Liontrust Global Smaller Companies Fund

• Volatile quarter included an unwinding of crowded trades, such as AI capacity buildout.
• Consumer sector stocks including Frontdoor made a strong contribution to quarterly returns. Japanese consultancy business BayCurrent was also a standout riser. 
• A broadening of market leadership in Q4 should provide a fertile environment for stock-picking approaches to add alpha.

The Liontrust Global Smaller Companies Fund returned 2.0% over the quarter, compared with the 2.5% return of the MSCI ACWI Small Cap Index and an average return of 0.2% in the IA Global sector, its comparator benchmarks.

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 portfolio’s overweight exposure to the consumer discretionary sector contributed strongly to performance over the quarter, as Frontdoor (+34%), LGI Homes (+25%) and Bright Horizons Family Solutions (+20%) all made sizeable gains. US home warranty provider Frontdoor upgraded 2024 earnings targets after price increases drove Q2 revenue growth in the face of lower volumes.

The most significant stock contributor to performance was Japanese consultancy business BayCurrent (+74%). Its quarterly 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.

The Fund’s technology stocks were exposed to weakening sentiment as investors paused to give the sector’s AI-fuelled gains more scrutiny, while its healthcare holdings were also a source of negative attribution, with Ionis Pharmaceuticals (-21%) a heavy faller on news it was looking to raise $500 million in share capital to support drug development.

The largest detractor was Fevertree Drinks (-24%), after the premium mixer company reported disappointing sales and a reduction in its full year revenue forecast and.

Portfolio trades

Over the quarter we took profits by selling Vertiv, the multinational provider of infrastructure and services for datacentres, on concerns that its valuation is now reflecting an extremely optimistic growth scenario.

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:

* 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.

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.

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. As the Fund is primarily exposed to smaller companies there may be liquidity constraints 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. In addition the spread between the price you buy and sell units will reflect the less liquid nature of the underlying holdings. 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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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.

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