Liontrust SF Absolute Growth Fund

Q1 2019 review

The Fund returned 12.0% over the quarter, outperforming the IA Flexible Investment sector average of 6.3%*.

Equities bounced back strongly over the period as markets climbed the proverbial “wall of worry”, recovering from the volatile sell-off that marked the end of last year.

We entered 2019 with two key risks at play, which had rocked markets over the last quarter of 2018. The first related to interest rates and risk of a policy error; the second centred on politics, with concerns focused on a US-led trade war with China and a calamitous “no-deal” Brexit in the UK. Both risks have subsided over the quarter, and with the risk of a recession still small, markets rallied as a result.

Negotiations between Presidents Trump and Xi, aiming to find a compromise on trade, appear to be heading in the right direction. With China slowing in the last few months and economic momentum in the US also facing hurdles, both parties are incentivised to find a solution and Trump is clearly concerned a recession could damage his re-election prospects in 2020.

China’s economy is heavily dependent upon its export sector and has slowed materially since the US imposed tariffs. While the Chinese are unlikely to open their economy fully to US imports, there remain areas in which they could appease America and still continue to pursue their agenda in terms of moving up the technology curve in key sectors.

As for the UK, while the political soap opera surrounding withdrawal from the EU rolls on, the risk of a hard Brexit has receded. The situation remains fluid and difficult to predict but a soft, or semi-soft, Brexit is the likely outcome, which will be supportive for the European economy.

Meanwhile, the risk of policy error by central banks has also receded. The US Federal Reserve has scaled back its expectations for further rate rises over 2019, citing a weaker economy. Likewise in Europe and China, we have seen the risk of tightening monetary policy shift swiftly to expectations of loosening and in the absence of global recession, this has translated into stronger equity markets.

We continue to stress that whatever macro events are unfolding in the background, the underlying business fundamentals for the areas of the global market in which we invest remain strong. Important structural dynamics, such as the shift to a digital economy, the drive to improve efficiency and the importance of improving quality of life, also continue to drive earnings.

In terms of asset allocation, we reduced our cash position from 15% back down to 4% over the period – having upped cash in Q4 – feeling the sell-off at the end of last year had discounted an overly negative outcome on both Brexit and the US/Chinese trade war.

Among the best-performing stocks over the quarter was US software business Cadence Design Systems, which was again able to deliver a strong set of results in January despite concerns around a cyclical slowdown in the semi-conductor industry.

The company continues to broaden its chip design software offering to new customers, as the likes of Amazon, Google and even Tesla invest in chip design teams. Cadence’s software offering is essential to this design and demand from these businesses, as well as more traditional chip manufacturing customers, will drive growth over the short and long term. This type of innovation delivers better efficiency, which is key to our Improving the efficiency of energy usage theme.

Continuing the software theme, SS&C Technologies also delivered another strong quarter. The company offers end-to-end solutions for compliance and software systems for the investment industry and as regulations become more complex, the SS&C offering is increasingly important.

It acquired three businesses in 2018 and continues to broaden the offering into mutual funds and wealth management. SS&C’s best-in-class products bring the scalability of cloud computing to even the smallest investment managers and its software ensures compliance and accounting functions can be outsourced reliably. The company remains a clear enabler of a more transparent and secure investment management industry and benefits from our theme of Increasing financial resilience.

Healthcare business IQVIA also continued its solid run, with the company’s data-driven strategy for the design of clinical trials creating an important competitive advantage. It also continues to grow its cloud-based technology offering, taking what was traditionally a database and offering analytical solutions based on salesforce.com’s platform.

All of this improves clinical trials, an area of the healthcare system with a poor track record of delivering positive outcomes for patients. Given the US spends nearly 18% of its entire economy on healthcare, companies that can deliver efficiencies and better value for money are likely to be more successful and IQVIA is therefore a key beneficiary of our Providing affordable healthcare globally theme.

Elsewhere, another healthcare name, Alexion, also bounced back from a tough Q4, during which the company suffered as rival firms presented data in competition to its main drug franchise Soliris. As we said last year, we continue to believe Alexion will remain a market leader and the company announced strong 2018 results in February, citing a 24% increase in revenues over a ‘transformational year’ and the approval of its next generation therapy Ultomiris for the treatment in PNH ahead of schedule.

As for the weaker performers, Norwegian metals producer Norsk Hydro struggled after warning it would miss 2019 expectations due to restricted output in its Brazil facility where the company has taken action to address environmental damage.

Norsk manufactures aluminium products used in a number of industries including transport, automotives and construction and is a beneficiary of our Improving the efficiency of energy use theme due to the lightweight properties of the alloy. Based on its supply chain and technology leadership, the company has developed a cost advantage in the production of aluminium products.

Henkel, the German adhesive and personal care company, also suffered as increasing investment impacted profitability. The Düsseldorf-based maker of Persil and Loctite warned investors that adjusted earnings per share growth would be lower than in 2018, which preliminary figures showed had missed its own muted goals. As a consequence, the company is under review.

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

 

 

Mar-19

Mar-18

Mar-17

Mar-16

Mar-15

Liontrust Sustainable Future
Absolute Growth 2 Acc

16.9

6.4

23.4

-1.9

14.3

IA Flexible Investment

3.3

2.4

19.1

-4.3

11.6

Quartile

1

1

2

2

2

 

*Source: Financial Express, as at 31.03.19, primary share class, total return, sterling, net of fees and income reinvested.

For a comprehensive list of common financial words and terms, see our glossary here.

 

 

Key Risks

 

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

 

Disclaimer

 

The information and opinions provided 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. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Wednesday, April 24, 2019, 3:22 PM