Liontrust UK Growth Fund

January 2019 review

The Liontrust UK Growth Fund returned 3.7%* in January, compared with the 4.2% return from the FTSE All-Share Index.

 

Global equity markets bounced back from their fourth quarter travails, supported by hopes that US-China trade talks would yield results and signs that the pace of US monetary tightening may slow (or stall completely) in 2019. Minutes from December’s meeting of the US Federal Reserve’s rate-setting committee – during which it had raised rates by 25bps – suggested that it might be now “patient” on further policy firming. A subsequent late-January decision to keep rates on hold was then accompanied by further dovish commentary suggesting that interest rate rises have been put on hold due to muted inflation and risks to global growth.

 

In a reversal of December’s trend, the mid-cap section of the UK market outperformed – rising 7.1% to significantly outstrip the FTSE 100 return of 3.6%. A number of the Fund’s holding participated in this bounce without having issued any notable corporate updates: Weir Group (+16.0%), Spectris (+14.1%) and Rotork (+11.0%) for example.

 

There was plenty of newsflow to absorb from portfolio holdings in January however. Shares in Savills (+17.7%) moved higher on a year-end trading update that referred to a robust fourth quarter. The company is on track to meet market expectations for the full year, with growth in revenues and underlying profits. Coming against a backdrop of market uncertainties and soft sentiment which weighed on Savills’ shares through 2018, this in-line statement was enough to prompt a relief rally in January. However, in its outlook comments, Savills warned that ‘prospects for 2019 are overshadowed by macro-economic and political uncertainties across the World’. While it states that the impact is difficult to quantify, Savills does anticipate lower transaction volumes in some markets – an effect it expects to offset by growing ‘less transactional’ business lines, such as property & facilities management.

 

Hargreaves Lansdown (-11.7%) is another business feeling the impact of weak investor sentiment. Shares in the company slid after disappointing net new business contributed to a decline in assets under administration. While trends in client numbers were fairly positive – total active clients rose 45,000 in six months to 1.14 million – their willingness to invest was less so. Net new business of £2.5bn in the six months to 31 December 2018 compares to £3.3bn a year earlier. Weaker-than-expected inflows combined with a drop in financial market levels saw Hargreaves’ total assets under administration contract to £85.9bn (down from £86.1bn a year ago, and £91.6bn on 30 June 2018). The company cited Brexit uncertainty as a primary factor in holding clients back from investing more. There are no signs of this uncertainty being resolved ahead of this tax year-end, a traditionally high volume period for Hargreaves, which makes for a very cautious short-term outlook for the business. Longer-term, we still believe the company’s excellent distribution network and high recurring revenues will allow it to compound earnings growth for its shareholders.

 

Funds under management at Brooks Macdonald Group (+20.3%) fell 4.5% over the second half of 2018 despite net new business of £241m. However, the net new business figures – a 1.6% Q4 inflow and 3.6% for the half-year – were viewed by investors as representing decent underlying trends given a backdrop of weak investor sentiment. Similarly, trading at WH Smith (+15.9%) was shown in a good light given the generally challenging conditions in UK retail over Christmas. Growth in its Travel division once again outweighed the slow decline of its High Street business: Travel sales were up 16% in the 20 weeks to 19 January, while High Street sales fell 1%. The Travel growth breaks down to 8% InMotion acquisition effect, 3% like-for-like growth, with the remainder coming from new store opening. It expects to open another 20 Travel this this year.

 

Domino’s Pizza Group (+13.6%) shares rebounded over January, despite losing some ground late in the month after issuing a Q4 trading statement. Group organic sales rose 5.8%, with 4.5% like-for-like expansion. In an increasingly familiar pattern, impressive ongoing growth in the UK and Ireland (6.2% organic sales growth) was undermined by a weak performance from its small international division. Domino’s had its busiest ever week in the run up to Christmas, selling 12 pizzas a second on the Friday 21 December, while the night of the Strictly Come Dancing final earlier in the month saw it set a new online orders record. However, the international operations suffered what the company described as ‘growing pains’, as it had difficulty integrating stores it had acquired in Norway.

 

Fund holdings residing in some of the more defensive areas of the market experienced negative returns as investors rediscovered some risk appetite. AstraZeneca (-5.8%) and GlaxoSmithKline (-0.9%) both ended in negative territory. AstraZeneca announced a business re-organisation that will see separate R&D and commercial units created for each of its main divisions– biopharmaceuticals and oncology – while Glaxo completed the US$5.1bn acquisition of oncology specialist TESARO, a deal first announced in December.

 

Consumer staples businesses Unilever (-3.0%) and Reckitt Benckiser (-2.5%) also lost ground. Reckitt announced that its CEO of eight years, Rakesh Kapoor, will retire before the end of the year. Unilever released 2018 results which, given their in-line nature and 31 January release date, look to be less a factor in share price weakness than sector rotation. As expected, Unilever’s 2.9% underlying sales growth was diluted by an adverse currency impact of 6.7%. While stating that it remains on track for its 2020 targets, Unilever did comment that challenging market conditions in 2019 may again hold underlying sales growth to the lower half of its medium-term 3-5% objective.

 

Bucking the trend of defensive underperformance was BAE Systems (+11.5%) which rose on the back of positive sentiment expressed in analyst research notes. A 2018 trading statement from Pearson (-3.5%) narrowed its adjusted operating profit guidance from £520m-£560m to £540m-£545m. The majority of the education business saw 1% underlying revenue growth but a 5% fall in US higher education courseware sales dragged the overall revenue to a 1% decline. In 2019 the company expects adjusted operating profit of £590m to £640m, the midpoint of which implies growth of about 13%. The US higher education segment has been a headwind to group performance for some time now, and there is not expected to be any let up next year: Pearson forecasts divisional revenue to fall by as much 5%.

 

Positive contributors included:

Brooks Macdonald Group (+20.4%), Savills (+17.7%), WH Smith (+15.9%), Spectris (+14.1%) and BAE Systems (+11.5%)

 

Negative contributors included:

Hargreaves Lansdown (-11.7%), AstraZeneca (-5.8%), Aggreko (-5.4%), Next Fifteen Communications (-4.7%) and Pearson (-3.5%).

 

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

 

 

Dec-18

Dec-17

Dec-16

Dec-15

Dec-14

Liontrust UK Growth I Inc

-6.1

14.2

18.1

9.6

1.8

FTSE All Share Index

-9.5

13.1

16.8

1.0

1.2

IA UK All Companies

-11.2

14.0

10.8

4.9

0.6

Quartile

1

2

1

2

2

 

*Source: Financial Express, as at 31.01.2019, total return (net of fees and income reinvested), bid-to-bid, institutional class. Non fund-related return data sourced from Bloomberg

 

**Source: Financial Express, as at 31.12.2018, total return (net of fees and income reinvested), bid-to-bid, primary class.

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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. Some of the Funds managed by the Economic Advantage team invest primarily in smaller companies and companies traded on the Alternative Investment Market.  These stocks may be less liquid and the price swings greater than those in, for example, larger companies. The performance of the  GF UK Growth Fund may differ from the performance of the  UK Growth Fund and will be lower than its corresponding Master Fund due to additional fees and expenses.

 

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.

Friday, February 22, 2019, 3:37 PM