- Global equity markets started the year well, driven by continued US equity market support based on the expectation that a Trump administration would be positive for Wall Street. Europe also performed strongly, closing the valuation discount to the US amid a wave of optimism over reforms. Against this backdrop, the MSCI AC World index reached an all-time high in mid-February.
- However, March saw optimism fade as US growth expectations moved lower on growing uncertainty around Trump policies and news flow surrounding DOGE, whilst in Europe fiscal response has been more forceful than expected. Value stocks and emerging markets were the relative outperformers.
- Energy, utilities and financials outperformed while information technology and consumer discretionary sectors were the clear losers over the quarter. Specifically, the ‘Magnificent Seven’ sold off, ending the quarter some 16% lower (BBERG MAG7 Index).
The Liontrust GF Global Alpha Long Short Fund returned 2.5%* over the quarter, compared with the 1.1% return of the Secured Overnight Financing Rate reference benchmark and the 0.2% return of the HFRX Equity Hedge (USD) Index, also a reference benchmark.
Market backdrop
The first quarter 2025 felt like a repeat of 2022 with the S&P 500 Index falling 5.1% as rotation out of the ‘Magnificent Seven’ continued with AI-related fervour subsiding. Tech-heavy Nasdaq unsurprisingly suffered more, falling 8.2% with semiconductor names – AI flag bearers – falling 14% in aggregate. The comparison to 2022 is eerie, with an almost identical Q1 pullback which preceded a very ugly Q2 causing investors to take a more cautious stance in March.
Increased rhetoric from the Trump team around tariffs also pervaded the quarter (they didn’t become reality until 2nd April in Q2) with investors positioning becoming more defensive. The prospect of higher tariffs on Chinese goods had a particular impact on domestic US consumer names and outlook for US consumption growth overall which inevitably fed through into rising expectations for inflation, a drag on the prospect for rate cuts in 2025.
Given the Mag7 contribution to S&P returns over the last three years, it’s unsurprising that the Q1 weakness was also driven by Mag7, with 70% of the S&P fall coming from those names. Nvidia fell 18%, Alphabet 18%, Apple 13%, Amazon 12%, and Microsoft 10%. The outliers bookending the group were Meta, which dropped just 1.5% in the quarter, and, most notably, Tesla, which fell a whopping 35% as delivery numbers from across the world came in significantly lighter than expected – in some cases, as much as 50% lower than the previous year.
Portfolio review
The Fund had average net market exposure of about 40% during the quarter yet was able to post a solid positive return despite equity market weakness focused on the US. Alpha generation on the short book was a significant highlight.
The investor rotation away from US technology mega caps as well as AI capex supported our strategies on AI makers and AI users. We ran a net long users against net short makers (AI Capex) throughout the quarter to the benefit of the Fund.
On the long book, the Fund suffered from long positions in Block (-42%) and Coinbase (-33%). Digital payments group Block fell after its rapid Q4 growth fell short of investor expectations, with $6.0bn revenue comparing against analyst consensus of $6.3bn, and a consequential miss on profitability. We retain conviction in both names.
Chinese e-commerce giant Alibaba (+56%) was a notable riser in the wake of Deepseek’s disruption of the AI sector; investors reassessed its prospects in light of its Alibaba Cloud unit’s heavy investment in its Qwen AI models. Rolls Royce (+29%) also rose strongly as prospects for the aerospace and defence sector were transformed by shifting dynamics around German defence spending as well as their exposure to SNRs (Small Nuclear Reactors).
The short book was well positioned for the market environment and for some clear stock specific opportunities. Deteriorating fundamentals for a number of shorts delivered clear profits for the Fund. In our Mobility strategy, Tesla struggled against the Chinese auto manufacturers (BYD long). We have long been structurally short of incumbent technology particularly in the hardware space and this yielded some stock specific wins. In particular, we were rewarded with a strong profit warning from Teradata, a provider of data warehouse software that has struggled to adapt its incumbent product set. This name has fallen in six of the last seven quarters, offering a very fertile short.
The Fund is managed by strategy, thematic, sector, pair or single stock and on this basis the standout strategies for the quarter were AI Capex (net short), Mobility (neutral), and Edge Compute. The primary detracting strategies was Fintech, as mentioned earlier.
