- Volatile quarter included an unwinding of crowded trades, such as AI capacity buildout.
- A number of the Fund’s technology stocks were affected by the associated softening in investor sentiment towards the sector; BayCurrent and Frontdoor were among the stronger performers.
- A broadening of market leadership in Q4 should provide a fertile environment for stock-picking approaches to add alpha.
The Liontrust Global Alpha Fund returned -3.2% over the quarter, compared with the 0.5% return of the MSCI ACWI Index comparator benchmark and the 0.2% average return in the IA Global sector (also a comparator benchmark)*.
Market backdrop
The third quarter of 2024 was not a period for the fainthearted as markets whipsawed their way through the summer.
Volatility was everywhere but nowhere more so than the Nikkei 225 in Japan, which fell 25% from mid-July to early August, including a 17% two-day fall as markets appeared to succumb to a 1987-like liquidity event.
Assets across the world reacted in tandem, with the US SOX semiconductor index in particular falling 25% peak to trough, reflecting a general move towards derisking of the most crowded trades (in this case the big AI capacity buildout). Even the US mega-cap constellation saw profit taking and a quarter of underperformance.
At the same time, interest rate markets were moving dramatically to price in a 50 basis points (bps) cut by the Federal Reserve in September. The short end (US 2-year bonds) saw yields fall a whopping 115 bps from 4.75% at the start of the quarter to 3.60 % at the end. In commodities, gold rose 14% in the quarter to complete a four-quarter winning run and hit new all-time highs, while oil fell 18% - perhaps taking its cue more from expected global economic weakness than the rising tensions in the Middle East.
All in all, the quarter was an ambiguous juxtaposition of asset price moves that left many wondering what the path to year end would really look like.
Portfolio review
The Fund’s moderate overweight to technology left it exposed to weakening sentiment as investors paused to give the sector’s AI-fuelled gains more scrutiny. As well as AI bellwether Nvidia (-7.4%), the portfolio’ ten largest detractors over Q3 also included SK Hynix (-27%), Microsoft (-9.2%) and CrowdStrike (-22%) from the tech sector. Of these, CrowdStrike sits alone in its share price weakness stemming from a stock-specific operational setback rather than a sector-wide shift in investor appetite. In July, the cybersecurity specialist pushed out a faulty software update responsible for one of the largest ever global IT outages. Although its subsequent Q2 results announcement in August quantified the sales impact at only a few percent this year, investors marked down the shares heavily.
Away from tech, Japanese consultancy group BayCurrent (+74%) was among the portfolio’s strongest quarterly contributors. Its Q1 results release in July beat expectations, as revenues rose 26% year-on-year following strong domestic investment demand, with companies focusing on digital transformation and generative AI.
PayPal (+27%) also moved higher on the back of quarterly results; in the three months to 30 June, operating profit rose 17% as margins expanded 126bps, ahead of expectations and strong enough to prompt an upgrade to full-year guidance. PayPal is now targeting “low to mid-teens” percentage growth in earnings per share, up from “mid-to-high single digit” guidance given in April.
Likewise, Frontdoor (+34%) – the US home warranty provider – upgraded 2024 earnings targets after price increases drove Q2 revenue growth in the face of lower volumes.
Also prominent among the Fund’s top contributors was Alibaba (+39%), as Chinese and Hong Kong listed stocks responded dramatically to a range of economic stimulus measures announced at the end of the quarter.
By contrast, Novo Nordisk (-23%) was a weak spot in the portfolio as speculation mounted that it could be forced to lower prices on weight loss drugs in the key US market.
Portfolio Changes
We added several new holdings across the Fund with the aim to provide further diversification across sectors and themes away from the more crowded ideas. These were funded by trimming existing holdings, as well as exiting CrowdStrike, where we see near term challenges, and Apple, where we believe the valuation is baking in a very optimistic growth scenario.
Wayfair was added to provide exposure in the challenged home furnishings space. Its growth has been relatively resilient, and it is well place for an environment where economic headwinds subside. Another addition was Trimble, which provides several hardware and software related solutions to the construction, agriculture and transportation industries. The company is undergoing a shift from being reliant on hardware sales, to becoming more software focused, which should lead to increasing margins and higher quality recurring revenues.
Late in the quarter, the fund increased software exposure with SAP, Shopify and Samsara. SAP continues to see robust growth in its S/4HANA ERP product cycle driven by cloud migration and up-sell opportunities. Shopify is seeing strength in merchants’ gross merchandise value and increasing its generative AI offerings. Samsara is helping industrial companies to digitalise physical assets and offer surface real-time visibility. It continues to scratch the surface of penetration, with new software offerings and asset tags providing large greenfield opportunities and expansion of addressable market.
Outlook
With so much lack of clarity, it normally pays to be more cautious. However, we believe there are clear ways to generate alpha in equity markets even if the overall direction is unclear.
The Fed commentary surrounding the 50bps cut in September made clear that the economy is strong, yet the rate cut itself might suggest otherwise, so we believe the market is going to remain volatile around data points until the path of the economy is clear.
While market direction may be hard to predict into year-end, we believe the backdrop is supportive of a broadening out in the market. This should translate into fertile conditions for stock, sector, or theme pickers. Looking at the winning equities ‘baskets’ in Q3, (according to Goldman Sach’s designations), the US is led by housing, non-profitable tech, ‘power up America’ and infrastructure – all lower rate beneficiaries while their AI basket of names turned in a negative quarter. Technology has been side-lined at its broadest level as the next wave of AI opportunity is more carefully scrutinised.
Our base case remains that set out last quarter: alpha will be generated from a focus on a broadening out of market leadership and less so from betting on the absolute direction of markets. It’s time to think beyond the consensus trades of the last 12 months; this should be highly beneficial for stock-picking strategies.
Discrete years' performance (%) to previous quarter-end:
|
|
Sep-24 |
Sep-23 |
Sep-22 |
Sep-21 |
Sep-20 |
|
Liontrust Global Alpha C Acc GBP |
16.5% |
5.6% |
-26.5% |
25.7% |
35.1% |
|
MSCI ACWI |
19.9% |
10.5% |
-4.2% |
22.2% |
5.3% |
|
IA Global |
16.2% |
7.8% |
-8.9% |
23.2% |
7.2% |
|
Quartile |
3 |
3 |
4 |
2 |
1 |
* Source: FE Analytics, as at 30.09.24, total return, net of fees and income reinvested
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.
Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund. This Fund may have a concentrated portfolio, i.e. hold a limited number of investments or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on the Fund's value than if it held a larger number of investments across a more diversified portfolio. The Fund may encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. The Fund will invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares. The Fund may invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of the fund over the short term. Outside of normal conditions, the Fund may hold higher levels of cash which may be deposited with several credit counterparties (e.g. International banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails.
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