Liontrust Global Equity Fund

H1 2020 review

The Liontrust Global Equity Fund returned 15.6% over the first half of the year, in comparison to the MSCI AC World Index, which returned 0.5% and the IA Global Equity sector average of 1.0%*.

 

The Fund follows a ‘disruption investing’ philosophy, which means investing in businesses on the right side of disruption taking place within each industry and avoiding businesses on the wrong side. Several disruptive trends (such as e-commerce and digitalization) have been accelerated by the COVID crisis and many of our holdings have benefited. We believe disruption is currently accelerating for strong secular reasons other than the COVID crisis, e.g. the growing use of data and artificial intelligence in business, which is driving the underlying outperformance of our holdings, as exhibited by strong outperformance prior to the crisis as well as during. The Fund’s process selects only businesses with acceptable levels of financial risk coupled with strong growth prospects. These businesses have so far proven well positioned to weather the current macroeconomic shock resulting from the COVID crisis and we believe are likewise well positioned to weather the likely persistent economic challenges ahead.

Owing to this approach, we would normally expect the Fund to prove relatively resilient in stressful macroeconomic conditions such as those faced in recent months. Nevertheless, the COVID crisis is a highly unusual source of market stress compared to problems rooted in the economy alone and has had extreme economic consequences, and as such we have been very encouraged by the degree of resilience the Fund has exhibited.  

Some of our businesses have found the crisis and its economic implications tougher than others. A holding that will benefit from a macroeconomic recovery is Disney. We classify Disney in the fund as an embracer of disruption. We believe it has a good opportunity to capture a significant and resilient share of the streaming market based on its exclusive IP and historical and future content. Importantly, its parks and merchandising business lines offer excellent synergies for accentuating the financial benefit of its growing streaming presence, and together this strategy offers the prospect of strong shareholder value creation on a 3-5 year horizon and forms the basis of our long term investment case for the business. However, its parks business has suffered from lockdown and social distancing and requires an improvement in the outlook for the virus (particularly the development of a vaccine) and economy, meaning that it is quite strongly geared to a macroeconomic recovery.

A holding that presents a bit more risk is JP Morgan. JP Morgan is one of the most technologically and disruptively progressive banks, which is why we hold it. Nevertheless, banks will likely face two persistent challenges resulting from the COVID crisis: rising non-performing loans over coming quarters and a very low interest rate path over the coming years (even lower than expected before the COVID crisis). We retain the holding for now on the basis that it may be able to gain market share through its application of disruptive technology in the post COVID environment, but are closely monitoring how its net interest income margins and non-performing loans evolve.  

On an individual holding basis, the biggest contributors to performance in H1 were Nvidia, an enabler of artificial intelligence across the economy, and Amazon. The biggest detractor was Royal Dutch Shell (RDS). RDS holds the best portfolio of alternative energy projects across the energy majors, however the Fund has sold and replaced it with Enel, a business building alternative energy infrastructure in Europe, which will provide the enabling basis for electric vehicles over the years to come. 

In the short term, we are cautious about the path of the economic recovery, despite the recent strength of the stock market. While we expect to see an initial bounce in consumer spending as economies are initially re-opened, owing to pent-up lockdown demand, we think consumer caution will prevail over the coming months. If correct, this will be visible in a persistently elevated household saving rate. Moreover, we expect businesses to remain extremely cautious and business investment to be low, which will constrain the short-term recovery in aggregate demand. Clearly a second wave of the virus would exacerbate both of these cautionary tendencies.

Looking long-term, we believe the key macroeconomic variables over the next cycle will be shaped by two factors: accelerating disruption and persistent hangover effects of the current crisis. Regarding the first factor, we expect strong productivity growth due to innovation, particularly the roll out of AI technologies across the economy. However, we expect this productivity growth to be quite narrowly captured by a subset of innovative and adaptive companies (disruptors and embracers in the terminology of our Fund), while many disrupted companies will lose market share and continue to see poor productivity gains.

Regarding the second factor, we expect an important legacy of the current crisis to be persistent low real interest rates as governments supress borrowing costs to manage the historically very high government debt burdens currently being incurred due to the crisis.

In our view, the combination of these two macroeconomic factors – highly unequal benefits from AI across companies and low interest rates, which put the focus in equity valuation on long term cash flows – are likely to favour the share prices of companies on the right side of disruption and punish those on the wrong side across the economy and market over the coming years.

As mentioned, the Funds follows a ‘disruption investing’ philosophy and we believe it works best in an investor’s portfolio when balanced with the other key equity philosophies of value and quality/moat investing. We see combining these three styles as the ultimate balanced approach for an investor’s equity portfolio. Value provides exposure for when economic forces of reversion to the mean are dominant, quality/moats for when the status quo is dominant and disruption for when rapid change is dominant.

Thinking about equities today, value has had a poor run over the past decade but historically has been very effective and is currently cheap, so can be reasonably argued to warrant exposure. Meanwhile, many moat-based businesses have delivered strong shareholder returns over the past decade so also warrant exposure. However, we believe today’s economy is characterised by accelerating disruption. Having produced strong shareholder returns for disruptive businesses over the past decade, we believe greater disruption yet over the next decade could continue to frustrate some areas of value and increasingly threaten some moats.

Together the three styles are likely to provide a good strategic balance whichever way the economy evolves over the next decade, and we believe that the Liontrust Global Equity Fund provides an excellent way to deliver the disruptive style.

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

 

 

Jun-20

Jun-19

Jun-18

Jun-17

Jun-16

Liontrust Global Equity C Acc GBP

23.0

2.0

19.4

25.6

-5.9

MSCI AC World

5.2

9.7

8.9

22.2

13.3

IA Global

5.4

7.5

9.1

23.7

6.7

Quartile

1

4

1

2

4

 

*Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested). Non fund-related return data sourced from Bloomberg.

 

**Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested) primary class.

 

For a comprehensive list of common financial words and terms, see our glossary here.

  

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. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

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.

Thursday, July 16, 2020, 3:28 PM