Liontrust SF Cautious Managed Fund

Q3 2019 review

The Fund returned 1.7% over the quarter, underperforming the IA Mixed Investment 40-85% Shares sector average of 2.0%*.

We saw another busy quarter on the policy front, with the Federal Reserve and European Central Bank (ECB) both cutting rates – twice in the case of the former – and the latter also announcing open-ended quantitative easing (QE) from November.

Concerns facing markets – in the shape of Brexit and trade wars – continue to be significant but they are also largely political and could be swiftly resolved. As always, 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.

Our themes are structural in nature and therefore less transient than cyclical drivers, which can change constantly. The key factor behind all our themes is the conviction that, over time, the global economy will become more sustainable.

In terms of asset allocation, our equity position is neutral, with overweights in corporate bonds and cash. This reflects our view that the economic backdrop is less solid and we have seen strong performance from risk assets from the beginning of the year. With key risks emerging – particularly related to Brexit, tariffs and a potential trade war – we feel this is the correct positioning to take.

Amid a volatile period for markets, Alphabet was among our strongest contributors, having bounced back from a weak first quarter. This was largely driven by a strong positive share price reaction to half-year results in July. In the previous quarter, the market was worried about slowing revenue growth but these concerns were assuaged when the business grew constant currency sales by 22%. Combined with slower growth in expense, this drove a significant beat to earnings per share estimates.

US company Equinix was another strong performer over Q3, with is core business seeing growth accelerate despite a challenging macro backdrop. Its co-location data centres remain key cogs in the infrastructure of the digital economy, providing both energy-efficient solutions and connecting people across this digital world.

Equinix has established deep relationships with the large public cloud service providers and allows customers to connect from in house private and hybrid clouds with these public clouds. The breadth of its customer network is unrivalled, as is the quality and regional diversity of the data centre assets. It can continue to deliver double-digit revenue growth, despite the low growth environment.  

Familiar names such as Spanish telecom firm Cellnex also featured among the top stocks over the period, having completed a capital increase of €1.2 billion in May to acquire further sites in France, Italy and Switzerland. CEO Tobias Martinez underlined the ‘transformational dimension’ of the acquisition, with the company’s current 29,000 sites expected to grow by more than 50%.

We believe infrastructure is the backbone of the digital economy and tower companies like Cellnex are poised to benefit from continued growth in communications. Cellnex is an important consolidator in the European market, as the telecommunication companies divest their tower assets to focus on their core business.

ASML also sits among our stronger holdings once again as the company released a solid set of second-quarter numbers in July, with sales within guidance and gross margins above guidance, helped by improved Extreme ultraviolet lithography (EUV) manufacturing results. Despite ongoing concerns around the economic outlook and semiconductor cycle, the company is now delivering these machines on a commercial scale and reconfirmed its positive growth outlook for 2019.

While acknowledging short-term volume demand uncertainties due to macroeconomic developments, the company remains confident on the longer-term outlook based on a positive view on technology drivers such as 5G communications, automotive, artificial intelligence and data centres.

Looking at weaker performers over the quarter, Alexion Pharmaceuticals has struggled despite announcing strong Q2 results, with a number of setbacks in relation to the patents on its first-generation product Soliris hitting the share price.

In contrast to the market however, we believe the company’s second-generation product – called Ultomiris – provides a significant benefit to patients versus Soliris. A key holding under our Enabling innovation in healthcare theme, the company is making good progress in the transition from one to another and we expect this to continue.

Another innovative healthcare name Abcam also had a weaker period despite similarly solid results. Over the period, the company released ambitious growth targets for 2024 and while management has a strong track record of hitting such goals, the market was not expecting Abcam to invest so much in the near term to achieve them. In contrast, we believe the company is making sensible steps to take advantage of current opportunities and continue to grow its strong position in this field.

Elsewhere, the founder-led US pet insurer Trupanion has seen its shares fall despite releasing what we felt were solid results: sales grew 26% and the total enrolled pets grew 22% year on year. Once again, the business was free cashflow positive and the only weakness we noted was a deterioration in the lifetime value to pet acquisition costs (LTV/PAC) ratio.

It remains a controversial stock with a number of vocal short-sellers who are doubtful of the optically high price to book ratio compared to other insurance companies. Modelling out three years from now, we believe the business can have 750,000 pets enrolled (up from 577,000 today) generating $570m in annual revenues. With operating margins of 10% and valued on a 30x multiple leads to an enterprise value of $1.7bn, implying the business could easily double in value within this period.

Prudential, meanwhile, saw its share price stabilise in September but had a tough quarter overall as issues continue to stack up in the short term, with a £24m fine for transparency around open market annuities and the High Court rejecting proposals to transfer £12bn of annuity business to insurer Rothesay Life.


As we have stressed in previous reviews, irrespective of any short-term price volatility, we see solid long-term prospects for the company, with low levels of insurance penetration in China, appropriate products and excellent management.

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

 

Sep-19

Sep-18

Sep-17

Sep-16

Sep-15

Liontrust Sustainable Future
Cautious Managed 2 Inc

8.4

7.2

11.3

14.3

5.4

IA Mixed Investment 40-85% Shares

4.2

5.3

9.1

15.4

0.6

Quartile

1

1

1

3

1

 

*Source: Financial Express, as at 30.09.19, primary share class, total return, net of fees and income & interest 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.

Monday, October 21, 2019, 9:03 AM