Liontrust UK Ethical Fund

Q3 2018 review

The Fund returned 2.5% over the quarter, outperforming the IA UK All Companies sector average of -1.2% and slightly lagging the MSCI UK Index’s -0.4*.

 

From a macro perspective, concerns over a trade war increased throughout the summer: the US continued to swap barbs with China and the deal to overhaul NAFTA (the North American Free Trade Agreement) has done little to ease things.

In the UK, Brexit still dominates the news agenda and we also saw a long-expected interest rate rise at the start of August, removing governor Mark Carney’s ‘unreliable boyfriend’ tag for now and showing we are firmly on the path towards policy normalisation.

While we do not attempt to forecast macroeconomic factors, it does not stop others from doing so. With that in mind, we follow economics and politics with interest but continue to focus on our core competence that we believe has enabled us to deliver outperformance: to identify businesses exposed to strong sustainability trends that will endure and grow their value per share regardless of the economic backdrop.

Our process targets businesses that can grow structurally, driven by the shift towards a global economy that is more efficient, provides a higher quality of life and is more resilient.

Over the third quarter, the standout event for the Fund was the announcement of the acquisition of Jardine Lloyd Thompson by Marsh & McLennan at a 30% premium.

JLT has been a holding for many years and is a beneficiary of our Insuring a sustainable future theme, which recognises the positive role well-run insurance businesses play in spreading risk and reducing uncertainty.

This stock is a strong example of how patience is often rewarded in the equity market. From 2014 to 2016, the share price was disappointing, underperforming the market and hitting lows below £8 at the start of 2016. Our regular meetings with management, however, gave us confidence the headwinds the company had faced were finally dissipating and our belief in a strong sustainability theme kept us invested and opportunistically adding to the position. Following the bid, we have sold our holding and reinvested the proceeds.

Other strong performers over the period, included Learning Technology Group, which provides workplace training and professional development, Worldpay Group, which benefits from the shift to digital payments on-line, and Cineworld, which is successfully attracting more people to its refurbished theatres in the UK, US and Poland.

We started a position in Cineworld towards the end of last year and performance was initially poor, with a news leak that the company was in talks to acquire Regal Entertainment, a much larger US cinema chain. To do so would have required significant gearing and a substantial rights issue, both of which were, understandably, taken poorly by the market.

This meant significantly more research was needed: we had to calculate the value of the business Cineworld was buying and decide whether to take up our rights or not. Doing nothing was not an option as our investment would have been diluted.

Our view was that the previous majority owner of Regal had run the business for cash and the numbers supported this. From listing in 2002 to the date of the Cineworld takeover announcement, Regal’s share price increased just 21% versus the S&P 500’s 149%. Taking into account dividends tells a different story entirely however: Regal delivered a total shareholder return of 500%, drastically outperforming the 244% return delivered by the S&P 500.

We felt the Regal estate had been underinvested and our analysis suggested returns on capital for refurbishing the sites was considerably higher than Cineworld’s own returns. We also felt the cost synergies outlined by management were achievable and there was further potential upside from replicating some of the strategies the team had been successful in implementing in the UK.

Combining all of this work, we arrived at an estimated EBITDA figure we felt was achievable by the combined group in 2020. Using an eight times multiple, at the bottom end of Cineworld’s five-year range, left us with considerable upside, even before the discounted rights issue. We took up our rights for the issue at £1.57 per share, essentially doubling down on the stock, and it has been an excellent performer since with the share price at the end of the quarter closing at £3.16.

Meanwhile, we saw weaker performance from Sophos, the cyber security company, amid concerns about rising competition. Despite this downturn, we believe this market is continuing to grow fast and Sophos will be successful in providing security to the small and medium-sized businesses that form the bulk of its customers.

In terms of trading over the period, we added to Smurfit Kappa, as we believe its card-based packaging will see stronger growth as customers’ preference for non-plastic packaging becomes manifest.

Finally, we added to UK exposed companies such as DFS, Crest Nicholson, and Smart Metering Solutions, as we anticipate the UK’s withdrawal from the EU will occur without major disruption.

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

 

Sep-18

Sep-17

Sep-16

Sep-15

Sep-14

Liontrust UK Ethical 2 Acc

11.7

20.8

7.8

12.8

1.8

MSCI UK

5.8

11.0

18.4

-5.9

6.0

IA UK All Companies

5.5

13.6

11.7

1.9

6.0

Quartile

1

1

4

1

4

 

*Source: Financial Express, as at 30.09.18, primary share class, total return, 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.

Monday, October 29, 2018, 10:11 AM