Liontrust Global Smaller Companies Fund

The Economic Advantage team took over management of the Liontrust Global Smaller Companies Fund on 14 January 2025.

The Fund will be managed by Alex Wedge and Bobby Powar, who will apply the same Economic Advantage process that has been used to manage the team’s range of UK equity funds, including the UK Smaller Companies Fund since 8 January 1998.

• Policy volatility, particularly around tariffs, has caused widespread stock market de-risking.
• Our investment strategy involves increasing positions in preferred stocks during any periods of cyclical weakness; in February we topped up holdings including the three largest detractors.
• Aris Water Solutions was the top riser following strong results and increased financial guidance.

The Liontrust Global Smaller Companies Fund returned -7.0% in February, compared with the -4.5% return of the MSCI ACWI Small Cap Index and an average return of -3.3% in the IA Global sector, its comparator benchmarks.

Throughout the month, global equity markets experienced increased policy volatility, particularly concerning tariffs, resulting in widespread stock market de-risking. Several of the Fund's holdings reported quarterly earnings during this period.

Our investment strategy focuses on acquiring high-quality businesses while maintaining valuation discipline. This approach often leads us to retain more of our preferred stocks during periods of cyclical weakness, as short-term volatility can present attractive entry points for long-term investors. However, such cyclical weakness can result in challenging quarterly financial results, which negatively impacted the Fund over the month. Despite this, we maintain our long-term confidence in the quality of the businesses within the Fund, given their strong market positions, substantial earnings potential, and highly aligned management teams. Consequently, we took the opportunity to increase our positions throughout the month in several holdings.

Largest detractors:

• Donnelly Financial Solutions (-26% total return in sterling terms) made strong progress in software but gave a cautious outlook for the cyclical capital markets business for FY25. We believe the shift to higher quality earnings through software will deliver strong long-term shareholder returns, despite short-term guidance changes. We bought more shares.
• Interpump (-21%) reported its Q4 results, which continued to highlight challenging trading conditions in its cyclical hydraulics divisions affected by economic slowdown and destocking. The executive chairman and founder, Fulvio Montipò, described 2024 as "the most difficult ever experienced by the Group, comparable solely with the 2009 financial crisis". Despite facing short-term trading challenges, the company reported record cash generation and remains well positioned for the future. Since its founding in 1977 and listing in 1996, Interpump has demonstrated an excellent financial track record over the long term. We have increased the Fund’s holding.
• Cellavision (-21%) reported a slower quarter, with US political disruption causing purchase delays. Long-term prospects remain strong, especially with last year's Sysmex partnership. We increased our investment.

Top contributors:

• Aris Water Solutions (+22%) reported strong results and slightly raised its guidance. The company has a network of approximately 790 miles of pipeline for water services to companies in Texas, enabling oil companies to save costs compared to trucking options for water handling and recycling. Along with the operating results, it announced the acquisition of the McNeill ranch for $45 million, which offers additional growth opportunities.
• Classys (+14%) reported a strong finish to FY24 and provided reassuring guidance for FY25. The company continues to experience rapid growth due to the introduction of new products and expansion into new geographies for its medical aesthetics products and consumables. Additionally, there was some bid speculation regarding the company, which was subsequently denied.
• CTS Eventim (+10%) reported robust Q4 results this month, continuing its strong performance. We remain confident in CTS Eventim's well-established market positions in Live Entertainment and Ticketing, which have been meticulously developed over several decades.

Stock example:

This month’s featured Fund holding is Advanced Drainage Systems (ADS), a US business based in Ohio, founded in 1966 and listed on the NYSE in 2014. ADS is the largest manufacturer of plastic piping for stormwater drainage and also sells onsite septic wastewater solutions. Unfortunately, the incidence of severe storms, cyclones, flooding and droughts has been increasing over the past four decades in the US, and around one third of US homes are still not connected to a sewage system. Therefore, in addition to general residential and commercial construction growth, federal policy support is another tailwind for growth of the wastewater industry. Historically, most water piping was made from concrete, steel and PVC, but increasingly ADS’s plastic piping solutions have been replacing these traditional materials, as they are lighter, more durable and often more cost effective and easier to install.

ADS has a meaningful distribution advantage versus its competitors, as it operates the largest manufacturing and distribution network in the US for these products. This means ADS can deliver products more quickly to customers, utilising its sizeable truck fleet, as well as benefitting from economies of scale in procurement as a meaningful buyer of both virgin and recycled resin (just under 60% of products are made from recycled plastic). Over the long term, ADS has consistently taken market share in its industry driven by these scale advantages, and its cash flow return on invested capital is now close to 20%. Management is long term-oriented, with just two CEOs over the past 20 years, with the current Chairman Joseph Chlapaty (who was previously CEO for 13 years) having joined the company in 1980. We like the hard-to-replicate distribution network that has delivered scale efficiencies as the business has grown, stewarded by well-regarded management who are aligned with shareholders (nearly 12% of stock owned by management, worth close to $1bn).

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

* Source: FE Analytics, as at 31.12.24, total return, net of fees and income reinvested. The current fund managers’ inception date is 14.01.25

KEY RISKS

Past performance does not predict future returns. You may get back less than you originally invested.

We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.

The Funds managed by the Economic Advantage team:

• May invest in smaller companies and may invest a small proportion (less than 10%) in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, a 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 a fund to defer or suspend redemptions of its shares. May invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing.
• 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.
• May invest in companies predominantly in a single country which maybe subject to greater political, social and economic risks which could result in greater volatility than investments in more broadly diversified funds.
• Outside of normal conditions, 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.

The risks detailed above are reflective of the full range of Funds managed by the Economic Advantage team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.

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.

DISCLAIMER

This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.

It 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.

This information and analysis 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, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.

This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. 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.