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Liontrust UK Ethical Fund

Q2 2022 review
Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

The Fund returned -12.8% over the quarter, underperforming the IA UK All Companies sector average of -8.3% and the MSCI UK Index’s -2.9% (both of which are comparator benchmarks)*†.

Prevailing conditions continue to offer considerable headwinds for our Sustainable Future investment approach, with central banks around the world still raising interest rates to curb inflation. As we have written before, for companies where the market expects growth for years to come, a large proportion of the valuation is attributed to cash flows in the future (known as long duration); conversely, for stocks with lower expectations, less value is ascribed to future growth and the bulk of the value is in near-term cash flows.

Companies with strong growth expectations, therefore, have higher sensitivity to interest rate changes than those with lower growth prospects, with the market discounting future earnings more heavily and bringing down their present valuation as a result. This shift has hit our funds hard given their growth bias and longer duration relative to the market. Performance figures above show this portfolio has fallen more than its benchmarks but, to reiterate, the MSCI index contains many currently outperforming ‘value’ companies in oil, tobacco and defence sectors, where we have never invested.

We have recently reviewed each of our holdings to ensure that, in this new higher interest rate and inflation world, our conviction remains strong, and, in almost all cases, it does. We have therefore not altered our portfolios significantly; this may sound as if we are not managing the assets actively but it has never been our approach to trade rapidly, only when necessary.

Looking forward, we cannot say exactly when the qualities of the businesses we own will become evident in their share prices; what we can say is that we have used the same approach for more than 20 years and it has served our clients well. There have been weaker periods of performance as a consequence of value rallies – notably in 2003, 2009 and 2016 – but by sticking to our process, we have more than compensated for these over the last 21 years and are confident that backing sustainable businesses is the path to making good recent underperformance once again.

There are many businesses in the portfolio offering significantly higher upside potential after recent derating and we are as positive on opportunities as we have been for several years. Recent indiscriminate selling has given us the chance to increase exposure to our highest-conviction companies at more attractive valuations and we added to names including Halma, Smurfit Kappa and Ashtead (a new buy in Q1) over the period.

Against such a challenging short-term backdrop, a number of our holdings were still able to post positive returns and we would highlight two names as underlining our long-term approach, with Trainline and Compass Group among the hardest hit in the portfolio during Covid lockdowns.

Trainline faced additional uncertainty as the UK government announced plans to create a new public sector body to oversee Britain's railways, with fears this could threaten its business model as an online platform for tickets and railcards. This ambiguity now appears to be receding and we feel Trainline is well placed to win the government’s contract to white label the train ticket solution, as well as potentially benefiting from a major growth opportunity in Europe as that market is democratised and opens up to independent providers.

Compass Group, meanwhile, continues to recover from lockdowns, recently hitting the key milestone of revenue exceeding pre-Covid levels on a run rate basis. The catering business said it has seen a notable improvement in Business & Industry and Education sectors as employees return to the office and students to in-person learning, with this allowing the company to increase FY 2022 organic revenue guidance from 20-25% to around 30% and start a share buyback programme.

We added to both companies at depressed levels in the wake of Covid lockdowns and the market is now recognising their improving prospects with higher share prices.

Helios Towers, held under our Connecting people theme, also had a strong quarter, with the market reacting well to Q1 numbers – year on year revenue growth up 20% – announced by new CEO Tom Greenwood. He highlighted a solid contribution from new markets of Senegal, Madagascar and Malawi and the company also launched its new five-year sustainable business strategy, focused on driving growth, impact, margins and returns. Helios has already achieved the five-year strategy goals set at IPO in 2019 and has set a new target to have 22,000 towers across sub-Saharan African by 2026.

As would be expected during a period of rising energy prices – and a burgeoning cost of living crisis – several holdings linked to our Improving the efficiency of energy use and Increasing electricity from renewable sources themes have posted strong returns, including Smart Metering Systems, Greencoat UK Wind, US Solar Fund, Renewables Infrastructure Group, and SDCL Energy Efficiency Income Trust.

Among weaker performers, as has been the case since the value rotation began, are several technology-focused businesses that continue to suffer from higher discount rates, including Trustpilot, Molten Ventures and Learning Technologies Group. We maintain conviction in these and other indiscriminately sold-down stocks and highlight that they have all executed well on growth plans.

Trustpilot, for example, is becoming the world’s leading review platform, allowing an independent and objective space for customers and merchants to interact online. As the economy continues to digitise, we believe Trustpilot’s dominant position in this fast-growing market will result in strong cashflow generation over the long term with millions of reviewers and merchants on this two-sided platform. The shares have dropped precipitously since IPO in March 2021, yet the results continue to positively surprise us. The market might be keen to see profitability sooner than the company is targeting, currently guiding to EBITDA profitability in FY24, but Trustpilot is delivering exactly what it set out at IPO.

In terms of other trading over the quarter, a new purchase was Aveva under our Improving the resource efficiency of industrial and agricultural processes theme, with the company’s digital solutions helping its customers achieve sustainability goals and targets. Aveva provides technology and engineering software, where real-time data is overlaid with AI and predictive analytics that improve efficiency and support circularity and traceability. This supports the energy transition for its customers, who are often among the world’s heaviest emitters.

As for sells, we exited a long-term positions in Hargreaves Lansdown and reduced exposure to Prudential on the back of weaker business fundamentals.

Shares in Hargreaves have been falling since interim results and its Capital Markets Day in February: net new business and earnings per share were weaker than expectations and the company also announced a higher cost trajectory for the next couple of years as it plans to reinvest in the business.

We think these investments are the right thing to do for the long term, helping HL maintain its market-leading position, but they have taken too long and are not without execution risk. We continue to believe this is one of the better businesses in the UK but have concerns over management quality, and decided to exit, maintaining exposure to our Saving for the future theme through names such as St James’s Place and AJ Bell.

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

Past performance does not predict future returns







Liontrust UK Ethical 2 Acc












IA UK All Companies












*Source: FE Analytics, as at 30.06.22, primary share class, total return, net of fees and income reinvested.


Understand common financial words and terms See our glossary

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 guaranteedYou 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.

Some of the Funds managed by the Sustainable Future team involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. Investment in Funds managed by the Sustainable Future team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Some Funds may invest in derivatives. The use of derivatives may create leverage or gearing. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead.


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.

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