Liontrust GF Special Situations Fund

December 2018 review

The Liontrust GF Special Situations Fund returned -4.7% in December, compared with the -3.8% return from the FTSE All-Share Index.


December’s market losses capped off a fairly miserable 2018 for UK and global equities. The FTSE All-Share posted a total return of -9.5% over the 12 months while the MSCI World Index of developed markets lost 3.0% and the MSCI Emerging Markets Index dropped 9.3%.


Prior to the fourth quarter, the UK market had just about managed to stay in positive territory despite a number of geopolitical and macroeconomic uncertainties clouding the investment horizon. As we noted following ‘Red October’, these issues began to weigh heavily on investor sentiment in the fourth quarter. The lack of obvious catalysts justifying the magnitude of the market correction is suggestive of investor fatigue in the face of headwinds rather than a sharp deterioration in underlying conditions.


The 2018 preoccupation with trade wars, rate rises and oil prices continued in December. In the UK, we can add Brexit to that list.


Not all news on these fronts was negative; the US-China trade frictions in particular offered some evidence of improvement as G20 talks in Buenos Aires resulted in a 90-day postponement of planned hikes to US tariffs on Chinese imports. It was perhaps developments in monetary policy that had the most bearish implications. While the ECB confirmed its previously announced end to quantitative easing, the US Federal Reserve – which has been under attack from Donald Trump over its rate tightening cycle – trimmed its forecast for 2019 rate increases from three to two 25bps hikes. Futures markets suggest that even two hikes might prove ambitious given growing concerns over the pace of economic growth.


As in previous ‘risk-off’ bouts UK mid-caps underperformed large-caps (the FTSE 250’s -5.1% return comparing with -3.5% from the FTSE 100) – a trend further aided by the fall in sterling which accompanied the postponement of a parliamentary vote on May’s Brexit deal.


The Fund did not escape the broad-based nature of equity market weakness in December, the majority of its holdings ending lower for the month, but it did show some pleasing resilience over 2018 as a whole, returning -2.4% compared with the FTSE All-Share’s -9.5%.

Investors familiar with the Economic Advantage investment process will be well aware that it is
unashamedly bottom-up in nature, and makes no attempt to predict macroeconomic events. We believe that our investments’ long-term prospects are driven mostly by their ability to successfully execute growth plans and compound profits. In the shorter-term, investor sentiment and other exogenous factors will impact share prices, so we aim to ride out periods of volatility and treat indiscriminate market weakness as a buying opportunity.


Market trends dominated company newsflow on the Fund’s holdings in December; only a few of its largest monthly contributors issued announcements of note.  A feature of Q4 weakness has been that high growth businesses on lofty share price valuations suffered some significant compression of their ratings. Craneware (-16.4%) and Gamma Communications (-9.2%) were good examples of this in December. An interim trading update from Craneware pointed towards revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) growth of 15% to 20% respectively and also reassured on funding, highlighting its operating cash conversion ratio of over 100%, ‘healthy’ cash reserves and a further funding facility of US$50m. In addition, it stated its confidence in meeting the market’s expectations for the full year. Nevertheless Craneware’s shares slid as its price/earnings compressed from a November peak of over 60x to closer to 40x. Gamma Communications experienced a similar effect, which was accentuated by an institutional shareholder selling a 4% stake in the company via a placing at 775p, a 5% discount to the previous day’s closing price. Notwithstanding the recent falls, both Craneware and Gamma Communications finished 2018 among the Fund’s largest positive contributors.


Wood Group (-20.3%) issued a 2018 trading statement which prompted a heavy share price fall despite highlighting a return to revenue growth (+10% to around US$11bn) and predicting earnings before interest tax and amortisation in the range of US$620m to US$630m. The company outlined a positive medium-term outlook, but warned that recent oil & gas price volatility could “impact confidence and the pace of contract awards. With Brent crude dropping a further 8% to finish the year at US$53.8 a barrel, the short-term demand outlook is clearly a concern for some investors.


Wood Group separately announced three contract wins during the month: a five year engineering, procurement and construction contract for a plastics manufacturing facility on the US Gulf Coast with undisclosed value; a US$43m gas pipeline contract in Texas; and a 10 year US$66m contract to supply digital control technologies to Sellafield nuclear power plant.


Clipper Logistics (-23.5%) is well-placed to participate in the long-term secular shift to online consumer spending by helping retailers with logistical fulfilment of orders. However, in 2018 the shares were held back by the nearer-term pressures that are mounting for the retail sector as a whole; solid full year results in July were overshadowed by cautious outlook comments. We can now add Brexit as a short-term concern for investors in Clipper after December’s interim results flagged the negative impact the political uncertainty is having on the availability of seasonal labour. While this perturbed some investors, underlying business progress was still strong - 14% revenue growth to £228m and a 16% uplift in operating profit to £10.7m driven by e-fulfilment and returns management services – and the fund managers maintain their conviction in the long-term opportunity offered by the company.


Among the handful of companies to finish in positive territory for the month was IntegraFin (+3.1%), which issued results for the 12 months to 30 September, its first full-year results since joining the London stock market earlier in the year. IntegraFin owns the Transact investment wrap platform, and in our view possesses intangible Economic Advantage assets in the form of its distribution network and high level of recurring revenues. The shares have performed well since their listing and investors welcomed this set of results, which outlined an 18.6% rise in funds under direction to £33.1bn following net inflows of £4.1bn, up 12% on the previous year, and positive market movements of £1.1bn. Adjusted operating profit increased 15% to £43.3m.


Coats (+0.3%) is another holding that was added to the Fund during 2018. It is the world’s leading manufacturer of industrial threads, operating through three divisions: Apparel & Footwear, Performance Materials and Crafts. As well as significant intellectual property, Coats has an excellent distribution network which extends to over 100 countries and 50 manufacturing sites. In December, it supplemented its IP through the US$12m cash acquisition of ThreadSol, operator of cloud-based digital applications for the apparel and footwear industries, and the purchase of a 9.5% stake in Twine Solutions, an Israeli start-up that has developed a digital thread dyeing system.


Positive contributors included:

Sage Group (+3.4%), IntegraFin (+3.1%), Intertek (+2.2%), Spirax-Sarco Engineering (+1.7%) and Coats Group (+0.3%).


Negative contributors included:

Clipper Logistics (-23.5%), Wood Group (-20.3%), AA (-18.5%), Brooks Macdonald (-16.8%) and Craneware (-16.4%).


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








Liontrust GF Special Situations C3 Inst Acc GBP






FTSE All Share Index








*Source: Financial Express, as at 31.12.2018, total return (net of fees and income reinvested), sterling terms, C3 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), 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.


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.

Tuesday, January 15, 2019, 4:52 PM