Liontrust Special Situations Fund

April 2018 review

The Liontrust Special Situations Fund returned 6.0%* in April, compared with the 6.4% return from the FTSE All-Share Index.

Equities rebounded strongly on an easing of the trade war worries which had stifled markets in March. Although China revealed some fairly tentative retaliatory tariffs of its own early in the month, April saw an acceptance that the confrontational rhetoric may well give way to a more pragmatic solution. From a geopolitical standpoint Donald Trump’s Twitter attack on Russia – for supporting a Syrian regime accused of using chemical weapons – would in normal circumstances be expected to spark some signs of risk-averse behaviour, or demand for ‘safe haven’ assets. However, April also brought us the spectacle of Kim Jong-Un becoming the first North Korean leader to set foot in South Korea for over 60 years, alleviating one of the largest geopolitical risks of recent months. 

As these global events transpired, UK equities rallied through the month. One macro factor that did have a large influence on returns in April was the oil price. Brent crude rose to over US$75 a barrel. Production restrictions implemented by Opec and Russia continue to have an effect on prices, while the US and UK’s participation in air strikes in Syria almost certainly contributed to April’s spike.

The oil sector was the strongest area of the FTSE All-Share Index, returning 13.3%. The Fund’s holdings in the sector amount to less than the index weight, leading to small negative allocation effect in pure attribution terms, but all the stocks performed well individually: Plexus Holdings (+20.4%), Royal Dutch Shell (+14.3%), BP (+12.3%) and Wood Group (+8.4%).

Given the extent of equity market strength in April, the vast majority of Fund’s holdings made a positive contribution during the month; only 5 of 49 holdings suffered a fall. 

Standing out in the sea of green was AA (+69.0%), which partially rebounded from recent share price losses after releasing final results. Having reacted adversely to new CEO Simon Breakwell’s revelation of strategic changes in February, investors’ response to this announcement suggests a softening of attitudes regarding the company’s new direction. The results themselves show 2% growth in revenue to £959m but a 3% drop in EBITDA (earnings before interest, tax, depreciation and amortisation) to £291m – the impact of third-party garaging costs which were used to cope with workload peaks. 

Management reaffirmed its new strategy and financial targets, which are expected to see next year mark a low point in free cash flow due to investment costs. Cash generation should then improve towards £100m+ a year as the company looks to reduce its debt pile. The outsized effect of financing costs on profitability is illustrated by a 41% jump in PBT (profit before tax) despite the 3% EBITDA decline; an uplift driven by an £18m reduction in interest costs following a debt refinancing. 

Stronger than expected Q1 order intake at actuator manufacturer Rotork (+17.1%) contributed to it raising its full year revenue guidance to “mid to high single digit growth”. Order intake rose 21% year-on-year, which the company attributes to a continuation of the more favourable market trends seen in Q4 2017. The order book now stands at £228m, 12% higher than a year ago. The rise in order intake was particularly stark in its Fluid Systems business, which saw 46% growth as conditions improved in key end markets such as the oil & gas industry. 

A half-year trading update from RWS Holdings (-17.0%) led to share price weakness due to its comments on the impact of currency trends and the initial performance of Moravia, a business acquired in late 2017. The company warned that dollar weakness against the pound, if maintained, would lead full year profits to fall short of consensus. RWS’s recent acquisitions in the US – LUZ, CTi and Moravia – have extended its operations beyond patent translation and into specialised IP support to sectors such as technology and pharmaceuticals. While this move has sound strategic logic, the Moravia purchase has experienced some teething problems in the form of lower-than-expected activity from certain clients. 

However, RWS commented that Moravia’s pipeline of new opportunities is strong, while integration of the business has identified more cost synergies than had been anticipated. We view this setback as a short-term hiccup and have taken the opportunity to buy into share price weakness. The effect of currency trends on profitability is very much a case of “swings and roundabouts” and has no impact on the Economic Advantage attractions which we have identified in RWS. 

Reckitt Benckiser (-4.0%) was another faller within a strong market after a full year trading update disappointed relative to expectations. Total like-for-like growth of 2% was behind consensus forecasts for an uplift of closer to 3%. The company maintained its full year target of 2%-3% growth. 

The position in Idox was closed during April, the conclusion of a sale process which was initiated after management’s share ownership fell below 3%, the threshold level we require of smaller companies in the Fund.  

Positive contributors included: 
AA (+69.0%), Rotork (+17.1%), Royal Dutch Shell (+14.3%), BP (+12.3%) and Hargreaves Lansdown (+9.6%).

Negative contributors included:
RWS Holdings (-17.0%), Reckitt Benckiser (-4.0%), GlobalData (-1.7%), Bango (-1.5%) and Spectris (-0.2%).

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

 

Mar-18

Mar-17

Mar-16

Mar-15

Mar-14

Liontrust Special Situations I Inc

7.2

23.0

4.7

8.2

11.9

FTSE All Share Index

1.2

22.0

-3.9

6.6

8.8

IA UK All Companies

2.7

17.9

-2.4

5.8

14.2

Quartile

1

1

1

2

3


*Source: Financial Express, as at 30.04.2018, total return (net of fees and income reinvested), bid-to-bid, institutional class.
 
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 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.

A proportion of the portfolio is invested in smaller companies and companies traded on the Alternative Investment Market. These stocks may be less liquid and the price swings greater than those in, for example, larger companies. 

Disclaimer

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, May 17, 2018, 4:26 PM