Liontrust UK Ethical Fund

Q3 2019 review

The Fund returned 1.2% over the quarter, outperforming the IA UK All Companies sector average of 1.0% and the MSCI UK Index’s 0.7%*.

We saw another busy period 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.

While the Bank of England has not acted yet, it said the ‘entrenched uncertainty’ caused by Brexit and trade will keep interest rates lower for longer and could prompt a cut in short order. Monetary Policy Committee member Michael Saunders said that even if the UK avoids a no deal, rates may still need to be cut, with uncertainty surrounding the UK's departure from the EU persisting and acting as a kind of "slow puncture" for the economy.

A month away from the scheduled Brexit date of 31 October, all options still appear to be on the table and it is hard to see what can change to resolve the situation.

In the face of such concerns, we maintain our balanced approach, looking for companies with sustainability-based growth that can weather short-term storms and also deliver value for the decades to come. Our process targets companies 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.

The majority of our performance against this backdrop came from stock selection, with a broad range of holdings contributing to returns.

London Stock Exchange was our best-performing stock over an eventful quarter for the company, with the shares up 30% on top of 30% growth in the previous three months.

There were three main talking points during the period. The first was the announced proposed acquisition of Refinitiv, a leading global provider of financial data, for $27bn. The acquisition price appeared good value and so the market responded by pushing LSE’s share price up 15% on the news.

The second talking point was LSE’s Q2 results, in which the business appeared to be doing very well, beating consensus earnings per share estimates by 6%.

Finally, in early September, Hong Kong Stock Exchanges and Clearing (HKEX) announced a takeover offer for LSE at an implied price some 23% higher than the shares were currently trading. We continue to believe LSE has high barriers to entry and remains an attractive asset to potential acquirers; however, we also believe the Refinitiv deal makes both strategic and financial sense. LSE cited this impending deal as one factor in its rejection of Hong Kong Exchanges and Clearing, describing it as the culmination of many months of strategy development, deep consideration and discussion. 

LSE is positively exposed to our Increasing financial resilience theme by providing valuable data to market participants as well as the infrastructure enabling financial markets to run smoothly.

Following the Refinitiv announcement, but unfortunately before the Hong Kong Stock Exchange bid, we decided to take some profits as the position had grown to 7%, larger than we felt comfortable given the risk/reward opportunity.

Elsewhere, Learning Technologies Group has rebounded strongly in 2019 after an indiscriminate sell-off towards the end of last year. The market reacted positively to a bolt-on acquisition of a recruitment software company, People Fluent, for $12m but, more importantly, the leader in the e-learning workplace education market has continued to deliver operationally.

The company is a beneficiary of our Providing education theme and is experiencing strong organic growth from existing professional educational products, as well as consolidating the fragmented market, with a focus on innovative content and technology.

Contract catering firm Compass Group also registered a strong three months, largely driven by performance in North America. As a result, the company expects to deliver full-year organic revenue growth at the top of its 4-6% range for 2019 and continues to positively surprise us with better than expected results. In June, Compass announced it had agreed to acquire Fazer Food Services for an enterprise value of approximately €475 million.

Among our financial positions, Paragon Banking Group had a solid quarter, reporting continued growth in its mortgage and commercial lending books and improvement its net interest margin over the first nine months of the financial year in July. In line with this growth, the company said it remains well placed to deliver 2019 objectives.

Looking at detractors, Smart Metering Systems (SMS) has seen its shares fall despite reporting revenue ahead of its expectations in the first half of 2019. The roll-out of second-generation smart meters has been slower than anticipated due to supply chain issues and SMS’s installation rate has been impacted. Perhaps also weighing on the shares was the government announcement to extend the deadline mandating all UK homes to have smart meters by four years to 2024. We expect a significant acceleration in installations during the second half of the year and continue to believe inflation-linked smart meters with estimated lives in excess of 20 years remain a valuable proposition.

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. We believe the shares are also being impacted by a combination of sentiment around US annuities, Hong Kong and mainland China tensions, and Brexit-related uncertainties.


As we have stressed in previous reviews,
irrespective of short-term price volatility, we see solid long-term prospects for the company, which provides insurance to those who have never had it before in countries where there is less state support. This growth, rather crucially, is profitable growth, which we believe will enable the book value per share to continue to compound over time. Combined with a 3-4% dividend yield, this should deliver total annual returns in excess of 10.

Elsewhere, shares in energy efficiency specialist Kingspan – one of our longest holdings – fell back slightly over the quarter after hitting an all-time high in June. This came despite the group announcing a record first half over the period, with revenue growth across all its business units. While acknowledging ongoing risks, the company continues to expand around the world, with new facilities under construction in the US, Brazil and Sweden. It also announced a series of sustainability targets under the Planet Passionate Programme, which builds on the Net Zero Energy plan started in 2011.

During the period, we exited our remaining position in RELX and took the opportunity to increase our holding in AJ Bell as the shares fell back to the price at which we participated in the placing in Q2.

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

 

 

Sep-19

Sep-18

Sep-17

Sep-16

Sep-15

Liontrust UK Ethical 2 Acc

5.8

11.7

20.8

7.8

12.8

MSCI UK Index

2.8

5.8

11.0

18.4

-5.9

IA UK All Companies sector average

0.0

5.5

13.6

11.7

1.9

Quartile

1

1

1

4

1

 

*Source: Financial Express, as at 30.09.19, 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 21, 2019, 11:44 AM