Liontrust SF European Growth Fund

Q4 2017 review

The Fund lagged its peer group over Q4, registering returns of 0.3% against the IA Europe ex-UK sector average of 1.0%*.

Our process targets businesses that can grow structurally, driven by the shift towards a global economy that is more efficient, provides a higher quality of life and is more resilient.

Among our stronger performers over the fourth quarter was Irish-based consumer staple Kerry Group. Kerry was established in 1972 as a dairy cooperative and has evolved to become one of the world's most advanced ingredients technology companies.

A recent area of research and development has been in functional ingredients, where Kerry is developing food fortification to target Sarcopenia (the degenerative loss of skeletal muscle mass) in aging populations. The company reported strong volume growth in its full year 2016 results, partly as a result of customer wins with its new R&D centre in Naas, Ireland.

Kerry’s share price was negatively impacted by the UK’s decision to leave the European Union, primarily due to foreign exchange concerns. We took this opportunity to increase our shareholding, believing the investment thesis remained intact and noting the strong underlying performance and geographic diversification. This decision proved valuable in 2017.

One of the Fund’s new positions is materials company Umicore, identified in our Reducing pollution from cars and industry theme and another way of gaining exposure to the growth of electric vehicles. Umicore is a Belgium-based materials company with three segments: catalysts, energy and surface technologies, and recycling.

Umicore currently generates about 70% of sales and earnings from the catalyst and recycling business, while its rechargeable battery materials division within the energy and surface technologies segment is growing rapidly, driven by the electrification of vehicles. Umicore has a market-leading position in the supply and manufacture of nickel-manganese-cobalt (NMC) cathode materials, one of the main components for lithium ion electric vehicle batteries.

We believe adoption of electric vehicles will outpace market expectations and Umicore will continue to expand margins and returns as a beneficiary of the structural shift.

On the negative side, DNB, one of the largest retail banks in Norway, was a detractor over the quarter. The stock was down nearly 6% in local currency and this negative return was amplified by a devaluation of the Norwegian Krone.

Until this point, DNB had performed strongly throughout 2017 and the company’s third-quarter results were ahead of consensus, with revenues ahead and loan losses lower than the market expected. Despite these results however, the shares went on to underperform the market for reasons that are unclear to us.

Our long-term thesis that DNB remains overcapitalised and should be able deliver a return on equity in excess of 12% has not changed and it remains a key holding across the Sustainable Future range.

Another detractor was Spanish apparel giant Inditex, a key long-term holding in the consumer discretionary sector. The company owns the famous Zara brand and has stores throughout the world, with a strong and defensible competitive advantage from its unique design and supply chain model.

The company has invested heavily in design capability and pioneered ‘proximity sourcing’ by keeping manufacturing close to end markets, while also implementing industry-leading labour and environmental standards. This competitive advantage has resulted in market-leading sales growth, profitability, and returns on capital combined with strong cash generation and a very conservative balance sheet.

However, the company underperformed in the last year due to foreign currency headwinds impacting gross margins and competition intensifying as online players gained market share. Our focus from here is to understand the sustainability of Inditex’s competitive advantage and whether this is eroding with the rise of e-commerce.

Looking towards the macroeconomic environment, Germany held elections in late September, which saw a historic fourth win for pro-European Chancellor and moderate Angela Merkel. This provided the eurozone with further stability following the election of French moderate Emmanuel Macron although we recognise the high levels of populist vote in both countries. The European Central Bank’s meeting in October was more dovish than expected, with policymakers reducing the size of the quantitative easing programme but extending its length.

Another potential political risk is related to the UK’s progress on its departure from the EU, which continues to be slow and acrimonious. With this in mind, we continue to believe holding high-quality companies with structural sustainability drivers will deliver outperformance over the long term.

Discrete years' performance* (%)






Liontrust Sustainable Future European Growth 2 Acc






MSCI Europe ex UK






IA Europe Excluding UK














* Source: Financial Express, primary share class, total return (net of fees and income reinvested), to 31.12.17


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 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.

Some of the Funds managed by the Sustainable Future Equities team involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.


This content 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, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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, January 25, 2018, 4:42 PM