Liontrust Special Situations Fund

The Liontrust Special Situations Fund returned 7.6%* in November. The FTSE All-Share Index comparator benchmark returned 7.1% and the average return in the IA UK All Companies sector, also a comparator benchmark, was 7.6%.

Global equities recovered further in November, helped along by hopes that the pace of monetary policy tightening may be set to slow. The US Federal Reserve and Bank of England both implemented 75 basis point hikes in November, while the European Central Bank had lifted rates by the same amount at the end of October.

More important than the scale of this month’s moves were the comments regarding the future direction of policy. Minutes from the Federal Reserve’s rate-setting meeting and comments from its Chair, Jay Powell, noted that rates may need to peak higher than previously anticipated, but also suggested that future rate hikes may be smaller and slower, as the Fed waits to observe the cumulative impact of the policy measures already taken.

As investors weighed up whether this should be interpreted as a hawkish or dovish message, weaker-than-expected consumer price inflation tipped them towards the latter and added fuel to the recovery in risk asset prices. Inflation for October came in at 7.7% year-on-year, the lowest since January, down from June’s peak of 9.1%, and below forecasts of 7.9%.

With a number of companies updating on trading on the period to 30 September, it was a busy month for portfolio newsflow, the majority of it fairly constructive.

Dotdigital Group (+28%) continued to recover from its heavy fall in March, which came after it warned of a post-lockdown unwinding of customer buying behaviour as well as tight labour market conditions in the US. In July, the omnichannel marketing automation specialist announced that revenues for the year to 30 June would exceed re-based expectations, and the release of full-year results in November triggered another leg up for the shares. The company commented that positive trading momentum has carried over into the new financial year, with the prior challenges now waning and market conditions improving overall. It is on track to meet expectations for revenue growth next year, while profitability is marginally ahead of forecasts.

Kainos Group (+30%) is an outsourced provider of IT design and support services primarily to the public sector and healthcare industry. Long-term customer relationships and ongoing demand from the NHS have meant that its business has proven resilient to a challenging economic backdrop. In November, it reported 26% year-on-year revenue growth to £180m in the six months to 30 September, while bookings rose 18% to £222m, taking its contracted backlog to £308m. At 53%, growth was particularly strong in its international operations, lifting its share of the group total to one-third.

Domino’s Pizza Group’s (+27%) shares eased back earlier in the year on a weaker outlook for consumer spending and due to the impact of food cost inflation. Although margins came under pressure in the first half of the year, Domino’s has planned to pass costs on to franchisees in a lagged manner; investors will therefore be encouraged that November’s Q3 trading update maintains full-year profit guidance, suggesting its approach is working so far. Its recent sales performance has been good: like-for-like systems (excluding the impact of VAT changes) grew 2.4%, and has accelerated to 10.4% in the first six weeks of Q4.

The company has also continued to retreat its fledgling international operations by exercising a sell option on its German division, which it expects to generate a profit on disposal of £40m - £50m. As part a tighter capital allocation framework applied since March 2021, Domino’s also announced a new £20m share buyback.

Due to solid trading and strength in the US dollar, Keywords Studios (+22%) now expects both revenues and profits for 2022 to be ahead of its previous guidance. The support services provider to the video games industry also included upbeat 2023 outlook comments within a trading update, noting that organic growth may moderate but should remain well above its medium-term target of 15%. Keywords Studios anticipates a 2023 financial performance which is towards the upper end of the current analysts’ forecast range.

The Fund’s engineers also saw some strength in November, with Rotork (+17%) leading the way. Component supply chain issues contributed to slightly slower than expected sales growth earlier in the year for the provider of flow control solutions. However, a November trading update showed that attempts to address these issues have begun to pay off, with direct purchasing and forward buying of semiconductors yielding improvements. Together with robust customer demand and higher selling prices, this generated organic constant currency revenue growth of 19% in the four months to 30 October.

Weir Group (+16%) also noted that supply chain and logistics challenges are easing, while additionally commenting that gross margins have been maintained despite input cost inflation. With commodity prices remaining elevated, Weir Group experienced strong demand for its products in Q3, particularly for aftermarket spares which saw 21% order growth.

Among the portfolio detractors, Paypoint (-7.4%) shares gave up some ground on news of its agreed £76m deal to buy Appreciate Group, a gift card and reward scheme provider in the UK. The cash-and-shares offer equated to an offer price of 44p a share, a 69% premium to Appreciate’s share price – a level which some Paypoint investors may have viewed as too full judging by the share price reaction.

TI Fluid Systems (-8.5%), a provider of highly engineered automotive fluid storage, is benefiting from a recovery in global car production, although it has lagged the uplift slightly. Q3 constant currency revenue growth was 20% in constant currency terms, 760 basis points behind the global light vehicle market’s production increase. During this period, growth was constrained by low participation in the Chinese battery electrical vehicle market, which was dominated by domestic suppliers. Investors were also disappointed that TI Fluid Systems’ pass-through of input cost increases to customers has only been partial, with further adjustments needed to mitigate margin pressures.

Positive contributors included:

Kainos Group (+30%), Domino’s Pizza Group (+27%), Keywords Studios (+22%), Rotork (+17%) and Weir Group (+16%).

Negative contributors included:

Iomart Group (-16%), Midwich Group (-13%), Mortgage Advice Bureau (-13%), TI Fluid Systems (-8.5%) and Paypoint (-7.4%).

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

Past performance does not predict future returns

*Source: Financial Express, as at 30.11.22, total return (net of fees and income reinvested), bid-to-bid, institutional class.

**Source: Financial Express, as at 30.09.22, 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.

Some of the Funds managed by the Economic Advantage team invest primarily 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.

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