Liontrust Global Innovation Fund

Q3 2021 review

The Liontrust Global Innovation Fund returned 4.2% over the quarter, outperforming both the MSCI AC World Index which returned 1.4% and IA Global Equity sector average of 1.9% (both comparator benchmarks)*.

 

The top performer over the quarter was Upstart (+159.6%) which jumped after reporting standout results over the quarter. The company provides a cloud-based artificial intelligence lending platform to banks to speed up the approval process for small to medium sized loans. This enables banks to not only increase customer convenience through speedy approvals but also reduces the cost to the bank as it removes the human workflow from the data collection to approval workflow process. Unsurprising, as Upstart achieves big new customer wins – regional banks across the US are rushing to sign up instead of developing an inhouse AI lending platform. We expect this growth to accelerate as the service becomes ubiquitous across the industry as laggards in the industry use Upstart’s services to catchup with the large incumbents in the space.

Also among the top performers was Topicus (+47.9%), which was spun out of Constellation Software, a holding with the Liontrust Global Dividend Fund, in early 2020 as effectively a carbon copy of its parent with a decentralized organizational structure, decentralized M&A process, sticky customers, and strong reputation as a perpetual owner of VMS businesses. As the business starts its journey as a standalone company, we expect the business to benefit from low customer churn and sustainably high incremental ROIC on acquisitions. So why has the stock price performed so well this year? The company spun out with little fanfare, which enabled us to easily build a position as the stock price weakened from institutional selling, and still has very little information on Bloomberg/FactSet. Providing the perfect backdrop for this innovative company to outperform market expectations of a low base.

Costco (+16.5%) is an example of a Covid winner who is winning share of cost-conscious consumers. It reported an increase in sales of 17% yoy for the month of June and was one of the Fund’s top performers over the quarter. Costco operates an international chain of membership warehouses, that carry quality, brand-name merchandise at substantially lower prices than competitors.

As a consumer you can have confidence that, at Costco, you get the best price. By paying a $60 annual fee, Gold Star members gives you access to Costco warehouses where you enjoy unmatched value for money. It’s a business model that pools buyers together alongside an efficient supply chain to drive prices lower and keep them there, clearly a part of the customer proposition consumers are excited about.

Reliance Industries (+22.5%) is benefiting from strong energy prices. However, over the longer term the management team is focused on building India’s digital infrastructure. Initially, the company built a low-cost telecommunications infrastructure alongside e-commerce and payments platforms. Now it has partnered with Google and Microsoft to build a complete end-to-end cloud offering for clients.  Under the “Jio” brand name Reliance is exploring building new services across gaming, healthcare, education, and video. These opportunities funded by significant cash from its legacy chemicals business separates it from its peers like Shell and Exxon.

Netflix (+18.4%) has performed well since mid-August, having gone side-ways for a year or so. Every big company likes to say it has outstanding economies of scale, but Netflix actually does. This is because the basic equation at the heart of television streaming is content spend, a massive fixed-cost crucial to the quality of the product, divided by number of subscribers. Just as Costco (one of our other favourite businesses) has done for decades, Netflix pools the buying power of its now 200m+ subscribers to purchase for each and every one of them close to $20bn of new content a year at an average monthly price of $11.50. This is a work of arithmetic beauty that none of Netflix’s competitors can get anywhere close to.

Looking forward, we expect significant long-term potential global growth in subscribers, particularly as non-English language hits such as Lupin and Squid Games prove they can work globally. We also see significant pricing growth, as the value and quality of content grows with subscribers, particularly given historical consumer spend on traditional TV subscriptions (at close to $100 per month) much higher than current streaming prices. Our base case is Netflix and Amazon as core household streaming products, supplemented with complementary specialist products such as Disney+. From the perspective of Netflix’s shareholder base, we view its recent transition to a positive free-cash flow business as a significant milestone. The formidable economics described above could make it one of the most powerful cash generators for shareholders of the next decade.   

On the other side of the ledger, Alibaba (-33.1%) continues to suffer from increased regulatory scrutiny from Chinese officials. The mounting pressure is focused on Alipay, which Alibaba owns a 30% stake, who is disintermediating the Chinese financial services sector. This digital first financial services company has completely upended the slow-moving incumbents by providing “pay without card”, “buy now pay later”, and investment services with low friction costs to its already large customer base acquired through its relationship with Alibaba. We expect the government to reduce Alipay’s market power to level the playing field against incumbents and new upstarts but longer term we anticipate Alipay to emerge stronger due to the level of inefficiencies in the Chinese financial system.

We expect the volatility in Alibaba’s stock to persist but remain positive on the longer-term fundamentals of the company. Given the increased volatility of the stock price, we have taken advantage of the recent bounce and reduced our position to 2.4% so that one individual stock does not drive the performance of the portfolio. We still see its leadership position in Chinese e-commerce, emerging outbound e-commerce platform, entertainment, and cloud services as incredible difficult to replicate assets positioned to benefit as Chinese economic growth drives middle class prosperity.

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

 

Sep-21

Sep-20

Sep-19

Sep-18

Sep-17

Liontrust Global Innovation C Acc GBP

19.5

29.9

2.0

16.5

20.4

MSCI AC World

22.2

5.3

7.3

12.9

14.9

IA Global

23.2

7.2

6.0

11.6

14.9

Quartile

3

1

4

1

1

 

*Source: FE Analytics as at 30.09.21

 

**Source: FE Analytics as at 30.09.21. Quartile generated on 06.10.21

 

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. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

 

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

 

This information 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.

Friday, October 22, 2021, 2:03 PM