Liontrust SF Global Growth Fund

Q4 2020 review

The Fund returned 9.6% over the quarter, matching the 9.6% IA Global sector average and outperforming the 7.8% return from the MSCI World Index (both of which are comparator benchmarks)*.

In terms of macro developments, positive news on effective Covid-19 vaccines created a strong recovery in markets after a weaker October. This optimism was further buoyed by Joe Biden’s victory in the US Presidential election and the expectation of calmer international relations ahead, as well as a last-minute Brexit deal between the UK and European Union.

While concerns about Covid-19 remain, with many countries forced back into lockdown amid worries about the virus mutating, broad market outperformance continued to the end of the year. While we welcome the recovery in our more cyclical names, we avoid trying to predict how the macro picture will develop and focus on backing companies benefiting from the structural shift towards a more sustainable economy. Covid-19 does not change our view that companies exposed to sustainable themes will see strong growth and many of these areas will continue to accelerate as the world recovers.

Top-performing holdings over the quarter included several of our financial names as the sector enjoyed a strong end to 2020, including Charles Schwab, Avanza and First Republic. We added to our holding in Charles Schwab in September; it had been somewhat left behind in the rally of the preceding months and due to an undemanding valuation, we felt the company offered compelling upside. Having traded in a fairly flat range in the $30s from July to September, the shares rose from around $38 at the start of October to above $52 by the end of the year.

Schwab is a long-term holding under our Saving for the future theme as the cost leader in the US financial services advice channel, benefiting from multiple structural changes: the need for people to save more, the shift to lower investment fees and the move away from traditional advice channels to smaller independent advisers. The company reported solid performance for Q3 2020 in October with a 17% year on year rise in client assets, albeit against a challenging backdrop and low interest rate dynamics. CEO Walt Bettinger referenced a pivotal moment in Schwab’s history with the acquisition of TD Ameritrade closing in October, creating a company with huge reach – approximately $6 trillion in client assets and 28 million brokerage accounts.

Q3 addition Avanza was also among our strongest contributors, with Sweden’s leading investment platform (also held under our Saving for the future theme) continuing to take market share with superior technology and customer service. 2020 has been an unusually strong year for the company – the platform added around 304,000 customers, representing a growth rate of 31%. To put this in perspective, over the 2017 to 2019 period, it added 405,000 customers. This sort of growth cannot continue forever but given customer churn has historically been just over 1%, the future profit generated from this rise in customers is likely to be significant. Avanza is taking over a 20% share of the net inflows in the Swedish savings market compared to its current market share of around 5%. The company will benefit from a sustained period of above-market growth as its overall market share converges with its share of net inflows.

Several familiar names continue to feature among our top performers, including Autodesk, which saw its shares rising again after a weaker second quarter when sentiment was hit by relatively cautious guidance from management. As we wrote, Autodesk services the construction industry, with software technology that makes its customers more efficient, cutting costs and improving profitability. The company’s growth rate is largely structural but its customers clearly sit in a cyclical industry and improving news on vaccines point towards better economic conditions in 2021 and beyond.

Against this backdrop, Autodesk reported strong results for the third quarter of fiscal year 2021, with revenue, earnings, and free cash flow above expectations, reflecting the growing value of its cloud-based platform and resilience of the subscription-business model. Over the period, it also completed the purchase of Norwegian company Spacemaker, its thirteenth investment in design and construction solutions providers in three years, including five acquisitions.

Elsewhere, a number of long-term semiconductor holdings continue to contribute, with Cadence Design Systems reporting Q3 2020 revenues of $667 million, up from $580 million in the same period last year. The company is raising 2020 revenue and earnings guidance, primarily due to higher second-half hardware and IP sales activity in China and continuing progress in its System Design and Analysis business.

Cadence continues to broaden its chip design software offering to new customers, as the likes of Amazon, Google and even Tesla invest in chip design teams. Cadence’s software offering is essential to this design and demand from these businesses, as well as more traditional chip manufacturing customers, will drive growth over the short and long term. This type of innovation delivers better efficiency, which is key to our Improving the efficiency of energy use theme.

