Liontrust Special Situations Fund

The Liontrust Special Situations Fund returned -8.5%* in June. The FTSE All-Share Index comparator benchmark returned -6.0% and the average return in the IA UK All Companies sector, also a comparator benchmark, was -7.3%.

The UK market suffered its worst monthly fall of 2022 so far as investors increasingly viewed aggressive central bank action on inflation as likely to tip the economy into recession.

While the FTSE All-Share Index’s total return is -4.6% year-to-date (and -6.4% in price terms), several other global equity indices – including the S&P500 – are close to, or below, the 20% drop which is often used to arbitrarily define a bear market.

In this risk-off environment, the more defensive areas of the UK market such as healthcare (+2.0%), telecoms (+0.1%) and consumer staples (-2.0%) were the most resilient. This year’s trend of large-cap outperformance was also extended: the FTSE 100’s -5.5% return takes its year-to-date performance to -1.0%, but the FTSE 250 returned -8.3%, taking it to -19.4% for 2022, with its price drop of 20.5% sitting the wrong side of that bear market line.

The Fund holds 18 stocks in the mid-cap FTSE 250 index. With many of these featuring amongst the biggest negative contributors over the month and registering double-digit falls, often on no results or news, this clearly had an impact on fund performance. FTSE-250 ‘losers’ were drawn predominantly from the industrials sector (including Weir Group (-14%), PageGroup (-13%), Rotork (-14%), Renishaw (-12%) and Spectris (-10%)) and the consumer discretionary sector, including Domino’s Pizza (-17%),which announced the loss of its CEO who is leaving to take the top job at Whitbread, and TI Fluid Systems (-17%). Some of the fund’s holdings in the financial sector also saw double-digit price falls, including JTC (-20%), Impax Asset Management (-25%), Mortgage Advice Bureau (-12%), Alpha FX (-25%) and TP ICAP (-14%). In both categories, fallers included stocks which remain ‘expensive’ relative to the market on conventional valuation measures, suggesting that the de-rating of such stocks may not yet have fully run its course despite substantial underperformance already this year. 

Elsewhere, the energy sector has been the UK market’s strongest area by some margin this year as the Ukraine war has disrupted supply, but this support turned to a headwind in June. Having almost doubled over the prior 12 months, the Brent crude oil price slipped 6.5% to $115 a barrel during June. The Fund’s sector holdings weakened; Shell (-10%) and BP (-11%) registered double-digit percentage losses and John Wood Group (-35%) fell heavily despite announcing the disposal of its built-environment consulting business for $1.9bn, having put the unit up for sale earlier this year.

While a number of the portfolio’s stocks have experienced painful share price falls in recent months, we retain our conviction in the companies the Fund owns and we believe their characteristics – such as barriers to competition, high financial returns and strong balance sheets – will shine through in time.

There is also ongoing evidence that corporate and private equity buyers are identifying value on the UK market and among the Fund’s holdings. Following Clipper Logistics’ exit from the portfolio last month ahead of completion of the takeover by US-listed GXO Logistics, June saw the position in Ideagen sold. Following confirmation of Cinven’s interest in the company in April, events progressed rapidly through to the agreement of £1bn+ takeover by HGCapital in May, which is now scheduled to complete in July.   

CareTech (+5.1%) also announced the receipt of takeover approaches earlier this year, from both a founder-led consortium (Sheikh Holdings) and a rival private equity bidder (DBAY Advisers). In June it was announced that Sheikh Holdings had teamed up with private equity investor THCP to make an 750p per share cash offer which has been recommended by CareTech’s independent directors. DBAY Advisers confirmed it would not be making a bid. Shares in CareTech had weakened in early June on interim results that commented that performance had been only “broadly in-line” with expectations. But the confirmed bid pushed the shares back up to all time highs, marginally below the offer level.

EMIS Group (+43%) was another portfolio beneficiary of takeover interest as its Board recommended a £1.24bn offer from US-based healthcare and insurance provider UnitedHealth Group. The cash offer of 1925p a share is 29% above the level prior to its announcement and 32% higher than EMIS’s prior all-time high of 1460p. The deal is expected to complete by the end of the year; shares in EMIS jumped to trade at a small discount to the offer price.

Things have so far gone less well for Next Fifteen Communications (-17%) in its pursuit of M&C Saatchi. A share price slide since it made a cash-and-shares offer for M&C Saatchi means that its bid is now worth less than the prior offer made by AdvancedAdvT Limited, an acquisition vehicle chaired by Vin Murria, also a director of M&C Saatchi. In response to the falling implied value of Next Fifteen Communication’s bid, the Board of M&C Saatchi has withdrawn its prior recommendation of the offer. Next Fifteen Communications has maintained its offer despite the share price fall and loss of Board support. It also issued a statement commenting that trading is strong and that adjusted profit before tax is ahead of management expectations.

Positive contributors included:

EMIS Group (+43%), Craneware (+31%), Caretech Holdings (+5.1%), AstraZeneca (+3.3%) and GSK (+1.9%).

Negative contributors included:

YouGov (-38%), John Wood Group (-35%), Alpha FX (-25%), Domino’s Pizza Group (-17%) and TI Fluid Systems (-17%).

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

Past performance does not predict future returns

*Source: Financial Express, as at 30.06.22, total return (net of fees and income reinvested), bid-to-bid, institutional class.

**Source: Financial Express, as at 30.06.22, total return (net of fees and income reinvested), bid-to-bid, primary class.

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.

A proportion of the portfolio is invested in smaller companies and companies traded on the Alternative Investment Market. These stocks may be less liquid and the price swings greater than those in, for example, larger companies. 

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.