Liontrust SF Managed Fund

Q2 2020 review

The fund returned 20.9% over the quarter, outperforming the IA Mixed Investment 40-85% Shares sector average of 13.1%*.

After a very difficult March as the full ramifications of Covid-19 became clear, the second quarter saw markets retrace a large part of their losses, with the huge stimulus effort from central banks and governments seen as sufficient to avert a financial crisis. These measures helped ease some of the impact of lost earnings, supported jobs and provided markets with liquidity and reassurance – but also had the effect of massively expanding already bloated government balance sheets.

The situation is unique and dynamic with no contemporary examples to use as a guide and it is impossible to predict the nature of economic recovery – although that has not stopped people from trying. Ultimately, we are long-term optimists and believe we will reach a new normal at some point, overcoming this challenge as we have others in the past.

Rather than trying to work out when the market will recover, our process focuses on the structural shifts to a more sustainable economy and companies making the 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 and we would expect many of these areas to accelerate as the world recovers.

In performance terms, our global ex-UK equity portfolio was key over the second quarter while our UK portfolio was solid on a relative basis although the market has been among the hardest hit. On our bond exposure, the duration short has been a detractor as the prospect of interest rate rises diminished but the quality of issuers remains a positive given that our focus is on lending to the economy of the future; overall, performance of our bond portfolio was in line with expectations over the quarter.

From an asset allocation perspective, we came into 2020 feeling more positive about markets and had therefore moved overweight equities and underweight cash and gilts. As the serious nature of Coronavirus became clear, our asset allocation committee met in early February and we made the call to reduce equities to neutral and allow cash to build up, while remaining overweight corporate bonds. As we approached the end of Q1, the committee met again and concluded the long-term opportunity for equities is increasingly compelling, so we began to deploy cash, bringing that level down and adding slowly to equities ­and we continued an averaging-in strategy into April.

We are currently moderately overweight equities and underweight cash and maintain our structural overweight to credit and underweight gilts, with the latter a negative contributor as government debt has outperformed.

Paypal was the strongest holding over the quarter, with digital payments (under our Increasing financial resilience theme) a good example of a trend accelerating during the crisis. PayPal continued to post revenue growth in March and April and announced 10m new active accounts in Q1 and a further 7.4m in April alone (the latter represents around 250,000 new customers a day, 135% more than in April 2019). As we reported last quarter, the stock sold off in March and we took the opportunity to add to our holding.

Our thesis is largely based around engagement and we look at the number of new customers that sign up and how frequently they use PayPal when making a purchase. The reason we focus on these metrics is that PayPal, like most payment companies, has very high incremental margins; simplistically, the more payment volumes it processes, the more cash is generated for the company and its shareholders. To bring it back to our theme of making digital payments safer and easier, CEO Dan Schulman said on the Q2 call that, on average, merchants who offer PayPal as an option experience a 60% increase in purchase conversion. The fact people trust PayPal to process and store their details safely is what makes this company so well positioned for continued growth.

DocuSign also remains among the top performers, with the share price more than doubling over the first half of 2020. DocuSign has created a unique product, which digitalises the final signature part of the document creation process. At this point, a document traditionally needs to be printed several times, then sent via mail, which is both time-consuming and costly. Traditional paper-based signatures cost $37 per document on average and take around two weeks, whereas DocuSign’s product costs between $1 and $2 and 83% of documents are signed within 24 hours, and 50% within 15 minutes.

The company has a 70% market share for e-signatures globally but its addressable market is around 10 times larger than current sales figures, given it is effectively competing with paper. The growth rate has understandably accelerated in the Covid-19 world and we see this stock, held under our Increasing waste treatment and recycling theme, as an excellent example of a solution that makes the world more efficient.

Another strong contribution came from the smallest investment in the fund by market cap, with US pet insurer Trupanion exposed to our theme of Insuring a sustainable economy. Pet insurance is in the US is growing at 20-30% a year from a very low base of just 1.5-2% coverage and has decades of growth ahead. The reason for such low penetration lies in the history of the industry, with products very prescriptive and insurance companies capping the amount they would cover per procedure.

