Liontrust GF Special Situations Fund

• Fund’s sector footprint a headwind during a volatile quarter, although – encouragingly – size bias has switched from headwind to tailwind as small and mid-caps lead the market recovery from April’s lows.
• Three of the Fund’s top five quarterly contributors – Spectris, Alpha Group and Craneware – rose on takeover interest.
• Aside from considerable re-rating potential, portfolio returns should continue to be supported by ongoing M&A, buyback activity and – most importantly – resilient earnings growth compounding from our companies.

The Liontrust GF Special Situations Fund returned 3.4%* in Q2. The Fund’s comparator benchmark, the FTSE All-Share, returned 4.4%.

Performance experience varied considerably over the course of the quarter, with all of the underperformance vs the benchmark occurring in April and the portfolio recouping ground in May and (to a lesser extent) June.

April was characterised by a very high degree of market volatility, after sweeping tariffs announced by US President Donald Trump (dubbed ‘Liberation Day’) sent shockwaves through global markets. Though sentiment improved later in the month following a shifting approach from the US administration, including a 90-day delay on tariffs for non-retaliatory countries, it still marked a very tough month sentiment-wise for the industrials sector.

The Fund has had a longstanding overweight in the industrials sector (currently ~12%), favoured for its companies’ strong intellectual property, global distribution reach, and robust, though somewhat cyclical, cash flow returns on invested capital. However, industrials bore the brunt of the tariff uncertainty, with constituent names exposed to a broad-based sell-off as investors digested the implications of both direct tariff exposure and potential second-order effects on global economic growth. As the Fund’s holdings in the sector are generally comprised of businesses with broad global footprints (lending a degree of flexibility in terms of optimising manufacturing and distribution) and strong pricing power, we feel that the first-order effects of tariffs on our companies’ trading are well-contained. However, it is impossible to predict any secondary effects stemming from weaker global growth and this wider uncertainty weighed on sentiment in the immediate aftermath of the tariff announcements.

May was a wholly different story, with markets rebounding strongly and the Fund delivering outperformance thanks to its tilt towards small and mid caps in a more risk-on environment. A number of small cap and AIM-listed holdings delivered double-digit share price gains during the month, a dynamic that was compounded by several Fund holdings receiving takeover approaches. There was also a bounce-back from a number of industrials holdings impacted by uncertainty in the prior month.

Meanwhile, June saw both the market and the Fund creeping modestly higher, despite elevated geopolitical tension in the Middle East.

Overall, over the course of Q2 the Fund’s sector footprint was an ongoing headwind, chiefly as a result of its long-standing underweight to the financials sector, where it has zero exposure to banks and insurance. These two sub-sectors – which comprise almost 16% of the FTSE All Share Index – continued to rally, presenting a -1.4% relative negative contribution to return for the Fund.

Meanwhile, the size bias of the Fund was a tailwind, with the performance of the small and mid cap market segments strengthening over the course of Q2 and continuing into early July.

The top five contributors to portfolio return collectively contributed 2.86% to portfolio return and delivered an average total return of +32.8%.

• Spectris (+70%) received a confirmed takeover bid at an 85% premium from US private equity fund Advent. The shares were further boosted when a rival bidder, KKR, also confirmed interest (KKR subsequently confirmed a recommended bid at a further 6% premium to Advent’s offer post period end, on 2nd July).

• Alpha Group (+27%) was also a beneficiary of takeover interest, this time from US payments company Corpay Inc. After initially rejecting a preliminary cash proposal (at an undisclosed level), the Board subsequently said it had held ‘constructive’ talks with Corpay and sought an extension to the Takeover Panel’s ‘put up or shut up’ (PUSU) deadline until the second week of July.

• The third top contributor to have received an M&A approach was Craneware (+20%), which was targeted by private equity group Bain Capital with a proposal at £26.50 a share, a 29% premium to the closing price the day before Bain announced its interest. The company issued a confident statement saying it had rejected the offer on the grounds that it “fundamentally undervalues Craneware and its prospects”.

• AJ Bell (+28%) rallied after interim results in May showed 17% revenue growth, driven by all three revenue lines and a high single-digit beat on EPS forecasts, with guidance raised for FY25 and the company reporting a bright outlook. Further out macro trends should continue to support continued customer growth.

• Mortgage Advice Bureau (+20%) shares climbed steadily through the quarter. Confidence was underpinned by the May AGM statement, which revealed strong Q1 completions, a 3% rise in mainstream advisers to 2,003 and guidance that refinancing volumes will accelerate as 2020–21 five-year fixes mature. Management said trading “continues to be in line with expectations” and they were “pleased with our performance so far in 2025”.

