Liontrust Special Situations Fund

March 2021 review

The Liontrust Special Situations Fund returned 3.7%* in March. The FTSE All-Share Index comparator benchmark returned 4.0% and the average return in the IA UK All Companies sector, also a comparator benchmark, was 3.8%.

 

Market gains continued to be driven by the prospect of economic recovery from Covid-19 restrictions. Within the UK market’s solid rise, individual stock movements were heavily influenced by the reporting season for 2020 results.

 

Before delving into the portfolio’s batch of earnings releases, it’s worth first highlighting a surprise move from  Renishaw (+12%) to launch a formal sale process after co-founders David McMurty and John Deer decided to sell their 50%+ interests in the business.

 

This is a something of a landmark event for the Economic Advantage funds that own it: Renishaw was one of the first stocks we bought for the Liontrust UK Smaller Companies Fund more than 20 years ago as we launched our investment process and it has delivered outstanding investment returns for our funds. We will be very sorry to see the company leave the stockmarket. The extent of Renishaw’s growth over the last two decades was recently illustrated by its promotion to the FTSE100 during the large-cap index’s Q1 review.

 

The specialist in high-tech precision measuring and calibration equipment has excellent levels of intellectual property, a global distribution network and strong customer relationships; we expect Renishaw to attract a number of suitors, although it has emphasised its desire for an owner that respects the company’s history, culture and importance to local communities.

 

Returning to financial reporting, it was a busy month for the Fund with updates driving some of the larger share price moves. The biggest of these was Smart Metering Systems (+19%). It announced a 6% increase in its preferred revenue measure – index-linked annualised recurring revenues – to £77m. The company commented that despite another national lockdown, the meter installation run rate was about 80% of the Q4 2020 pre-Covid level.

 

At around 75% of total revenues, Smart Metering Systems’ level of recurring business is sufficient for us to consider it an intangible barrier to competition for the company. Its other core intangible asset as assessed by the Economic Advantage process is its distribution network. Following the recent award of two smart meter installation contracts with unnamed energy suppliers, the company has grown its contracted smart meter pipeline to around 2.5 million meters.

 

Domino’s Pizza Group (+13%) also made headway after giving more detail on what we already knew was a very busy year for the company. Like-for-like system sales rose 10% to £1.35bn as online sales grew by 24% to account for 94% of the Domino’s delivery sales in the UK. The company commented that trading in 2021 has started strongly, with its highest ever sales week recorded over the new year period. The bullish tone was supplemented by some ambitious new medium-term growth targets: the opening of 200 more stores and a sales target of £1.6bn - £1.9bn.

 

While Smart Metering Systems and Domino’s Pizza Group are good examples of businesses whose activities have been resilient to the pandemic, the Fund also owns companies that have experienced soft demand; three of these feature among March’s detractors following release of 2020 results: John Wood Group (-9.5%), Weir Group (-10%) and Coats Group (-8.5%).

 

Weir Group reported a 2020 revenue drop of only 1% in constant currency terms but it experienced a 13% reduction in orders to £1.86bn and issued a slightly cautious outlook statement. Following the sale of its oil & gas division earlier this year, Weir Group is now focused on premium mining technology.

 

John Wood Group also saw some order book weakness in 2020; it shrunk 17% to US$6.5bn. The pandemic and low oil prices combined to depress activity levels for the engineering group. As it prepares for another year of soft demand in 2021, the company is focusing on improving profit margins through cost and efficiency drives.

 

Industrial thread manufacturer Coats Group reported a 19% fall in organic revenues and a 43% tumble in adjusted operating profit in 2020. The end of 2020 saw more encouraging signs that Covid disruption may be lessening; organic sales for November and December were down only 5% year-on-year compared with a 15% shortfall in Q3 and 26% drop in the first half of the year.

 

Among the other key movers in March was GlobalData (+17%). It recorded flat revenue at £178 after a 7% increase in subscription sales compensated for the decline in revenues at its small events division during the pandemic. Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) rose 14% after a 4 percentage point improvement in margin to 32%. The company has a medium-term target to achieve a margin of between 35% and 40% and is also targeting organic revenue growth of at least 10% per annum.

 

Having in January raised its financial guidance for 2020 in a trading update, shares in Learning Technologies (-8.1%) eased back on the release of full results in March. Since the start of 2020, Learning Technologies has made eight acquisitions using the growth funding secured in last year’s £80m+ share placing. It commented that trading in 2021 has begun in line with management expectations.

 

Positive contributors included:

Smart Metering Systems (+19%), GlobalData (+17%), Kainos Group (+13%), Domino’s Pizza Group (+13%) and Renishaw (+12%).

 

Negative contributors included:

Weir Group (-10%), John Wood Group (-9.5%), Coats Group (-8.5%), Learning Technologies (-8.1%) and JTC (-6.4%).

 

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

 

Mar-21

Mar-20

Mar-19

Mar-18

Mar-17

Liontrust Special Situations I Inc

31.1%

-11.0%

8.9%

7.2%

23.0%

FTSE All Share

26.7%

-18.5%

6.4%

1.2%

22.0%

IA UK All Companies

38.0%

-19.2%

2.9%

2.7%

17.9%

Quartile

3

1

1

1

1

 

*Source: Financial Express, as at 31.03.21, 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 31.03.21, total return (net of fees and income reinvested), bid-to-bid, primary 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. 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, April 16, 2021, 12:57 PM