Liontrust Global Smaller Companies Fund

Q3 2021 review

The Liontrust Global Smaller Companies Fund returned 2.4% over the quarter, versus the MSCI World SMID Index and IA Global sector respective returns of 1.6% and 1.9% (both comparator benchmarks)*.


US equity markets continued to rally this quarter but were led by more defensive parts of the market as opposed to the more cyclical areas which dominated at the end of last year and the beginning of this. The dominant debate this year continues to be around inflation and whether the pick-up in inflation we have seen is transitory in nature or something more structural which will cause the Fed to tighten monetary policy quicker than otherwise might have been expected. One of the drivers of inflation has been the widely reported supply chain challenges and indeed US company earnings that were reported in the early part of this quarter began to show the impact. Supply chain challenges have included, amongst others, the shortage of semiconductor chips, logistics bottlenecks, labour shortages and subsequent wage pressure. Despite many of the companies we own, with strong pricing power, have looked to address this with price increases, these impacts are beginning to show up in their margins.

A related debate that has raged in recent months is whether the economic momentum that has been so strong in the US since the summer last year is already tailing off. The Delta Covid-19 wave has certainly slowed and in some cases reversed momentum in the re-opening of the US economy. The good news here is that by the end of September, it is looking likely that the US is past the worst of the Delta wave with the case count around a third lower than the Delta peak at the end of August and hospitalisations almost a quarter lower.

Elsewhere, UK equities started the third quarter well, bolstered by strong second quarter earnings reported across the majority of sectors.  As we entered the quarter, earnings revisions ratios for UK companies reached fifteen-year highs, indicating that UK companies had weathered the Covid storm better than many had feared. This earnings momentum injected a degree of optimism into the market, as did the restoration of UK dividends, which have recovered to one sixth below pre-Covid levels.

 

Since September, however, along with other global markets, we have seen the majority of these gains erased. Central to this observation has been the pace of inflation (which climbed to 3.2% in August), closely tied to the direction of interest rates and bond yields, and consequent valuation support for equities. In the past month we have seen a sharp rebound in UK bond yields, which surpassed 1% for the first time since May 2019 as the Bank of England took a more hawkish stance on monetary policy to combat inflation. Companies across the industry spectrum continued to report cost inflation pressures, citing supply-chain bottlenecks caused by the disruption of the pandemic. 


Adding to recent uncertainty, the regulatory crackdown in Beijing on companies on the wrong side of the theme of ‘common prosperity’ has created concerns beyond China, given the region’s critical importance as both manufacturer and end consumer for many multi-national companies. 

 

Asana was the top performer over the quarter. The company provides a general productivity platform allowing for better collaboration and task distribution/monitoring for all knowledge workers. Over the quarter, the company reported fiscal second quarter results that beat expectations, announcing that second quarter revenue growth accelerated to 72% year-on-year, while revenues from customers spending $5,000 or more on an annualised basis grew 97% year-on-year.

 

SPS Commerce was another significant contributor to the Fund’s performance over the period. The company provides cloud-based supply chain management software to retailers, suppliers, third-party logistics providers and partners. To date, more than 95,000 companies in retail, distribution, grocery and e-commerce have chosen SPS as their retail network. Over the quarter, shares in the company jumped following an announcement that boosted its revenue forecast for the full year, beating expectations.


Also contributing to the Fund’s outperformance over the quarter was Dynatrace. The company helps increase Dev Ops productivity with a suite of products to help IT operators to optimise their cloud operations, and Asana with a general productivity platform allowing for better collaboration and task distribution/monitoring for all knowledge workers.

On the other side of the ledger, our position in Fiverr International led the detractors over the third quarter. Shares in the online marketplace for freelance services slumped after the company reported second-quarter results that topped estimates, but third-quarter guidance came in below expectations. The company’s updated guidance reflects the new post-Covid effect, explaining that “people are spending more time out of home and less time on screens”.

Also among the detractors was the freelancing platform Upwork. The company connects businesses with freelancers, independent talent, and agencies around the globe. Shares in the company slid in the third quarter after 2Q adjusted earnings per share missed average estimates.

Furthermore, we continue to be very positive on the outlook for high quality growth stocks over the next year. We are especially positive as the small cap area of the market continues to give considerable scope for further outperformance as the world continues to recover from the Covid-19 pandemic. Our emphasis on the drivers of Science, Intellectual Property, New Deep Technology, Positive Social Change and Entrepreneurial Vision will, we believe, guide the Fund towards those companies that will change the world as we adapt going forward.

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


 

Sep-21

Sep-20

Sep-19

Sep-18

Sep-17

Liontrust Global Smaller Companies C Acc GBP

25.0

31.7

-2.9

32.8

22.2

MSCI World SMID Cap

30.6

-0.9

2.8

12.7

14.5

IA Global

23.2

7.2

6.0

11.6

14.9

Quartile

2

1

4

1

1

 

*Source: FE Analytics as at 30.09.21

 

**Source: FE Analytics as at 30.09.21. Quartiles 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