Other long-term semiconductor holdings, Infineon and ASML, have also posted solid results over recent months. Infineon CEO Reinhard Ploss said some of the company’s target markets, especially the automotive sector, have recovered better than expected since summer and the structural transformation towards electro mobility is accelerating, particularly in Europe, which remains a key part of our thesis. 

Among weaker names, stocks tied into the stay at home theme gave back some of their gains of recent months, including communication businesses such as American Tower and Cellnex. The latter had a weaker period despite being widely touted as the frontrunner to buy mobile infrastructure from Poland's Cyfrowy Polsat as part of ongoing growth plans. As for American Tower, it has experienced slightly slower growth in the US as key customer T-Mobile increased spending at a lower-than-expected rate post its Sprint acquisition, but the company expects this new business to come through and remains a key holding in our Connecting People theme.

As does data centre business Equinix, which also had a weaker Q4 as vaccine news drove a recovery in more cyclical stocks but was still up more than 20% over the course of 2020. We believe changing communication trends are here to stay in the post-Covid world and companies focusing on lowering the substantial environmental impact of growing demand for storing and distributing data have a major role to play.

Kingspan shares fell over the quarter, with the company part of the Inquiry into the Grenfell Tower tragedy. Like everyone else, we must await the conclusions and recommendations of the Inquiry before we can fully determine the impact on the company’s future, but we recognise failings in the governance of fire specifications on its insulation products. A core part of the Liontrust Sustainable Investment team’s process has been direct engagement, which we use to challenge companies, encouraging and pushing them to implement better business practices. Given this approach, we began questioning Kingspan the day after the Grenfell tragedy in June 2017. The team have continued engaging with Kingspan about Grenfell Tower in particular and the fire resistance of the company’s products more generally.

The reasons we have invested in Kingspan for 15 years and continue to do so is because of the company’s positive impact on energy use and its leading approach to carbon reduction and the circular use of materials. Notwithstanding this, we will engage with Kingspan about any findings of concern to the company.

In terms of Q4 trading, we bought Spotify under our newest Encouraging sustainable leisure theme, the world’s dominant audio platform with close to 300 million monthly active users (138 million paying a monthly subscription) in more than 70 countries. The company is adding users at a faster pace than closest rivals Apple and Amazon and keeping them more engaged: while launched as a music streaming service, it is moving into podcasts and its own content and we are excited to watch the business expand into audiobooks, live gigs and other areas as it takes advantage of its leading position.

Spotify collects comprehensive data from users and with so much for people to consume, the company is working hard to develop the ‘Spotify experience’ via curated and personalised content offerings. With an improving experience, it will continue to take market share in what is clearly a structural growth area, improving pricing power and expanding margins. We believe Spotify can comfortably scale up to 300 million paying users over the next decade and with a small monthly cost and a rough estimate of 700 million people globally willing to pay up to $1,000 for a smartphone, the addressable market for a device-agnostic platform is huge.

We also started a position in US healthcare business Illumina, a global leader in sequencing and array-based solutions for genetic analysis. This is another name for our Enabling innovation in healthcare theme, with the company’s ability to read and interpret a patient’s DNA a core first step in the shift towards more personalised and efficacious medicines. Illumina continues to lower the cost of high-quality gene sequencing over time, enabling broader adoption of these techniques and helping accelerate further beneficial trends for patients, such as the progress seen in liquid biopsy. 

Illumina’s announcement of its acquisition of GRAIL within this space was not received well by the market due to its shorter-term impact on earnings. We saw this price fall as an opportunity to initiate a position given our positive view of its strengths and the substantial benefits it aims to provide in the medium to long term. 

Elsewhere, we sold two stocks that had neared our long-term valuation calculation after a very strong 2020, Salesforce.Com and Eli Lilly.

 

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

 

 

Dec-20

Dec-19

Dec-18

Dec-17

Dec-16

Liontrust Sustainable Future Global Growth
2 Acc

32.3

29.4

1.3

18.8

17.3

MSCI World

12.3

22.7

-3.0

11.8

28.2

IA Global

15.3

21.9

-5.7

14.0

23.3

Quartile

1

1

1

1

4

 

* Source: Financial Express, as at 31.12.20, primary share class, total return, net of fees and income reinvested.

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. 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.

Wednesday, January 20, 2021, 3:59 PM