Trupanion does things differently and has spent the last 20 years disrupting the industry: it has a monthly subscription model that stops when you cancel or your pet dies rather than annual policies that require rebuying every year, and no caps on coverage. The company takes pride in paying out on claims and targets a 70% payout ratio. The idea is that by being a digital-native business, it has cost advantages to pass onto customers, thereby increasing its moat. Our theme is about providing financial resilience to individuals and covering them against unexpected shocks: Trupanion does exactly this in a manner we think is not only responsible but provides advantages that are very difficult for competitors to replicate.

Elsewhere, our Connecting People theme continues to accelerate as millions of people work from home, with solid performance from holdings such as Cellnex, while familiar names such as Autodesk, Adobe and Cadence Design Systems also feature among our top contributors.

We also continue to be proud of the work many of our healthcare companies are doing in the fight against Covid-19, across the spheres of therapies, testing and vaccines. In the second category, US firm IQVIA was among our top positions over the quarter despite being one of the worst hit in March. We reviewed the stock during this period and felt our thesis remains intact despite the potential interruption of medical trials from lockdowns. We added to our holding at the end of March and in results announced in May, the company said it has shifted trials to a virtual model and subsequently seen no cancellation of contracts.

In terms of trading, we have implemented a phased, average-in strategy to avoid having to call the market bottom, with the first stage in late March and the second in early April. For the latter, we sold Japanese bike parts manufacturer Shimano, which was close to our price target and we also have concerns about cycle sales over the next few months. We added Intuitive Surgical, a global leader in robotic-assisted surgery, which helps reduce errors and therefore costs for hospitals.

Among our existing holdings, we reduced positions in outperforming names such as Cellnex and DocuSign and added to weaker performers such as Hella, Prudential and Puma. A number of stocks have sought additional capital as they look to get through the next few months and we feel this offers an opportunity to both stand by, and increase our position in, favoured companies for the long term such as DFS, Compass Group and National Express.

In terms of weaker performers over Q2, Compass Group has continued to struggle, as would be expected of the world’s largest catering business in a period of global lockdown. We like this business under our Leading ESG management theme, with best-in-class sustainability in terms of reducing food waste helping the company improve operating margins versus peers.

A large part of its revenues come from feeding people at work or at live events, however, and due to the current situation, these have been extremely challenged. Having spoken to Compass Group and done our own analysis, we believe 30-50% of the company is resilient to the crisis and considering the strong balance sheet, it should be able to manage its way through. We therefore decided to take part in the share placing in May at £10.50, designed to shore up the balance sheet and allow Compass to come out of the crisis in a stronger position.

In normal times, this is a business that generates a return on invested capital of 20% and earnings growth of 8-10%, so we are happy continuing to hold the stock and expect it to generate strong returns in the coming years.

We see a similar story with holdings such as Italian fitness equipment manufacturer Technogym, which is also among our weaker names. Technogym is a leader in the global fitness equipment market with a 6% market share and the number-one brand in Europe, as the only company in the sector to provide a full solution from fitness equipment to gym management. The business has excellent fundamentals, with a ROIC well in excess of 30% and annual compound EPS growth of 22% over the past five years as well as a net-cash balance sheet.

With widespread gym closures however, the shares have obviously taken a hit. Several of Technogym’s customers will be cutting back or postponing their planned capital expenditure but this repair and replacement cannot be postponed indefinitely due to the wear and tear on equipment when gyms start to reopen. On a longer-term view, we think the structural shift towards health and fitness will not be diminished by the crisis and this high-quality cyclical will provide the portfolio with some ballast in a recovering economy, whenever that occurs.

Among other weaker holdings, we sold our position in Cineworld over the quarter, with the company struggling alongside other consumer-facing businesses as they endure a period of zero revenues. The difference with Cineworld versus other holdings where we remain confident in their prospects is that the company recently made a large acquisition in the US by gearing up its balance sheet and was preparing to make a similar purchase in Canada before Covid-19 forced a rethink. A period of no revenues has left the business struggling to finance these borrowing costs and, in hindsight, we should have seen the excess leverage as more of a red flag.

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







Liontrust Sustainable Future Managed 2 Inc






IA Mixed Investment 40-85% Shares













*Source: Financial Express, as at 30.06.20, 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.


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, July 16, 2020, 3:28 PM