Liontrust Special Situations Fund

May 2019 review

The Liontrust Special Situations Fund returned -0.4%* in May compared with the -3.0% return from the FTSE All-Share Index.


The hoped for improvement in US-China relations failed to materialise. Instead, the US imposed the additional trade tariffs that had been threatened last year before being postponed.  Duties on US$200bn of Chinese goods rose from 10% to 25%. A further US$325bn worth of goods may eventually be subject to a 25% tariff. Huawei was also targeted with an executive order allowing the US to prohibit the use of the Chinese telecoms equipment manufacturer’s products by US companies. China has so far retaliated with new tariffs on US$60bn of US goods.


There is a growing disconnect between the interest rates outlook priced into futures markets and the message being conveyed by the US central bank. So far this year, the US Federal Reserve has unveiled a ‘patient’ approach to future rate moves and adjusted its median rate forecast from two hikes in 2019 to unchanged rates to the end of the year. Investors are instead expecting two rate cuts this year. Minutes from the Fed’s latest meeting showed that it expects a patient approach to be appropriate ‘for some time’, causing some disappointment to equity investors hoping for evidence of a more dovish stance.


A growing consensus that US rates may have peaked at a mere 2.25% - 2.50% has contributed to the US yield curve taking on a downward sloping shape at the shorter maturity end. Much has been made of the resulting ‘inversion’ of yields for 3 month and 10 year maturities. The three month US Treasury bill ended May yielding marginally more than the 10 year bond, a rare occurrence which many have posited is a precursor to a recession.


In the UK, political uncertainty was heightened by Theresa May’s confirmation of a June 7 resignation date and EU election results which saw big losses for Labour and the Conservative party at the hands of the Brexit Party and Liberal Democrats. The pound dropped by 2.9% in trade weighted terms over the month. Given this sizeable move in sterling, the more internationally diverse large-cap FTSE 100 Index (-2.9%) held up better than the mid-cap FTSE 250 Index (-4.0%).


It was pleasing that the Fund help up well relative to the FTSE All-Share Index in May. Whilst it has proportionately larger exposure to the FTSE 250, many of the Fund’s companies are international businesses which held up better than those with a domestic focus.


The portfolio’s strongest holding YouGov (+17.1%) issued no corporate news in May, but its shares resumed 2019’s upward trend after some profit taking in April, possibly also benefitting from an expectation that ongoing UK political turmoil could boost demand for market research and polling data.


Revenues at Kainos Group (+16.7%) grew by more than 50% to £151m in the year to 31 March 2019. Notwithstanding the large increase in activity over the year, Kainos Group still finished with a sizeable contracted order backlog of £122m.  Sales orders rose almost a third to £172m. As an outsourced provider of IT design and support services to the public sector, Kainos stands to benefit from the UK government’s agenda to digitise public services. The company stated that while Brexit uncertainty has affected the wider UK economy, it has had minimal impact on Kainos’s existing projects. The company does expect some deferral of new programme decisions if Brexit, a general election and/or a spending review occur within a similar timeframe. However, it also anticipates that an exit from the EU will trigger significant growth opportunities with over 300 public sector IT systems potentially affected.


Newsflow from metrology specialist Renishaw (-13.3%) was less positive. A trading update covering the first nine months of its financial year (ending 30 June 2019) revealed an 18% drop in profits. Having already issued a profit warning in March, Renishaw further cut its guidance for full-year revenue and profit. Revenue is now expected to be between £580m - £600m, an additional 3% trim versus March’s already-reduced level, while profit before tax of £105m to £120m is forecast, an 11% cut.


An AGM statement from Wood Group (-16.9%) maintained full year guidance, but investors perceived execution risks to have grown due to the company announcing a larger than normal second half weighting. The 2019 outlook is unchanged: revenue growth of around 5%, cost synergies of around US$60m and EBITDA (earnings before interest, taxes, depreciation and amortisation) growth in-line with analyst consensus. However, this year’s “phasing of projects” means that c.60% of EBITDA is expected to fall in the second six months. The company also announced a new contract worth up To US$1bn, providing engineering design services to the Sellafield nuclear plant.


A Q1 trading statement from Domino’s Pizza Group (-12.1%) repeated the now very familiar pattern of international difficulties undermining solid UK growth. Group sales rose 4.3% to £324m: UK and Republic of Ireland sales rising 4.8% to £299m while international sales fell 2.0% to £25.1m. A deterioration in international sales means that Dominos no longer expects the division to break even this year.


Following rumours of unrest from some of its UK franchisees, it is notable that Domino’s chose to allude to this issue in its comments: “we remain in open and ongoing dialogue with our UK franchisees, actively exploring win-win solutions for stimulating growth and new store openings”. The company opened four new stores in the quarter, down from eight in the prior year comparable period, but Domino’s remains confident of securing further new store openings with franchises. It had opened a further three stores by the release of the trading statement on 7 May.


PayPoint’s (+8.2%) results for the year to 31 March 2019 showed that although net revenue dropped 2.5% to £117m, operating margins rose by 1.6 percentage points to 46.3%. This allowed profit before tax to rise 3.3% to £54.7m, in line with the guidance given at the interim stage in November. Underlying costs were cut by £2.9m as the result of an efficiency drive. Revenues would have been higher were it not for the negative impact of a contract renegotiation with Yodel. As well as providing its network of convenience stores with electronic point of sale technology, PayPoint also uses this network to provide the Collect+ parcel pick-up and drop off service. The company’s PayPoint One platform had been rolled out to an additional 4,331 sites, taking the total as at 31 March 2019 to 12,881 convenience stores, ahead of the company’s target of 12,400.


Automotive fluid storage systems manufacturer TI Fluid Systems (-13.7%) released a Q1 trading update that outlined a 4.8% constant currency fall in revenues. The decline was less sharp than the 6.7% contraction TI Fluid Systems estimates for the global light vehicle production market over the period. Shares in the company still retreated, despite it maintaining overall 2019 forecasts.


Positive contributors included:

YouGov (+17.1%), Kainos Group (+16.7%), Craneware (+14.4%), Gamma Communications (+9.2%), and PayPoint (+8.2%).


Negative contributors included:

AA (-25.0%), Wood Group (-16.9%), TI Fluid Systems (-13.7%), Renishaw (-13.3%) and Domino’s Pizza Group (-12.1%).

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








Liontrust Special Situations I Inc






FTSE All Share Index






IA UK All Companies













*Source: Financial Express, as at 31.05.2019, 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 31.03.2019, 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.


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.

Tuesday, June 11, 2019, 9:35 AM