Liontrust GF SF Global Growth Fund

Q3 2020 review

The Fund returned 9.8% over the quarter in dollar terms, outperforming 8.1% from the MSCI World Index (which is the comparator benchmark)*.

On the economic front, most central banks around the world remain in ‘whatever it takes territory’, with a challenging winter expected. Elsewhere, what is fast becoming the most divisive election in US history approaches and it will not surprise anyone that we believe Joe Biden’s Democratic policy basket is more beneficial for many of our sustainable themes. That said, we have seen good progress in areas like renewable energy and the decline of coal under President Trump and there is encouraging momentum for change at state level, with California pledging to phase out internal combustion engine cars by 2035 for example.

We see any improvements in the Covid-19 situation as an opportunity, with a vaccine announcement over the latter part of 2020 or early 2021 a strong possibility. We also believe our understanding of the disease, and the ability to keep economies open while we await a vaccine, will be a tailwind over the next three to six months.

In terms of markets, we saw something of a correction in technology stocks in September, which hit some of our names that had benefited most from the post-Covid working environment. We remain confident in these stocks despite the selloff: while positioning in the tech sector is heavily concentrated, we continue to focus on the long-term potential of each of our businesses and the four elements we seek in all investments, thematic drivers, sustainable credentials, good fundamentals and attractive valuation.

We have also had these shifts in markets again and again over 2020. To put it into context, growth versus value has seen greater than two standard deviation moves more than 30 times so far this year. Given the speed at which underlying economic fundamentals changed, the market is always likely to overreact both ways and against such a backdrop, we maintain our focus on the long-term changes for which our portfolio is positioned, namely a cleaner, healthier and safer world.

Over a slower period for equities, particularly later in the quarter, Trupanion was once again the best performer in the portfolio. The US pet insurer released strong results in August, reporting total revenue of $229.2 million over the first half of the year, an increase of 28% compared to the same period in 2019.

Of around 180 million pets in North America, it is estimated that just 1-2% have insurance and also that a quarter of Americans have zero emergency savings. By providing what we think is a great value proposition in an industry with low penetration rates, Trupanion is a beneficiary of Insuring a sustainable economy theme. Going into the pandemic, we felt the shares were good value and the business was unlikely to see a major impact from Covid. In fact, we would have expected new customer growth to slow, assuming people had other things to worry about, and claims to have fallen. Almost the precise opposite happened, again demonstrating the fallibility of short-term forecasts. Claims did not slow and neither did the rate of new customer growth, and the market has rewarded this resilience with the shares more than doubling year-to-date.

Customer relationship management business was another strong contributor, with this company able to report one of the best quarters in its history: Q2 revenues were $5.15 billion, up 29% year on year. The business has been able to deliver its market-leading CRM offering into larger institutions and create multiple sales platforms that service different parts of a client’s digital transformation. Covid-19 has led to the digital trend accelerating and has been able to capitalise on this increase in demand. The fact Salesforce uses cloud computing across its suite ensures the transformation can be achieved in an energy-efficient manner and so the company is a strong fit for our Improving the efficiency of energy use theme.

Long-term holding Kingspan remains a consistent performer, with the thermal insulation provider issuing exactly the kind of solid results we expect from this market leader. First-half revenues were down 8% in what the group called a period of unparalleled challenges but CEO Gene Murtagh said the rapid introduction of cost containment measures has been key. While expecting a weak environment ahead, Kingspan noted policymakers’ growing focus on ensuring buildings are more energy efficient exactly the kind of structural growth trend that underpins our sustainable themes.

Several other familiar names continue to feature among the top performers, including healthcare stocks PerkinElmer and ThermoFisher Scientific, Infineon and companies such as Docusign and Paypal (which we covered in detail last quarter). German semiconductor giant Infineon is benefiting from an expected recovery in auto demand next year, particularly related to electric vehicles. Our theme of Making transportation more efficient targets companies tied to growth in EVs and the market expects this to be somewhere in the mid-teens in 2021. Infineon is well placed as the market leader in the chips that power semiconductors in these vehicles.

