Liontrust GF Special Situations Fund

October 2018 review

The Liontrust GF Special Situations Fund returned -5.8%* in October, compared with the -5.2% return from the FTSE All-Share Index.


The extent of market weakness was sufficient for it to be dubbed ‘Red October’. The FTSE All-Share return was in-line with the 5.4% drop of the MSCI World Index of developed markets; the MSCI Emerging Markets Index fell 6.8%.


The steepness of the market’s descent is suggestive of a shock or catalyst, but the collapse in sentiment appeared to be a reaction to the same factors that have been bubbling under the surface for some time: rising interest rates & yields, and global trade concerns.


Within the UK market, returns were slightly worse further down the market cap scale: the FTSE Small-Cap ex-Investment Trust (IT) Index returned -7.1%, the FTSE 250 ex-IT Index -7.1% and the FTSE 100 -4.9%. As is often the case, the IA UK All Companies sector’s bias towards mid and small-cap companies relative to the FTSE All-Share Index therefore led it to underperform during a bout of weakness; the sector average return was -6.7%. The Fund is no exception - with almost 50% invested below the FTSE 100 compared with the FTSE All-Share weight of 20%, it was exposed to the weakness.


The amount of newsflow from the portfolio during the month was fairly typical but its influence on its return profile was fairly limited – reflecting the fact that sentiment was the predominant factor in October, as would be expected during a market de-rating.  This is well illustrated by the range of the Fund’s small-cap or AIM holdings suffering double-digit percentage falls without having issued any news of note. This list included, but wasn’t limited to Accesso Technology Group (-30.7%), Eco Animal Healthcare (-21.9%), PayPoint (-14.8%), EMIS Group (-10.4%), Clipper Logistics (-12.5%), IMImobile (-13.8%) and Statpro (-11.4%).


Those stocks with a perception as cyclical or possessing high-beta characteristics were also vulnerable, a pattern which was visible through the FTSE All-Share sector returns: financials (-5.3%) and industrials (-10.7%) among the fallers while defensive areas such as utilities (+2.2%) and health care (-1.3%) proved more resilient.


Within the Fund, recruiter PageGroup (-14.8%) was part of the industrials sector weakness. Its shares fell despite issuing a quarterly trading update showing the fastest gross profit growth since Q3 2011 and predicting 2018 operating profit will be “marginally ahead” of consensus market forecasts of £138.7m. Q3 gross profit in constant currency terms rose 20% year-on-year. The UK returned to quarterly growth (+0.8%) despite ongoing Brexit uncertainty but it was international operations that drove the gross profit increase: Asia Pacific +27.7%, Americas +30.1%, and EMEA +20.9%.


Metrology specialist Renishaw (-11.2%) also appeared to be marked down due to the cyclicality of its industrial end-markets. A trading update showed quarterly profit before tax contracting 9% year-on-year to £33.5m, but this was an expected temporary drop as investment in infrastructure squeezed margins. Revenues increased 8% to £154m in the three months to 30 September. The company’s outlook statement made reference to the uncertain impact of Brexit and Chinese trade tariffs, but reiterated its target of growing profit this financial year (ending 30 June 2019).


Hargreaves Lansdown (-16.4%) was another to be disproportionately affected by market weakness. The FTSE All-Share’s financial services sector fell 8.3% in the month as high-beta asset management stocks slid. Hargreaves was exposed to this trend. It also issued a trading statement showing a 3% quarterly increase in assets under administration to £94.1bn from a client base which grew 29,000 on a net basis to 1.12bn. Of the asset increase, £1.2bn came from market movements and £1.3bn was net new business. Although this moderate increase in assets yielded an impressive 16% rise in net revenue to £121m, investors showed some concern over the pace of new business growth. In our view, these worries are misplaced.


Reckitt Benckiser’s (-9.7%) share price weakness showed a stronger connection with newsflow as the consumer goods giant disclosed a 2% drop in Q3 revenues. This was the result of a temporary manufacturing disruption at its European infant nutrition plant at a time of high demand and before its new facilities in Australia were operational and able to help reduce the shortfall. Supply was restored before the end of the quarter and Reckitt still expects to meet its full year net revenue growth target of 14% - 15%. Year-to-date revenue growth has been 13%, so some acceleration is now required in Q4 in order to meet its target.


In other portfolio news, Caretech (+5.3%) completed the £370m acquisition of Cambian in a cash and shares deal. The Cambian business will operate as a separate entity until the Competition and Markets Authority completes a review due in early 2019. The combined business will be one of the largest UK social care providers, with Cambian specialist children’s education services complementing Caretech’s care homes for “high acuity” patients which are run on behalf of local authority and health services commissioners. Caretech also provided an update for the year to 30 September, in which it confirmed that trading had been in line with market expectations. Net capacity increased by 88 to 2,622 places, while occupancy in the mature estate remained high at 93%.


Given the tone of recent newsflow around UK consumer spending, it was encouraging to see evidence of another quarter of solid growth for Domino’s Pizza Group (+1.4%), with systems sales up 5.9% across 1,236 stores. In the period to 30 September, UK like-for-like sales rose 2.2% despite the negative sales impact of hot weather, while total sale rose 6.0%. The like-for-like increase was driven by a 3.1% average price increase; volumes contracted by 1.4%. The company guided towards the mid-range of the market’s expectations for full year profit before tax.


Positive contributors included:

TP ICAP (+10.7%), Caretech (+5.3%), Plexus Holdings (+5.1%), AA (+3.8%) and Domino’s Pizza Group (+1.4%).


Negative contributors included:

Accesso Technology Group (-30.7%), Hargreaves Lansdown (-16.4%), Paypoint (-14.8%), Pagegroup (-12.2%) and Spirax-Sarco Engineering (-11.0%).

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








Liontrust GF Special Situations C3 Inst Acc GBP






FTSE All Share Index







*Source: Financial Express, as at 31.10.2018, 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 30.09.2018, 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.

Wednesday, November 14, 2018, 11:29 AM