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Liontrust Global Innovation Fund

Q4 2021 review

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 Liontrust Global Innovation Fund returned -1.1% over the quarter, versus the MSCI AC World Index which returned 6.2% and IA Global Equity sector average of 4.7% (both comparator benchmarks)*.

 

The Liontrust Global Innovation Fund faced challenging conditions in the fourth quarter due to sharply rising inflation and a resultant increase in market expectations of interest rate hikes ahead. As has been much debated throughout the year, the high and rising rate of inflation experienced so far during the recovery looks increasingly likely to stick around longer than markets initially expected. The final six weeks or so of the year saw a heavy sell-off across the stock market in companies with high growth potential, including some of our companies, held with the very highest levels of our conviction – such as the East Asian e-commerce company Sea, US artificial intelligence-based credit analyst Upstart and European-focused software roll-up company Topicus – and as a result the Fund underperformed during the quarter.

The main short-term challenge for stocks when rate expectations sharply rise is a resultant rise in equity discount rates and a negative impact on valuations. The valuations of stocks with higher long-term growth prospects and therefore longer-duration earnings are affected more. The Fund’s current long-term expected earnings per share (EPS) growth is 31% per annum, which is much higher than the benchmark’s current expected 10% per annum.

Growth is clearly a good thing from a fundamental perspective, particularly for innovative companies such as those in which we invest the Fund, which through new ideas can grow at a much lower cost of growth than the average company overly reliant upon price cutting, unimaginative product proliferation or expensive M&A. But it exposes the Fund’s valuations more than those of the overall market to the short-term impact of rising interest rates.

While this adjustment to interest rate expectations presents a short-term valuation challenge to innovative growth companies, we believe it does not present a significant longer-term operational one. Innovative companies are the most resilient and adaptable in the face of challenges and, as such, we expect them to manage emerging tougher macroeconomic conditions much better than non-innovators.

The companies in which we invest the Fund are operationally very strong indeed, with outstanding pricing power, which will enable them to absorb higher interest rates, inflation and potentially slowing economic growth. The Fund’s aggregate operating margin is 36%, roughly three times that of the benchmark’s 13%.

Such operational resilience to inflation, interest rates and growth is the case even for those of our companies hit hardest during the quarter. Upstart provides an artificial intelligence system to banks that enables them to price personal loans more efficiently, resulting in lower interest rates and lower default rates on loans and better access to credit for households. Higher interest rates will increase the benefit to banks from using Upstart’s service in terms of maintaining lending volumes, protecting net lending margin and managing an increase in risk.

Sea is building the Amazon.com of South-East Asia. It specialises in low-cost products through cross-border e-commerce from low labour cost countries, whose consumer demand is likely to increase under tighter financial conditions and slower growth. Topicus is a capital allocator that buys small companies that provide niche, mission critical software systems to sectors such as healthcare, finance and the public sector, whose ability to enhance productivity for their customers is all the more valuable under higher inflation, tighter financial conditions and slowing growth.

As such, while it may take some time, when interest rate expectations fully adjust to their new higher level, we expect macroeconomic headwinds for the Fund to abate and for the portfolio to strongly outperform. Valuation also underpins this opportunity. Valuing the Fund on a growth-adjusted basis, as is appropriate for companies with significant growth potential, its PEG ratio (price/earnings adjusted for expected long-term EPS growth) is only 1.7x, compared with 2x for the MSCI All Country World Index benchmark.

Turning to the positive contributors to returns during the quarter: the top three were Nvidia, Costco and Tradeweb. Nvidia occupies an extraordinary position in today’s economy as the leading designer by far of high-performance semi-conductors for artificial intelligence-based computing. The strength and breadth of its growth drivers continues to increase as AI finds more applications across the economy. Costco continues to execute its powerful combination of business model innovations, welcoming its members directly into its warehouses to beat Walmart and even the mighty Amazon on prices. As the lowest cost retailer of groceries and other household goods, customers respond to any cost-of-living squeeze by shopping more at Costco. Tradeweb is a newer company to us having IPO’d in 2019. We like it for its steady disruptive growth as an electronic trading network within the still significantly over-the-counter based world of institutional fixed income trading.

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

 

Dec-21

Dec-20

Dec-19

Dec-18

Dec-17

Liontrust Global Innovation C Acc GBP

12.1%

32.1%

18.3%

-2.7%

20.5%

MSCI AC World

19.6%

12.7%

21.7%

-3.8%

13.2%

IA Global

17.7%

15.3%

21.9%

-5.7%

14.0%

Quartile

4

1

4

2

1

 

*Source: FE Analytics as at 31.12.21

 

**Source: FE Analytics as at 31.12.21. Quartile generated on 07.01.22

Understand common financial words and terms See our glossary
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 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.  

 

Disclaimer
 
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
 
This 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 

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