Liontrust GF Special Situations Fund

March 2019 review

The Liontrust GF Special Situations Fund returned 2.2% in March, compared with the 2.7% return from the FTSE All-Share Index.


US-China trade negotiations and UK Brexit developments generated a significant amount of background noise through March. However, with little evidence of real progress on either front, investors remained focused on the US Federal Reserve’s increasingly dovish tone. As had been widely expected, the Fed backed away from its prior forecast of two rate rises in 2019, instead predicting via its ‘dot plot’ that rates will remain on hold through the year. Futures markets are instead pricing in a rate cut by the end of 2019. In addition, the Fed announced that its quantitative tightening programme – a slow unwinding of quantitative easing – will be paused. The prospect of a postponement of monetary tightening helped extend the Q1 rally in equity markets.


Despite the deadline day of 29 March looming large there was no reduction in Brexit uncertainty as Theresa May’s deal was rejected again and a number of indicative votes failed to suggest that Parliament could take charge of the process. A short-term deadline extension to April 12 was granted by the EU. Worries of a chaotic exit weighed on certain assets. Sterling dropped a modest 1.2% in trade-weighted terms, but the effect was clearer in the market cap profile of the FTSE All-Share: the FTSE 100 Index returned 3.3% compared with the FTSE 250 Index’s -0.1% performance.


The Fund’s large-cap names therefore feature more prominently among March’s key contributors, especially those with a ‘defensive growth’ revenue stream, which were also boosted by bond yields compressing back down to very low levels. Diageo (+7.7%), Unilever (+9.7%), Reckitt Benckiser (+10.7%), Compass Group (+8.4%) and GlaxoSmithKline (+6.6%) were among the Fund’s holdings exposed to this effect.


On a relative basis, however, the Fund’s lower FTSE 100 exposure – around 50% vs 80% for the FTSE All-Share – was a factor in the Fund lagging a touch in March.


The largest stock-specific drag on the Fund was Renishaw (-12.3%), the high-tech precision measuring and calibration equipment provider. It issued a profit warning, downgrading the revenue and profit before tax forecast ranges that it had issued within January’s interim results. Full-year revenues are expected to be £595m - £620m, down from £635m - £665m, while the profit before tax forecast has been cut to £117m - £135m from £140m - £160m. The company cited a slowdown in demand from Asia for encoder products and from large consumer electronics manufacturers, issues which were noted in the company’s interim report but are now expected to persist through the second half of the year.


Renishaw has excellent levels of intellectual property (IP) – a result of decades of accumulated research and development – and has also built a global distribution network, giving it two of the three core Economic Advantage intangible assets we look for. While Renishaw enjoys reasonable levels of repeat orders, they are not contracted and the company is exposed to cyclical end markets. Its shares can reflect some of this cyclicality which we will occasionally attempt to manage by trimming or increasing the Fund’s position. In March we were able to top up into the weakness. The company remains a high-quality long-term compounder of earnings in our view and is a core Fund holding.


Renishaw’s counterpart on March’s Fund leaderboard was Gamma Communications (+14.5%). Having stated in January that 2018 EBITDA (earnings before interest, tax, depreciation and amortisation) would be at the “top of the range of market expectations”, the company came good with results showing a 34% increase to £48.3m. The provider of voice, data and mobile communications for businesses saw an 18% increase in revenue to £285m, led by its indirect sales channel as its number of channel partners grew from 1,089 to 1,150 over the year.


2018 results from Aggreko (+9.9%) revealed underlying revenue growth of 8% to £1.76bn and a 10% increase in profit before tax to £182m, in line with expectations. The top line increase was led by the Rental Solutions division, which saw a 22% increase following hurricane related work and strong demand from key industries such as oil & gas, utilities and construction.


Shares in Aggreko have lagged the market for a long time now – going back as far as 2015 when newly-installed CEO Chris Weston announced a strategic reorganization for the group following a period when it had arguably grown faster than it could cope with. This refocus was hampered by a slowdown in its provision of temporary power to emerging markets, which had previously been hugely profitable. While it may be a long process, we think that management is now putting in place measures that should see a considerable recovery in Aggreko’s return on capital.


Some outlook caution appeared responsible for Coats’ (-10.7%) share price slide. The leading manufacturer of industrial threads issued 2018 results which showed 6% constant currency revenue growth to £1.42bn in 2018, the result of a 2% sales increase for its Apparel and Footwear division and a 23% acceleration for Performance Materials. Adjusted operating profit rose 24% (constant currency) to £195m as margins expanded by 190 basis points to 13.8%. However, in reported terms operating profit slid 5% due to costs from exceptional items such as a restructuring programme and adherence to pensions legislation. The company’s outlook statement suggested that business current trends are solid in the new year but that it is cautious concerning the potential impact of current macroeconomic uncertainties.


Smart Metering Systems (-14.1%) slid ahead of April’s scheduled release of 2018 full-year results, despite it announcing a new contract win during the month. The company has been appointed preferred national smart meter supplier for SSE Energy’s small business customers.


In other newsflow from portfolio holdings, Spirax-Sarco Engineering (+7.9%) announced a 15% sales increase in 2018, spilt roughly equally between organic and acquisitive growth. The company, which manufactures products to regulate steam and electrical thermal energy, stated that the integration of the recent Gestra and Chromalox acquisitions had progressed to schedule and their business performance continues to be in line with its expectations. Later in March, Spirax-Sarco Engineering announced the completion of another acquisition, paying £139m for Thermocoax whose core technology is a mineral insulated cable that can be used in extreme environments (temperature, pressure, vibration) and critical applications.


Craneware (-7.5%) reported a 15% revenue increase in the six months to 31 December 2018 to $35.8m. It is the largest provider of pricing and billing systems to US hospitals and commented on a supportive market environment during the period as US healthcare operators increase demand for accurate financial and operating data. In our view, one of Craneware’s core Economic Advantage intangible assets is its level of recurring business; it already has visibility on over US$70m of this financial year’s sales – almost 90% of the markets forecast for the whole year.


Positive contributors included:

Gamma Communications (+14.5%), Reckitt Benckiser (+10.7%), Aggreko (+9.9%), Unilever (+9.7%) and Compass Group (+8.4%).


Negative contributors included:

Smart Metering Systems (-14.0%), Renishaw (-12.3%), Coats Group (-10.7%), Iomart (-8.9%) and Craneware (-7.5%).


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








Liontrust GF Special Situations C3 Inst Acc GBP






FTSE All Share Index







*Source: Financial Express, as at 31.03.2019, 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 31.03.2019, 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, April 16, 2019, 10:52 AM