We actually trimmed our position in DocuSign slightly in September after another strong rise as we felt the valuation potential near term and momentum risk warranted some profit taking. We recycled into stocks left behind in the rally over Q2 and Q3, such as Charles Schwab. We also took some profits in Paypal in July but continue to feel this business remains undervalued despite its considerable share price growth this year.

Elsewhere, we also highlight performance from Intuitive Surgical, a position we started in early April, using market volatility as an opportunity to pick up a high-quality company at a compelling valuation. Intuitive delivered positive results in July, with procedures already back to 95% of pre-Covid levels. Our thesis had always been that the procedures at which Intuitive’s surgical robots excel cannot be delayed too long and this has proved to be the case. We are pleased with the position, proving our analysis has once again uncovered a business at the forefront of healthcare innovation.

Among the weaker performers, we saw some of our stronger names from recent quarters come back slightly, including American Tower and Autodesk. American Tower experienced slightly slower growth in the US as key customer T-Mobile increased spending post its Sprint acquisition at a slower-than-expected rate. Its international business was also impacted by an adverse ruling in India relating to outstanding debts owed by telecom operators to the government. Both issues are likely to be resolved over the back half of the year and the company remains a key play in our Connecting People theme .

With Autodesk, second-quarter earnings were good but guidance from management was relatively cautious, which led to some weakness over the period. Autodesk services the construction industry, with software technology that makes its customers more efficient, cutting costs and improving profitability. The company’s growth rate is largely structural but its customers clearly sit in a cyclical industry. The strength of economic recovery over 2020 and into 2021 will affect when customers are able to invest in Autodesk’s technologies but we have ongoing conviction in the structural growth of its products.

In terms of trading over the quarter, we started a new position in Evotec, a global leader in providing outsourcing solutions to the pharma and biotech sectors for drug discovery and development. Its solutions enable R&D investment to be more effective and we see this as another key name for our Enabling innovation in healthcare sector.

Adyen was another addition, a beneficiary of our Increasing financial resilience theme through making the shift to digital payments safer and more efficient. It operates in a structurally growing market and is rapidly taking share as one of the best (if not the best) solutions in the industry. The business has minimal capex requirements and is entirely focused on organic growth, which should result in continued margin expansion as operating leverage continues to shine through. While the shares are up substantially over the year, our long-term focus enables us to look past high multiples and consider what the business will do over the next five years.

A further financial added in Q3 was Sweden’s leading investment platform Avanza (held under our Saving for the future theme), which is disrupting the market with superior technology and customer service. Its customer NPS score was 85% in 2019, incredibly high for the sector and highlighting a superior offering. The exciting aspect for us is how underpenetrated the Swedish investment platform market is: Avanza is the largest by far and only has a 4.5% market share, and yet is capturing some 16% of the net inflows in the industry.

As for sales, Terraform Power was acquired over August by Brookfield Renewable Energy Fund. Both investment vehicles are majority owned and managed by Brookfield Asset Management and the outstanding balance in Terraform Power was bid for. The new vehicle includes the developed world renewable energy assets from Terraform alongside the hydro-electric power assets in Brookfield Renewable, which tend to be located in Latin America. The vehicle was rated uninvestable given the related social and environmental issues associated with these assets. We also exited St James’ Place over the quarter. While still a business we like, competition for capital in the portfolio is intense and we had more conviction in new idea Avanza, which sits in the same theme.

Elsewhere, we sold Trimble Navigation as our conviction around the strength of the underlying business has fallen, with less than half the company now exposed to the structural growth areas we favour. A further sale was Roper Industries, which continues to pursue M&A driven purely by return targets rather than an underlying strategy related to a more sustainable world. This makes it difficult to understand what the business will look like in five years’ time. Roper was downgraded to a Management Quality rating of 4, reflecting a lack of integration of sustainability into the business strategy, and as the company was also approaching its inherent value, we decided to sell and reallocate the capital to new positions.

* Source: Financial Express, as at 30.09.20, primary share class (B5) in dollars, total return, net of fees and income reinvested. No discrete data is available for annual periods due to the launch date of 12.11.19.

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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. 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.


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 19, 2020, 1:11 PM