Liontrust Special Situations Fund

March 2018 review

The Liontrust Special Situations Fund had a flat return in March, compared with the -1.8% return from the FTSE All-Share Index.

 

Equity markets extended their losses in March, with the prospect of a trade war led by the US and China taking up the mantle of investors’ primary focus. Donald Trump announced hefty tariffs on steel and aluminium imports, before outlining a range of tariffs targeted at imports from China. Equity investors globally fretted over the prospect of retaliatory measures and the risk of a downward spiral into a damaging bout of protectionism. As has been widely commented on, the first three months of 2018 represented the weakest quarter for global equities since Q3 2015. Commodity markets also showed signs of stress; aluminium (-6.0%) and copper (-4.4%) were among those suffering falls.

 

Against such a backdrop, it is unsurprising that the FTSE All-Share’s basic materials sector fell 3.4%. The technology sector also saw marked losses, in what was a global trend. In the US, Facebook came under scrutiny due to Cambridge Analytica’s use of its data, while a fatality from a self-driving Uber car crash further dented sentiment towards the tech stocks which drove much of 2017’s gains. The UK technology sector is small at less than 1% of the FTSE All-Share Index, so a halving in the share price of its second largest constituent Micro Focus (a Fund non-hold) dragged the sector’s March return down to -18.8%. Micro Focus revealed problems with integrating its US$8.8bn reverse takeover of a Hewlett Packard Enterprise division and announced the departure of its CEO after only six months in the job.

 

The Fund’s flat return in an environment of equity weakness can be attributed to its avoidance of some of the softest areas of the market – the Fund has no banks, which were another large drag on the FTSE’s performance – and timely share price boosts resulting from corporate activity.

 

Following last month’s approach for Fidessa, NEX Group (+45.9%) joined it as the subject of takeover discussions while Shire (+15.6%) shares rose on news that Japanese pharmaceutical company Takeda was “considering marking an approach”.

 

In other corporate activity for Fund holdings, GlaxoSmithKline (+6.6%) announced an agreement to buy Novartis’ 36.5% stake in their consumer healthcare JV for £9.2bn. It is also initiating a strategic review of Horlicks and other consumer nutrition products to explore options to support the funding of the transaction. Investors welcomed the news, viewing it as a smarter strategic option than a proposed deal to acquire Pfizer’s consumer healthcare division which was also on the table. Glaxo had pulled out of the bidding with Pfizer earlier in the month.

 

The Novartis deal is expected to be immediately accretive to earnings for Glaxo and should boost operating cash flow. It also removes the uncertainty created by a put option which Novartis previously held concerning its stake in the JV. 

 

While NEX Group shares were rocketing on the CME approach, investors in TP ICAP (-16.9%) – the remainder of the businesses affected by the transaction between ICAP and Tullet Prebon – were reacting less positively to the release of final results. On a pro-forma basis in its first full-year since the transaction, TP ICAP saw a 44% fall in statutory operating profit to £102m, even as revenues rose 4% to £1.76bn. On an underlying basis, adjusting for exceptional items such as acquisition/disposal and integration costs, the picture improves, with operating profit rising from £240m to £263m. TP ICAP also echoed last month’s positive outlook comments from NEX Group, referring to an encouraging start to 2018 as volatility picks-up from the lows experienced in 2017.

 

Shares in EMIS Group (+13.0%) staged a partial recovery from the falls which accompanied January’s disclosure of service level failures on its NHS Digital contract. It released full-year results which revealed it had made a provision of £11.2m to cover the related costs.  Although this amount is slightly greater than the initial cost estimate given in January of “upper single digits of millions of pounds”, the company was able to provide better news in the form of a company-wide SLA (service level agreement) review which found no similar issues with other customers. So although 2017 financial results have been heavily affected (reported operating profit down 55% to £10.6m), this setback was already in the price following January’s warning and investors have now been able to take comfort from the likelihood that this was an isolated incident.

 

EMIS’s underlying performance in 2017 was otherwise in line with its expectations. Recurring revenues have further increased to now account for 83% of revenues. In 2018 so far it has already secured revenue amounting to over 90% of the 2017 total.

 

Market research and data analytics group YouGov (+11.2%) grew revenues by 10% to £56.3m in the six months to 31 January 2018 with adjusted operating profit jumping by over 50% to £88m. The company has successfully increased sales from its Data Products & Services division so that they now account for 48% of the total, giving it equal prominence with its Custom Research business – one of the goals of its five year growth plan announced in 2015. YouGov is one of a selection of portfolio holdings we believe will benefit from the growth of the digital economy, helping its clients to harness the power of the data they generate and draw actionable insights from that information. YouGov also confirmed its full year expectations, noting that the second half of the year has begun strongly while its international spread of revenues should provide some insulation from Brexit uncertainty.

 

Having de-rated at the start of 2018, consumer goods businesses showed some relative strength in March. Reckitt Benckiser (+4.5%) had also shown interest in Pfizer’s consumer healthcare division, before it too walked away from the deal, a decision which investors welcomed. Anglo-Dutch consumer goods Unilever (+6.0%) also updated on strategy, announcing a reorganisation to three divisions (beauty & personal care, home care and foods & refreshment) and its intention to move from two legal entities (plc & N.V) to a single entity incorporate in the Netherlands. It will retain share listings in London and Amsterdam as well as New York.

 

Wood Group’s (-11.9%) final results showed that on a reported basis its revenues were boosted to the tune of 25% by the acquisition of Amec Foster Wheeler in October. On a proforma basis however, revenues weakened by 12% to US$9.88bn and EBITA dropped 11%. Although the company commented that the results were ahead of expectations on a reported basis and in-line on a proforma basis, investors appear to have focused on predictions of only modest EBITA growth in 2018, as the company looks for its core oil & gas markets to make a slow recovery from very challenging conditions. In March it separately announced a contract with Saudi Aramco and SABIC to provide design and project management services on the engineering, procurement and construction phase of the world’s largest fully integrated crude-oil-to-chemicals complex in Saudi Arabia.

 

Positive contributors included:

NEX Group (+45.9%), Shire (+15.6%), EMIS Group (+13.0%), YouGov (+11.2%) and GlaxoSmithKline (+6.6%).

 

Negative contributors included:

TP ICAP (-16.9%), Wood Group (-11.9%), Clipper Logistics (-9.4%), Renishaw (-6.5%) and Compass Group (-5.9%)


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 31.03.2018, 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.

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

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.

Monday, April 16, 2018, 2:56 PM