Liontrust Special Situations Fund

April 2020 review

The Liontrust Special Situations Fund returned 9.6%* in April.  The FTSE All-Share Index comparator benchmark returned 4.9% and the average return in the IA UK All Companies sector, also a comparator benchmark, was 10.3%.

 

Given the sharpness of the stockmarket declines over the previous two months, it was no surprise to see a bounce in April as society and investors alike adjusted to life under these new circumstances. There was some evidence that April’s moves were more substantial than a simple bear market bounce, however. Although economic data pointed to a sharp global recession, governments and central bank stimulus continued apace with trillions of dollars now committed globally to supporting economies through this downturn. There were also some signs that lockdown measures could be eased, particularly in Europe where leaders – including UK Prime Minister Johnson – declared their respective countries had moved past the peak of Covid-19 cases.

 

As bottom up stock-pickers, we have no special insight into how this pandemic will play out and we won’t seek to make any forecasts. We will continue to apply the Economic Advantage process, which has served the funds so well over the past 20+ years, and focus on companies which hold a long-term competitive edge.

 

It was pleasing to see that the Fund was able to outpace the market during this bounce, having also performed relatively better during the initial fall. Leading the gainers in April were some of the holdings which were hit the hardest in March, with Weir Group (+32.4%), John Wood Group (+30.2%) and Robert Walters (+43.3%) all seeing strong share price rises.

 

Recruitment company Robert Walters operates in one of the sectors most affected by lockdown measures and the uncertainty of coronavirus. In a first quarter statement, the group noted that Covid-19 has impacted trading – revenue fell 11% – and expects a more challenging second quarter. However, management was confident that the company is well placed to weather this crisis, outlining cost cutting measures which reduced its cost base by 15% and highlighting a strong balance sheet with ample liquidity.

 

Engineering company Weir Group also highlighted its resilience during the downturn. It too emphasised measures it has taken to control costs and improve liquidity, including gaining access to up to £300m from the UK Government's Covid Corporate Finance Facility. Operationally, the group’s mining after-markets have remained robust, seeing only a limited impact from coronavirus so far. Its oil and gas division has come under greater pressure, given the significant downturn in the market.

 

During April, West Texas Intermediate (WTI) oil futures turned negative for the first time in history. The cause of this move was a combination of reduced global demand during lockdowns and limited oil storage space amid a supply glut. North Sea benchmark Brent crude avoided falling into negative territory but still fell to its lowest price in over 18 years.

 

This price movement weighed on shares of oil and gas producers BP (-9.0%) and Royal Dutch Shell (-5.4%). In a trading update, BP stated that Brent crude prices and refining marker margin touched levels not seen for well over a decade. It added that the outlook for oil prices remain highly uncertain, but it has announced a raft of measures to shore up its balance sheet, including the issue of US$7bn worth of bonds. Shell echoed sentiments around oil price uncertainty, adding that it may need to reduce production. While the plight of oil prices is likely to be negative for earnings, it is worth noting that BP and Shell both have extensive operations beyond oil exploration and production. These include gas, power, petrochemicals, retail networks (filling stations – where prices are certainly not negative), energy trading operations and, increasingly, renewables. This mix of operations has historically led to relatively stable returns – much more so than the exploration and production sector, where we have no holdings. We find significant intellectual property and distribution strength in both companies, across the range of their activities.

 

Oil services engineer John Wood Group had already suffered a substantial share price decline but reclaimed some lost ground in April. The company said the steep fall in oil prices will likely lead to postponement of projects in its current pipeline and slower new order intake. However, like other holdings, the company reassured investors over the strength of its balance sheet and stated that it will accelerate planned cost reductions to combat the pressures it is facing.

 

RWS Holdings (+17.3%) was another holding to see a double-digit share price increase. The property and life sciences translation specialist has been aiding the research efforts into Covid-19 vaccines and treatments, on a pro-bono basis. The company said it has seen an increase in demand within its Moravia division, which provides localisation services, and its Life Sciences business. This had offset some of the decline in demand from some customers which are acutely affected by the pandemic, such as those in the travel sector.

 

One of the companies whose involvement in finding a Covid-19 treatment has been well publicised is AstraZeneca (+15.3%). The Anglo-Swedish pharmaceutical company teamed up with Oxford University in an attempt to research, manufacture and distribute a coronavirus vaccine. The strength of AstraZeneca’s distribution channels is one of the key intangible assets that underscores its investment case.

 

We made two changes to the Fund in April. We sold AA after the roadside assistance company fell into the small cap segment of the market but had less than the 3% requisite senior management equity ownership. We started building a position in a small cap stock and will disclose more details in a later review.

 

Positive contributors included:

Gamma Communications (+33.5%), Weir Group (+32.4%), Domino’s Pizza Group (+21.2%), RWS Holdings (+17.3%) and GlobalData (+16.4%).

 

Negative contributors included:

BP (-9.0%), Smart Metering Systems (-8.7%), Aggreko (-5.8%), Royal Dutch Shell (-5.4%) and JTC (-4.8%).

 

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

 

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust Special Situations I Inc

-11.0

8.9

7.2

23.0

4.7

FTSE All Share

-18.5

6.4

1.2

22.0

-3.9

IA UK All Companies

-19.2

2.9

2.7

17.9

-2.4

Quartile

1

1

1

1

1

 

*Source: Financial Express, as at 30.04.20, total return (net of fees and income reinvested), bid-to-bid, institutional class. Non fund-related return data sourced from Bloomberg.

 

**Source: Financial Express, as at 31.03.20, total return (net of fees and income reinvested), bid-to-bid, primary class.

 

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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. Some of the Funds managed by the Economic Advantage team invest primarily 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. The performance of the GF UK Growth Fund may differ from the performance of the UK Growth Fund and will be lower than its corresponding Master Fund due to additional fees and expenses.

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.

Friday, May 15, 2020, 2:59 PM