Liontrust GF UK Growth Fund

• Portfolio M&A activity continues, with Spectris targeted by private equity.
• Engineering peers Halma and Renishaw rise on the read-across, as well as positive investor updates.
• GlobalData added to the portfolio as termination of bid interest presents a valuation opportunity.

The Liontrust GF UK Growth Fund returned 1.1* in June. The Fund’s comparator benchmark, the FTSE All-Share, returned 0.5%.

Despite ongoing US trade policy uncertainty and a spike in geopolitical tensions as Israel launched attacks on Iran, investment markets showed little signs of risk-off or flight-to-safety behaviour, even after the US became directly involved by targeted Iranian nuclear facilities.

Global equity markets largely registered modest gains, taking several to fresh all-time highs, while a spike in oil and gold prices were short-lived.

On a number of previous occasions, we have highlighted the extent to which the generational low valuation opportunity in high-quality UK companies has attracted takeover activity. The Economic Advantage investment process has always experienced a lot of inbound M&A interest, as corporate and private equity acquirers recognise the appeal of the barriers to competition these companies possess. Since 2022, the fund range has had 18 takeovers of companies at an average premium of 44% – clearly illustrating the level of value acquirers are seeing.

In addition to these completed deals, this month Spectris (+92%) joined the list of holdings subject to bid interest. The specialist in precision instrumentation received a conditional proposal from private equity group Advent at £37.63 a share, an 85% premium and a level at which Spectris indicated it would recommend a firm offer.

However, shares in Spectris jumped even higher by the end of the month as it became clear that private equity peer KKR is also an interested party. Spectris announced that it had received and rejected a conditional proposal from KKR (without disclosing an indicative value) before going on to announce agreed terms on Advent’s offer. KKR’s response – reiterating its ongoing interest and urging shareholders not to accept the Advent offer – ensured that Spectris shares finished the month at a modest premium to the recommended deal price.  In early July, KKR subsequently submitted a £40 cash offer which was recommended by Spectris’s board.

Amid an uncertain macroeconomic outlook, some of the Fund’s IP-rich engineers have experienced share price weakness over the last year due to the inherent cyclicality of their businesses. The scale of the Spectris bid premium really serves to illustrate the extent to which short-term sentiment driven weakness can generate a fundamental disconnect from the true, intrinsic longer-term value of these businesses. The read across from the bid interest helped lift shares in fellow engineers Renishaw (+11%), Halma (+10%), and IMI (+5.3%).

Additionally, Halma and Renishaw’s gains were supported by investor updates.

Halma released results showing 11% revenue growth in the year to 31 March, supported by a particularly strong performance from its businesses in the Environmental & Analysis division. Trading in its new financial year has begun well, with order intake ahead of revenue and last year’s level. It expects to deliver upper single digit percentage organic revenue growth this year, with operating margins slightly above the middle of its 19% - 23% target range.

At a capital markets day, Renishaw announced a new £20m annualised savings target for labour costs. Last month the company released a Q3 trading update showing a 5% year-on-year revenue increase as consumer electronics and semiconductor sales picked up but also noting its exposure to tariff policy volatility through the 20% of sales into the US.

Moonpig (-9.3%) had performed well earlier this year, helped by a new share buyback scheme announced at its April trading update as it cited exceptional levels of cash generation. The shares gave back some of these gains in June after a full-year results statement included the surprise resignation of CEO Nickyl Raithatha after seven years in the role. Raithatha will stay in the role as a successor is sought out. In the year to 30 April, Moonpig grew revenue by 2.6% to £350 million, with free cash flow rising 8.4% to £66 million.

Aside from trading and takeover bid-related share price moves, sentiment weighed on the pharmaceutical holdings GSK (-7.8%) and AstraZeneca (-5.6%), with the sector facing uncertainty over tariffs and increasing political scrutiny on drug pricing from the Trump administration in the US.

Turning to portfolio activity, two holdings were sold from the Fund in June: Indivior and RWS Holdings. Indivior was sold due to the company’s decision to cancel its London secondary listing, after moving its primary listing to the US last year. As the Fund only invests in domestically listed companies, the decision catalysed the Fund’s exit from the holding.

RWS has been a long-standing holding across 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. In addition, the team had conducted several due diligence meetings with an expert network provider and an industry contact which reinforced our concerns. We therefore completed a full exit in June.

Meanwhile, the Fund initiated a small starting position in a new holding, GlobalData. The company had been the subject of potential takeover interest from two separate private equity firms earlier in the year. One (KKR) had already walked away, but GlobalData announced in June that it had terminated discussions with the second (ICG). Having held the shares in other EA funds for many years, the Liontrust UK Growth Fund took the opportunity of the negative share price move on the news to initiate a starting position. While the initial position is small, cognisant of uncertainty in the backdrop and potential pressure on client budgets in the short term, longer term we feel this is a business rich in the intellectual capital assets our investment process seeks out.

GlobalData is a provider of business-critical research, data and analytics to over 4800 clients across 20 sectors globally. It has significant depth of intellectual property, claiming ownership of hundreds of unique proprietary datasets, augmented by in-depth proprietary research and analysis, delivered from a single software platform. Meanwhile, its output and data become deeply embedded in client workflows, and the business model is largely recurring, with subscription income close to 80% of total revenue. It also has a strong owner-manager culture; founder Mike Danson – who previously founded, floated and ultimately sold Datamonitor – still holds well over 50% of the shares.

Positive contributors included:

Negative contributors included:

Diageo (-9.3%), Moonpig Group (-9.3%), Unilever (-6.0%), AstraZeneca (-5.6%) and GSK (-7.8%).