Liontrust US Opportunities Fund

The Liontrust US Opportunities Fund returned 3.2% in the third quarter, outperforming both the S&P 500 Index return of 2.9% and the IA North America sector average return of 2.8% (both comparator benchmarks)*.

US equity markets continued to rally this quarter but were led by more defensive parts of the market as opposed to the more cyclical areas which dominated at the end of last year and the beginning of this. The dominant debate this year continues to be around inflation and whether the pick-up in inflation we have seen is transitory in nature or something more structural which will cause the Fed to tighten monetary policy quicker than otherwise might have been expected. One of the drivers of inflation has been the widely reported supply chain challenges and indeed US company earnings that were reported in the early part of this quarter began to show the impact. Supply chain challenges have included, amongst others, the shortage of semiconductor chips, logistics bottlenecks, labour shortages and subsequent wage pressure. Despite many of the companies we own, with strong pricing power, have looked to address this with price increases, these impacts are beginning to show up in their margins.

A related debate that has raged in recent months is whether the economic momentum that has been so strong in the US since the summer last year is already tailing off. The Delta Covid-19 wave has certainly slowed and in some cases reversed momentum in the re-opening of the US economy. The good news here is that by the end of September, it is looking likely that the US is past the worst of the Delta wave with the case count around a third lower than the Delta peak at the end of August and hospitalisations almost a quarter lower.

Concerns over whether the US was hitting the roadblocks, i.e. supply chain challenges, of such a strong recovery and some tepid jobs market reports, presumably complicated by the Delta wave and the ending of the US furlough program over the summer, meant that bond yields continued to retrace their steps for much of the quarter. At the end of March, 10-year Treasury yields had been as high as 1.75% but during August had touched 1.20%. However, the tune changed during the latter parts of September when the Fed essentially confirmed that they will look to start tapering QE in November and then once completed in 2022 will look to start raising interest rates at either the end of 2022 or early 2023. Yields finished the quarter a shade under 1.50%. 

The US Liontrust Opportunities Fund marginally outperformed the S&P 500 Index and the wider IA North America peer group during the quarter. As has been the case for a number of years now, the majority of the performance has been from stock specific factors. Strong performers included Horizon Therapeutics, which has continued to deliver strong results as it has transformed itself from a primary care pharma company to a full-fledged large cap biotech over the last few years. Another strong performer was HCA Healthcare, the largest non-government hospital operator in the US, which is currently benefiting from the recovery in post-COVID hospital volumes. In addition to this, HCA rallied during the three months after it boosted its revenue forecast for the full year, beating the average expectations.

On the other side of the ledger, our position in private security and protection company Brink’s was a detractor to returns over the quarter, with the company’s full year adjusted revenue forecast falling short of estimates. The company cites the persistence of the global pandemic as the primary driver behind lower-than-expected revenue in several key markets in Europe, North America and Latin America. However the company have addressed this by explaining that “despite a near-term revenue shortfall and the labour shortage in the U.S., we continue to expect 2022 percentage profit growth in the high teens as the pandemic subsides and revenue growth improves, driven by improvement initiatives in our core operations and initial results from our new digital solutions".

In terms of portfolio activity, we have made relatively minor changes to the portfolio and have been focusing our attention on companies and industries which we think we will structural beneficiaries of the post-Covid world. We continue to believe that disruption, and particularly digital disruption, will remain the most important determinant of corporate success. We continue to search for companies that we believe will be drivers of this disruption (disruptors), help fuel it (enablers) or indeed benefit from it (embracers). 

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

*Source: FE Analytics as at 30.09.21

**Source: FE Analytics as at 30.09.21. Quartiles generated on 06.10.21

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