The five largest detractors from portfolio return collectively contributed -2.59% and delivered an average total return of -15.3%.

• BP (-15.6%) and Shell (-8.6%) both emerged from Q1 nursing bruises. BP’s headline profit roughly halved year-on-year and its quarterly buy-back was scaled back. Shell’s earnings likewise slipped, dented by LNG outages and a hefty working-capital drag, yet brokers highlighted its strong cash conversion and determination to keep rolling a multi-billion-dollar buy-back programme. The bigger drag was macro: President Trump’s ‘Liberation Day’ tariff salvo saw crude fall almost $10 in a week, souring sentiment across the sector. Ironically, the pull-back unlocked fresh corporate speculation. Bloomberg reported in early May that Shell had quietly run the slide-rule over BP; a month later Shell issued a Rule 2.8 “no-intention” statement, but strategists still see merit in the tie-up should valuations stay stressed, underscoring latent value in both names.

• Bunzl’s (-20%) profit warning caught the market, and the team, completely off guard, coming from a company with a long track record of forecasting reliability. The warning stemmed from operational issues within its large US foodservice subsidiary, compounded by softness in the backdrop thanks to macro uncertainty, prompting a ~10% downgrade. The share price fall brought the stock’s valuation to a level not seen since the global financial crisis, and after a reassuring meeting with management, we remain confident in the position and have topped up our holding.

• AstraZeneca (-10%) underperformed in Q2 amid a combination of stock-specific and broader sector pressures. Investor sentiment cooled following its Q1 results, which, while beating on core operating income, recorded a small miss to revenue growth forecasts driven by the Oncology franchise. The broader pharmaceuticals sector also faced headwinds, with tariff uncertainty and increasing political scrutiny on drug pricing from the US administration. In spite of short-term noise, we remain bullish on the company's strength of IP and distribution and its ability tocompound growth strongly over the long term.

• RWS Holdings (-23%) has been a long-standing holding within the EA funds (>15 year holding period) and for much of this time was a strong organic growth compounder, with particular IP strengths in patent and complex technical translations for industries such as life sciences, a global footprint (enabling it to serve large enterprise clients) and long-term, embedded customer relationships.

However, in more recent years it has suffered not only from the extreme valuation compression associated with AIM-listed small cap businesses and from short term cyclical demand pressures on end customer budgets, but critically also from significant longer-term structural questions over its relevance (and importantly its business model and pricing power) in a world where translation is increasingly AI-enabled, if not AI-executed. Our prevailing team view had been that the extreme low valuation (>25% free cash flow yield for much of the past few years) already reflected a substantial amount of this longer-term uncertainty, and that such structural concerns would take years to play out and were over-done in the short term.

However, a trading update in April catalysed a re-appraisal of the pace at which the company’s competitive advantage might be under threat.  References to “specific challenges with two large clients in relation to changes to delivery models and content types”, with associated gross margin impact, led to a substantial profit downgrade for the year, and strengthened the case against continuing to hold on to the shares. We therefore completed a full exit in June.

We are delighted to see that momentum appears to be turning for UK small caps, which have led the market recovery since the April lows. Of the 15 small cap and AIM-listed stocks currently in the portfolio, the average total return delivered in Q2 was 12.6%, compared to the portfolio average total return of 5.4% (3.6% average across large and mid-caps only).

Anecdotally we are seeing signs of capital returning to the market with a growing volume and size of buying interest in the small cap shares we own. While these moves so far represent but a fractional reversal of the extreme de-rating across the smaller company segment of the portfolio over the past few years, it is nevertheless cheering to see significant signs of life emerging. We have consistently sought to emphasise that despite the brutal underperformance of mid and small caps since the end of 2021 relative to their large cap peers, the Fund remains resolute in its conviction that such companies retain their highly attractive growth compounding potential over the longer term. It has maintained its exposure so that our investors may benefit when the cycle finally turns again in favour of smaller companies.

In the meantime, we feel strongly that returns will continue to be supported by ongoing M&A, buyback activity and – most importantly – resilient earnings growth compounding from our companies.

Positive contributors included:

Spectris (+70%), AJ Bell (+28%), Alpha Group International (+27%), Craneware (+20%) and Mortgage Advice Bureau (+20%).

Negative contributors included:

RWS Holdings (-23%), Bunzl (-20%), BP (-15%), AstraZeneca (-10%) and Shell (-8.6%).