Liontrust UK Ethical Fund

The Fund returned -0.3% over the quarter, underperforming the IA UK All Companies sector average of 2.1% and the MSCI UK Index’s 5.1% (both of which are comparator benchmarks)*.

Volatility remains rife in markets, with violent moves between sectors and factors and uncertainty surrounding new strains of the pandemic. Macroeconomic debate continues to centre on long-term versus transitory inflation and the ability of central banks to control prices without disrupting recovery and we saw a first rate rise in the UK over December and the US Federal Reserve outline eight potential hikes over the next three years. As we said last quarter, increasingly hawkish policymakers have caused a rotation back into the ‘value‘ part of the market and many of our favoured quality growth companies have lagged.

Global supply chain issues are exacerbating inflationary forces as aggregate demand recovers from the depths of the pandemic and pricing power remains critically important for businesses to protect margins as costs rise. Our process looks beyond these shorter-term issues, however, and focuses on the themes that are driving our economy in the next decade and beyond as it becomes cleaner, healthier and safer.

Natural extracts and ingredients company Treatt was the strongest holding over the quarter, with shares climbing as the business announced record results for the year ended 30 September: profit before tax and exceptional items was up 41.3% to £20.9 million, substantially exceeding the Board’s initial expectations. We identified Treatt as part of our research into our Delivering healthier foods theme five years ago and found a company of highly motivated and aligned people, focusing on a strategy of increasing its value to customers (many of whom are decades-long partners).

Treatt’s positioning towards authentic flavour, taste and fragrance with natural ingredient and sugar reduction technology has proven astute, with almost 80% of group revenues now from higher-margin natural and clean-label products. Our research highlights continued strong demand from consumers wanting to eat healthier and more natural food and beverages, particularly in the wake of the pandemic when many are thinking more about health and well-being. Treatt continues to invest in its people and capabilities as well as deepening relationships with its customers and we remain excited about the long-term compounding prospects.

National Grid also registered a solid contribution under our Improving the efficiency of energy use theme, with the company looking to embrace cleaner energy and operate in a more responsible way. Workings are under way to decarbonise the energy system, from building interconnectors allowing the UK to share clean energy with Europe, to investing in renewable generation in the US. The company connects millions of people safely, reliably and efficiently to the energy they use every day and is responsible for ensuring electricity and gas is transported safely and efficiently from source to where it is consumed. National Grid has a key role to play by investing in the grid system to make it smarter and better able to cope with the shift to more renewables.

A top financial holding, under our Saving for the future theme, was Mortgage Advice Bureau, which reported revenue growth of 46% for the first half of the year, up to £92.4 million, and adjusted EPS growth of 36%. Mortgage completions increased 48% in a favourable market fuelled by strong demand and the company has also secured significant new lead sources, including a long-term agreement with MoneySuperMarket.

MAB provides a platform for advisers to help individuals get mortgages and insurance products and we expect to see ongoing expansion by continuing to attract advisers to join the brand. With a market share of around 6%, there should be significant growth ahead without any real capital requirements needed to achieve this.

In a connected area, but held under our Building better cities theme, Home REIT was another contributor, which we added in the early part of the year. The company looks to a provide property to help alleviate homelessness in the UK and addresses a critical need, with an increasing homeless population but a lack of available and affordable housing to accommodate them. At present, local authorities are struggling to meet the cost of providing accommodation to the homeless, with the worsening shortage meaning they are forced into using more expensive bed and breakfast hotels and guesthouses. These relationships with local authorities and housing associations provides stability of rent for Home REIT, offering long-term leases at cheaper levels.

In a December update, the company said it now has properties accounting for more than 7000 beds across the UK, following a significantly oversubscribed £350 million top up equity issue in September.

