Liontrust UK Growth Fund

• The Fund’s sector footprint was a headwind as banks and insurance (zero exposures in the portfolio) continued to rally.
• The Fund’s industrials holdings bore the brunt of April’s tariff uncertainty but recovered strongly in May and June as a takeover approach for Spectris at 85% premium highlighted value on offer among IP-rich engineers.
• New positions in Intergrafin and GlobalData were added to the Fund.

The Liontrust UK Growth Fund returned 1.3* in Q2. The FTSE All-Share Index comparator benchmark returned 4.4% and the average return in the IA UK All Companies sector, also a comparator benchmark, was 7.4%.

Performance experience varied considerably over the course of the quarter, with underperformance vs the benchmark occurring predominantly in April before the portfolio recouped ground in 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 ~13%), 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 a number of the Fund’s industrials also recovering. 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. We’ve made a long-term, high-conviction decision not to invest that sector. We believe that banks historically have proved themselves to be very poor compounders of capital, with low earnings quality given their elevated risk profile and inescapable dependence on interest rate movements which are outside of their control.

The Fund’s top quarterly contributor was engineer Spectris (+70%), after it 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 2^nd July).

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 such as Renishaw (+11%), Halma (+22%), and IMI (+11%).

These businesses also issued investor updates which were positively received: IMI released an in-line quarterly trading update and announced a strategic review, with its transport division – responsible for 8% of 2024 sales – under consideration for options such as a sale; Halma commented that trading since April has been strong, with order intake ahead of revenue and last year’s level; and Renishaw announced a new £20m annualised savings target for labour costs.

BAE Systems (+22%) extended its very strong recent share price performance. The defence and aerospace group reconfirmed guidance for 7% to 9% sales growth this year and commented on a supportive demand backdrop as most regions look poised for higher defence spending. BAE also noted that its largely domestic supply chain for equipment delivered to the US should minimise exposure to trade tariffs.

Indivior (+49%) reported Q1 net revenue of $266 million, exceeding the consensus estimate of $243 million. Alongside the strong top-line performance, the company reaffirmed its full-year 2025 financial guidance, reinforcing confidence in the outlook and the turnaround strategy catalysed by the arrival of the activist investor Oaktree Capital on the shareholder register late last year.

Smiths Group (+17%) was also among the Fund’s top contributors after a Q3 trading update upgraded full-year organic revenue growth guidance toward the top end of its existing 6% to 8% growth range. The diversified engineer saw growth across all its businesses, with particularly strong showings from Smiths Detection and Smiths Interconnect – two units earmarked for sale or spin-off. Smiths Group, under pressure from an activist shareholder, has recently announced plans to streamline its operations by concentrating on high-performance industrial technologies while divesting non-core business units. As with BAE Systems, Smiths Group also noted that its US goods (around 45% of sales) are predominantly produced locally – meaning exposure to trade tariffs should be limited.

To the downside, 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 to compound growth strongly over the long term.

Although Auction Technology (-22%) delivered in-line interim results and maintained its full-year guidance, its statement also flagged a significant amount of uncertainty over the near-term trading environment. The operator of online auction marketplaces and services grew revenue by 3% to $89 million in the period to 31 March as gross merchandise value stabilised. It saw good trading during the first five months, but activity levels slowed in March as trade buyers and consumers took stock of macroeconomic volatility. Although trading subsequently stabilised in April, Auction Technology noted that the uncertain economic backdrop and threat of tariffs leaves it little near-term demand visibility.

Turning to portfolio activity, two holdings were sold from the Fund in Q2: 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 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.

Two new holdings were added to the portfolio: Integrafin and GlobalData.

Integrafin owns the Transact B2B investment wrap platform, one of the largest in the UK. It has consistently aimed to differentiate itself via high levels of client service, engendering deep and loyal relationships with its independent financial advisory clients, as well as the ownership of its own proprietary technology. The decision to invest in proprietary technology is in contrast to almost all of Transact’s competitors, which mainly utilise third party offerings, but it is one which Integrafin believes is key to being able to shape the development of the platform to best suit customer needs. With high levels of recurring fee income, the business model is robust, while the company has a current cash flow return on invested capital of 16.6% - very comfortably ahead of both its own cost of capital and the wider market average.

GlobalData 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.

Looking forward, the Fund’s companies continue to display all of the hallmarks of quality that have underpinned strong long-term alpha generation from portfolios managed by the Economic Advantage team. The team retains its long-held conviction that the companies in the portfolio can continue to compound growth and deliver attractive returns to shareholders for many years to come.

Valuation is not the primary driver of long-term equity returns for a style like ours, but it can be a very significant factor in the short term – and that short term opportunity for a pronounced re-rating boost looks particularly compelling at the current juncture, with a high proportion of companies trading at material discounts to their long run average valuation rating.

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%), Indivior (+49%), Halma (+24%), BAE Systems (+22%) and Smiths Group (+17%).

Negative contributors included:

Auction Technology Group (-22%), Bunzl (-20%), BP (-15%), AstraZeneca (-10%) and Shell (-8.6%).

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

*Source: Financial Express, as at 30.06.25, total return (net of fees and income reinvested), bid-to-bid, institutional class. **Source: Financial Express, as at 30.06.25, total return (net of fees and income reinvested), bid-to-bid, primary class.

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.

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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.

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