Portfolio changes
During the quarter, the Fund reduced exposure to technology names both through increasing shorts in the hardware sector as well as well as reducing exposure to software (duration longs). We initiated a new asset management/trading strategy to reflect both increased volatility as well as the structural earnings power reduction for asset managers as market struggle to move higher.
Outlook
It is easy to see how an outsider could be forgiven for thinking that US economic policy is being created on the fly. The method of calculation for the significant tariff increases has been ridiculed and, at the same time, in just a week saw significant policy pull back and change, culminating in a 90-day suspension of all tariffs above 10% while terms are negotiated with specific countries.
The market voted very clearly on this uncertainty. In times of trouble, it would be normal for money flows to seek out the US dollar and treasuries as safe havens. In this case, that has not happened. In fact, the US 10-year yield increased 60bps in the week following the tariff announcements, marking its sharpest increase since 1982. Gold, the Swiss Franc and Yen looked like the safer haven assets with gold rising to consecutive highs throughout the reactionary period post 2nd April.
The move to suspend the new tariff levels on Wednesday 9 April, just a week after their introduction, resulted in a 12.5% up-move in the Nasdaq Index and 9.5% in the S&P 500 – the third largest single day up-move in equity market history, surpassed only by days in 2008 and 2001 during the Global Financial Crisis and the dotcom boom-bust. Incidentally, neither of these two bigger moves marked the bottom in markets during those two periods. Based on data showing significant short covering on this move higher, we have to believe it is likely the bottom is not in place here either.
As laid out in last quarter’s outlook, we remain convinced the concentration in a narrow selection of US companies is set to change. Passive investment flows, American exceptionalism and the AI revolution have all contributed to a very narrow group of winners. This set up was already of concern but it was not clear what the catalyst would be for it to change – it seems quite likely that the new Trumpian economics might well be that catalyst.
Following a sharp rally after the US elections in November, 2025 has seen the beginning of a rapid unwind – most clearly seen perhaps in the share price of Tesla. It rallied 40% from the election to the end of 2024; in 2025, the shares have fallen 37%. Another reversal of fortunes has occurred in semiconductors where the SOX index had a two-day drawdown of 17% in week beginning 7 April –the worst such move since the 1970s. There is not a single SOX constituent that rates positively on the Global Equity Team’s T-Score relative indicator.
We strongly believe that risk reward now favours more diversification away from passive core index strategies, Magnificent Seven and American exceptionalism.
The concentration of money flows into such a narrow portion of the market also leaves a level of vulnerability from the upcoming earnings season. We cannot see many companies brushing aside the tariffs and related earnings issues. At best, we may see guidance removed; at worst, it is likely that guides are lower. Investment levels are also likely to be cut as no one has any idea what the tax (tariff) implications will end up being.
All this concern and likely relative derating of the US leads us to continue to favour diversification into other geographies. Europe remains very cheap historically; India looks like a relatively tariff unaffected growth story and we still believe that China holds value based on the significant de-rating of names there. In fact, one feature of the protectionist policy on IT and AI that America has been pursuing is that of reduced innovation in the US market itself. Deepseek was a great case in point. Faced with losing access to the most powerful chipsets in AI, the Chinese have had to be far more innovative and they have been just that. Could the reluctance of the US to make their hardware available to China end up leaving then lagging in certain areas of innovation?
Within the US equity market itself, we believe diversification is also important. On a top level, the S&P Equal Weight is expected to outperform the S&P. We look towards similar types of diversification in US equity portfolios.
Finally, it seems clear that volatility and uncertainty are here to stay for the time being and so safe haven assets should form a bigger part of a any long book. Gold has been a stellar performer and that is likely to remain so; gold miners have also done well but still sit well below their all-time highs. Safe haven currencies like the Swiss Franc and the Japanese Yen have done well since the tariff announcement and this is also likely to continue making assets in these markets interesting.
In conclusion, risk levels have increased; Trumpian policy is unclear and subject to change on a coin toss. Equity risk premia increase on that basis and diversification both within the US equity market and more broadly on a geographic basis makes sense. The Q1 earnings season is likely to be very cautious and can only result in raised concerns for those companies that are in the eye of the tariff storm. We still see many opportunities in equities with significant polarisation between winners and losers, an ideal backdrop for long short.
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. 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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