UK testing, inspection and certification (TIC) business Intertek also had a strong Q4, supported by a trading update covering the first 10 months of 2021 and revealing it is on track to deliver full-year targets. For Q3, the company produced total revenue growth of 6.7%, boosted by recent acquisitions as well as positive momentum on margin and cash. Looking ahead, the pandemic has made the case for Total Quality Assurance clearer and Intertek expects the $250 billion global market to grow faster post-Covid.

Elsewhere, Oxford Instruments also benefitted from impressive results, with revenue growth of 26.8% over six months to end September, and up 13.5% against the same period in a non-Covid impacted 2019. The company, which sits under our Better monitoring of supply chains and quality control theme, develops products and services around imaging, from the atomic to the astronomical scale, and said it has emerged from Covid a stronger, more focused and efficient business, more aligned to customer needs.

A further name in this theme reporting record revenue and profits was Halma, the global group of technology companies focused on growing a safer, cleaner and healthier future (and therefore a strong fit for our approach with those terms slightly swapped around). Over six months to 30 September, revenue was up 19% compared to 2020 and the company reported 10 acquisitions in the first half and one further deal since the period end.

Weaker names over the quarter included Learning Technologies Group, held under our Providing education theme, with a collection of e-learning, compliance, training and Human Resources software and content brands. The company continues to consolidate the e-learning space with a number of acquisitions designed to access new technologies, geographies and cross sell to new customers. Over the quarter, LTG reported a swift return to organic revenue growth in the first half and another in a line of acquisitions, GP Strategies for $394 million, but the shares have been volatile and gave back most of their growth from recent months.

Trainline also saw its shares falling despite also reporting a return to profitability over the first half of 2021 as passengers came back and moved to digital ticketing. For the six months to end August, the company posted EBITDA of £15 million versus a £16 million loss in the same period a year ago, while revenue rose 151% to £78 million and net ticket sales were 179% higher at £1 billion. As a travel company, it has obviously been hit more recently as the Omicron variant led to concerns about renewed lockdowns and restrictions.

A similar trend is evident in a volatile quarter for Gym Group, with shares down despite a fairly healthy trading update in December that shows a strong recovery in membership numbers following re-opening. Total member numbers grew from 547,000 in February 2021 to 753,000 at the end of October and the company also remains on track to deliver its organic rollout plan targeting 40 new openings in the 18 months to December 2022.

Elsewhere, GB Group fell after the group announced plans to acquire Acuant, bringing together two leaders in the global digital identity market. While the price does look high, the strategic fit is clear and benefits to the group’s top line and operational cost synergies are positive.

In terms of recent activity, as flagged last quarter, we sold our position in anti-virus provider Avast after it merged with US peer Norton as we do not rate the combination very highly in terms of business growth.

After a long process of engagement and analysis, we also decided to sell our remaining position in Kingspan Group towards the end of the year. We have invested in Kingspan for more than 15 years and have held the company in high regard for the benefits its products bring, playing a key role in energy efficiency in buildings and therefore carbon dioxide emission reduction. Revelations from the Grenfell Tower Inquiry, however, have raised concerns about the culture and controls within the insulation business.

We initially decided to downgrade Kingspan’s sustainability rating (in our proprietary matrix) from A1 to A4 in December 2020, a significant reduction in terms of management quality. This means we view a company as higher risk and its weighting in the portfolio fell substantially as a result. Our view at that stage was to reserve final judgement until after the Inquiry concludes and we could discuss the findings and recommendations with the company’s management and other parties. As part of continuing engagement, we requested a meeting with the new Chairman to understand his view of how the culture has changed, and needs to change further, towards safety. This has not been forthcoming, however, which is disappointing given our large holding and long-term support of the business. This lack of engagement has prevented us from improving our rating from A4.

There are also more fundamental issues to consider. With the share price currently around 105 euros, on our modelling, the company has to deliver faultlessly over the coming years for there to be upside. On balance, factoring in concerns on valuation, culture and management rating, we feel now is the right time to exit.

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

*Source: Financial Express, as at 31.12.21, primary share class, total return, net of fees and income reinvested.

Key Risks 

Disclaimer