Liontrust SF Cautious Managed Fund

Q1 2020 review

The Fund returned -10.3% over the quarter, outperforming the IA Mixed Investment 40-85% Shares sector average of -15.4%*.

Like all other investors, our funds have been impacted by the Coronavirus-related volatility in recent weeks, with markets pricing in a deep economic downturn. It remains challenging to predict the length and depth of this but we are confident the underlying quality and resilience of the businesses in which we invest can withstand this volatility.

Despite the huge toll this virus has already inflicted, we are beginning to see some light at the end of this dark tunnel. The Chinese economy is in the midst of a restart, suggesting that once the medical threat is contained, our economies can resume reasonably quickly. Cases in Italy are also starting to slow, suggesting lockdown measures can be effective in preventing the virus’s exponential growth. We remain optimistic that in time, this battle can be won.

Over March, we have seen enormous fiscal measures across the world and these are crucial in terms of plugging the economic hole we are entering. Governments have pledged to support businesses and families over the next few months in an attempt to ensure economies come through this crisis intact and can function effectively. The size of these fiscal pledges is extra-ordinary but necessary in our opinion and markets reacted positively to this news.

It is ultimately impossible to know what impact the current crisis will have on sustainable issues: on the one hand, we would hope the current ‘uniting against a common enemy’ trend could be directed against climate change in the future; on the other, we may find governments have used much of their firepower fighting economic slowdown to be spending money on sustainable projects for some time to come. Our base case, however, remains that sustainable companies have better growth prospects and are more resilient than businesses not prioritising ESG – and these advantages remain underappreciated by the wider market.

Across the portfolios, we continue to concentrate on where we have expertise and confidence in our predictions, namely the 20 sustainable themes that identify companies set to benefit making our world cleaner, healthier and safer. The impact of COVID-19 on our health, livelihoods and economies does not change our view that companies exposed to these themes will see strong growth in coming years; indeed, longer term we can expect investment in areas such as healthcare to be prioritised.

From an asset allocation perspective, we came into 2020 feeling more positive about markets, with encouraging news on the US/China trade war and Brexit. We had therefore moved overweight equities and corporate bonds and underweight cash and gilts. As the serious nature of Coronavirus became increasingly clear, our asset allocation committee met in early February and we decided to reduce equities to neutral and move overweight cash, while remaining overweight corporate bonds and infrastructure equities. The latter is a particularly defensive area of the market as the companies tend to benefit from a solid cashflow backed by governments.

As we approached the end of the quarter, the committee met again and decided the long-term opportunity for equities is increasingly compelling, so we therefore began to deploy cash, bringing that allocation down and adding slowly to equities.

While the portfolio has clearly been caught up in the widespread indiscriminate selling, a number of factors have driven our continued outperformance of the wider market. First and foremost, this remains a fund biased towards high-quality structural growth areas, providing a natural shield from harder-hit cyclical parts of the market.

Some of our themes have also performed better in the midst of difficult conditions: as might be expected, stocks in our two healthcare themes have outperformed with names including Eli Lilly, Roche and CSL all among our stronger contributors. As millions of us face up to working remotely for the foreseeable future, several names held under our Connecting People theme have also held up well, including DocuSign, Cellnex, American Tower and Equinix. The latter three will be well known to our investors as consistent performers, while DocuSign is a US business that allows organisations to manage electronic agreements.

Among the weaker names – again, in the context that we have seen indiscriminate selling – are consumer discretionary holdings such as Cineworld, Crest Nicholson and Technogym, which face an undefined period of zero revenues.

With these, and holdings across the portfolios, our focus has been twofold: first, have the prospects changed five and ten years from now and second, how is the company positioned for the next six to 12 months in terms of cash and the capacity to flex down the cost base and access debt facilities? In the majority of cases, we remain confident in the long-term prospects and have been in contact with nearly all of the management teams to understand how they are dealing with these challenging times.

We are not the kind of investors who will pile into lower P/E stocks just because they are cheap but we do expect to see opportunities to tilt within the portfolio: while our more defensive areas have outperformed on a relative basis, many of our technology names have struggled for example and we would potentially top up positions at more attractive valuations.

We have researched a number of high-quality companies over the years that are benefiting from thematic growth, strong sustainability management and attractive fundamentals but did not meet the fourth aspect of our process – an attractive valuation resulting in 10% annualised upside on a five-year horizon. There may now be an opportunity to add a few select companies that do meet this valuation target after recent falls.

Over the quarter, we exited our position in Svenska Handelsbank. This was approaching our long-term price target and had performed relatively well during the crisis, falling 25%. Our calculation suggested that even after the decline, and its cut to earnings, the upside to our long-term valuation target was relatively limited.

Elsewhere, we initiated a position in Ansys, a global leader in simulation software. Its products help customers get their own products to market quicker, reducing risks around defects and generally improving innovation. Revenues are tied to R&D budgets for clients, which we feel are much less cyclical than other areas in which businesses tend to invest. As an example of what we outlined above, we initially looked at the stock in December 2019 but it did not meet our valuation criteria at that time. After falling over 40% from its highs in February, the stock did now meet our target, even after adjusting for the lower revenues due to the current crisis.

We also added to two holdings under our Increasing financial resilience theme, PayPal And Visa. Paypal shares had de-rated to a three-year low and yet we think the business is better positioned than ever to take advantage of the growing trend towards a digital economy. In our view, one of the outcomes of the pandemic will be that people who have rarely engaged with e-commerce before will be encouraged to do so. While 2020 will prove difficult for all businesses, we believe PayPal will continue to grow earnings in excess of 20% for 2021-2024.

We added to Visa for similar reasons, expecting use of cards to accelerate during this time of crisis. Combine this with a multi-year low in the valuation and we felt it was a compelling time to increase our holding.

Buying and selling a stock within a couple of months is unusual for our team but this happened with Alphabet over the quarter. Shares were hit hard in the selloff, down 30% peak to trough, and we felt a large part of this was due to the fact the company earns a substantial portion of revenues from the travel industry. The business has over $100bn in net cash and equivalents on the balance sheet, however, meaning it is extremely well placed to withstand any economic malaise.

As such, the shares were trading at a seven-year low despite Alphabet being more ingrained and useful to individuals and businesses than ever before. We had previously taken profits in early February as we had identified better risk/reward for our capital elsewhere but felt the compelling opportunity could not be ignored.

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

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust Sustainable Future Cautious
Managed 2 Inc

-0.7

9.1

4.7

15.8

-1.2

IA Mixed Investment 40-85% Shares

-8.0

4.3

1.5

17.1

-2.9

Quartile

1

1

1

4

2

 

 

*Source: Financial Express, as at 31.03.20, primary share class, total return, net of fees and income & interest reinvested.

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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. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well-regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

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, April 16, 2020, 3:46 PM