Liontrust SF Defensive Managed Fund

Q4 2019 review

The Fund returned 2.3% over the quarter, outperforming the IA Mixed Investment 20-60% Shares sector average of 1.7%*.

With trade wars and Brexit dominating news for the whole of 2019, it was encouraging to see long-awaited developments on both fronts in the final weeks of another year plagued by uncertainty. Despite this macro backdrop, we saw the strongest year for stocks since 2009, with the MSCI World Index up close to 23%.

In Britain’s first December general election since 1923, Boris Johnson’s Conservative party won a comprehensive victory, with the largest Tory majority in 25 years. Such a result showed an electorate firmly deciding that to get Brexit done was the priority for the next government. Meanwhile, December also saw a significant move forward in the near two-year trade war between the US and China, with both sides agreeing to a phase one deal.

Our themes are structural in nature and therefore less transient than cyclical drivers, which can change constantly. The key factor behind all our themes is the conviction that, over time, the global economy will become more sustainable.

In terms of asset allocation, we took the decision in mid-October to overweight equities and reduce cash to underweight, both from neutral. In our view, economic momentum, which had deteriorated over 2019, was set to improve. We felt markets had moved to discount a negative outcome for Brexit and the trade war and equity markets offered decent valuation support for outperformance over cash over the remainder of 2019 and into 2020. This led to a positive asset allocation effect over the quarter, with equities delivering strong returns and cash and bonds the weakest performers, where we were neutral and underweight respectively.

As ever, the majority of our performance came from stock selection, with a broad range of holdings contributing to returns.

Our belief in the business model of US-based pet insurance provider Trupanion started to pay off in the final quarter of 2019. The shares were up 37%, most of which occurred on the day the company released its Q3 results.

Revenues increased 27% compared to the same quarter in 2018 and the number of enrolled pets grew to 613,000, a rise of 23% year over year. Management also announced a share repurchase programme as they felt the current share price significantly undervalued the intrinsic value of the business. Should our investment thesis play out, there remains significant upside but the share price is volatile given the amount of short interest so do not be surprised to see Trupanion feature in future commentaries.

Industrial software company Autodesk also featured among our top performers despite growing fears that demand for its technology is vulnerable to a slowing global economy and construction market. The company reported 28% growth in revenue and more than 50% growth in free cashflow over Q3, which calmed fears of a slowdown.

Autodesk’s software brings technology to the construction sector, which had previously relied on paper and sketches. It reduces errors in construction, saving time and vital resources, and makes the overall construction industry more efficient – and is therefore a strong fit for our Improving industrial and agricultural process theme.

While the construction industry remains a cyclical end market, the secular nature of the growth in technology adoption, related to Building Information Management (BIM) and Autodesk’s cutting-edge solutions, should ensure strong compound growth over many years to come.

Another strong contributor after a weaker Q3 was antibody specialist Abcam – held under our Enabling innovation within healthcare theme – which saw share price growth on the back of its acquisition of Expedeon’s Proteomics and Immunology business. Protein labelling is a large, growing market and this deal accelerates Abcam's ambition within the complementary antibody conjugation and labelling markets.

Australian healthcare business CSL was also among the best performers, with the company continuing to develop its R&D pipeline to deliver a highly differentiated product portfolio mix, addressing a broader range of patients’ unmet needs. With a long-term commitment to serving patients and protecting public health, the company fits in our Providing affordable healthcare theme.

At the group’s annual R&D briefing to investors in December, CSL said the company is building on its leadership in plasma therapies through the identification of emerging new medicines from both within its existing portfolio and newer platforms such as gene and cell therapies and recombinant proteins.

Several of our financial names were strong performers over the quarter, with Danish bank Ringkjoebing Landbobank (Rilba) continuing to benefit from what it called highly satisfactory financial results as it reported a 6% increase in core income accompanied by an 8% fall in total expenses for the first three quarters of 2019. Rilba continues to buck the trend in European banks by delivering sustainable and profitable growth driven by a relentless focus on customer service.

 

Meanwhile, UK-based wealth manager St. James’s Place enjoyed a strong period, buoyed by reporting new inflows for Q3 of £2.11bn and record funds under management of £112.8 billion, some 18% higher year to-date.

 

In what remains an uncertain external environment, the group said these figures highlight the resilience of its business model and with the growing savings gap, the company remains well placed to benefit under our Saving for the future theme.

 

Among the few negative stocks over the period, contract catering firm Compass Group fell back slightly after a strong Q3, reporting less-than-expected full-year earnings to end September. CEO Dominic Blakemore highlighted another strong year overall, with organic revenue growth ahead of target, largely driven by strong performance in North America. Deteriorating business and consumer confidence in Europe, however, has necessitated a restructuring of the European division in order to protect margins.

Water and energy technology business Ecolab also had a weaker quarter, reporting a slowdown in organic growth in its core institutional business as it allowed a contract, which fell below its ROIC threshold, to pass to a competitor.

 

We see this slowdown as a one-off and prefer Ecolab to stay disciplined on return demands across its business. Coupled with the divestment of the energy business, we believe Ecolab is well positioned to benefit from the Improving the management of water theme across the global economy. Ecolab’s products help customers save on both energy and water, delivering cost savings and reducing resource needs.

Terraform Power was another underperformer after its Q3 results disappointed, with the management team indicating their M&A pipeline was more bolt-on than large scale; there had been some expectation that a large deal was imminent.

The company also reported some curtailment issues in Texas relating to wind assets. We see the pipeline of solar and wind assets available to a downstream, best-in-class operator such as Terraform as robust over the next decade, however, as the US transforms its energy system away from coal in favour of wind and solar. Curtailment remains an important issue but one that can be solved as the cost of storage drops over time.

 

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

 

Dec-19

Dec-18

Dec-17

Dec-16

Dec-15

Liontrust Sustainable Future Defensive
Managed 2 Inc

16.8

-2.2

11.9

9.3

3.7

IA Mixed Investment 20-60% Shares

11.8

-5.1

7.2

10.3

1.2

Quartile

1

1

1

3

1

 

* Source: Financial Express, as at 31.12.19, primary share class, total return, net of fees and income & interest reinvested.

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.

Tuesday, January 21, 2020, 10:50 AM