Jody Ford said he is positive about long-term tailwinds for the industry, including the significant planned investment in rail capacity, particularly on high speed routes, and a growing awareness of the environmental benefits of travelling by train versus less sustainable modes of transport.

Weaker names over the period included Syncona, the investment trust owning stakes in privately held biotechnology firms, which we own under our Enabling innovation in healthcare theme. The company slipped after its quarterly update for three months to end June revealed its NAV has declined 7.7%, driven by weakness in two of its most recently listed companies, gene therapy business Freeline and Achilles Therapeutics, a biotech firm developing personalised cancer therapies.

Syncona’s vision is to deliver transformational treatments to patients by building companies around exceptional science in areas of unmet need. Over the years, we have seen it achieve exactly that with the success of companies like Nightstar and Blue Earth, and the creation and sale of these businesses has provided breakthroughs for patients as well as excellent value for shareholders. Looking to the future, our thematic work has identified gene and cell therapies as a high-growth area, with potential to cure previously untreatable diseases and the promise of a one and done model for therapy. With the majority of Syncona’s companies in this space, and more to come (a target range of 15-20), we see the business, with a trusted management team and proven track record, as an ideal way to access this theme.

Intertek also had a slower Q3 despite delivering first-half results in line with expectations, with group revenues up 5.8%, and predicting an acceleration in the global Quality Assurance market post-Covid as companies have realised the need to reduce risk in supply chains. In May, the company agreed to acquire SAI Global Assurance, also adding JLA in July to enter the fast-growing food testing industry in Brazil. We see this business a global leader in the testing and inspection space and a strong fit for our Better monitoring of supply chains and quality controls theme. Through its technology, it ensures that products are tested, checked and certified to meet regulatory standards.

Hargreaves Lansdown was also among the detractors, with its shares falling after announcing lower profits for the year to end June, 3% down on the previous period. More positively, the company revealed assets under administration up 30% to more than £135 billion and a record number of new users, 233,000, bringing the total to more than 1.6 million.

Hargreaves warned recent growth in users may fall off as lockdowns ease but feels the younger mix of clients that remain, with 83% of new users below the age of 55, will drive future growth. This supports our long-term view of HL as a stock for our Saving for the future theme, with a huge rise in pension provision required to prevent a future shortfall in retirement funding.

In terms of recent activity, we exited our long-term position in Kerry Group. The company is exposed to our Delivering healthier foods theme, using its IP to improve the nutritional characteristics of our foods. We sold after our annual review as the share price now reflects our five-year assessment of intrinsic value.

Rotork was a new addition over the quarter, also under our Better monitoring of supply chains and quality control theme, as a play on safety and reducing methane emissions from gas and oil extraction, transportation  and processing. The company’s aim is to keep the world flowing for future generations, helping to drive the transition to a cleaner future where environmental resources are used responsibly. Rotork announced a return to underlying growth in the first half of 2021, with margins improving despite significantly higher logistics and commodity costs, and also reinstated its half-year interim dividend.

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

*Source: Financial Express, as at 30.09.21, primary share class, total return, net of fees and income reinvested.

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