Liontrust Special Situations Fund

May 2020 review

The Liontrust Special Situations Fund returned 4.0%* in May.  The FTSE All-Share Index comparator benchmark returned 3.4% and the average return in the IA UK All Companies sector, also a comparator benchmark, was 2.9%.


The market’s recovery from February and March’s Covid-triggered losses continued in May. Despite further dire data on the economic impact of the virus response and the prospect of revised tensions between the US and China, investors again chose to look towards the recovery anticipated as lockdown measures begin to ease and massive monetary and fiscal stimulus kicks in.


Economic impact estimates released during May included the Bank of England’s prediction of a 14% fall in UK output this year and the ECB forecast of an 8-12% eurozone contraction. Meanwhile, US unemployment jumped to 14.7% in April, its highest since the second world war.


It was a relatively busy month for portfolio newsflow, with a number of holdings providing trading updates on 2020 so far. The Fund’s positive contributors for May were dominated by those updating on trading: either highlighting resilience or simply providing a bit more clarity on the scale of the immediate setback.


Hargreaves Lansdown (+27.3%) is among those companies whose operations have been relatively adaptable to the current climate. A trading update revealed net new business of £4.0bn in the four months to 30 April after 94,000 new clients joined. While client numbers swelled to 1.37m, assets under administration dropped to £96.7bn as the inflows were outweighed by a £12bn negative impact from this year’s market falls. Nevertheless, the new business trends were enough to suggest that Hargreaves Lansdown is able to operate effectively in the in the current climate, an impression that was firmed by its intention to maintain its dividend approach.


Results from Kainos Group (+19.4%) covered the year to 31 March – only overlapping with the start of the Covid-19 crisis, but showing enough to suggest that it too may display some resilience to current conditions. The outsourced provider of IT design and support services to the public sector grew revenues by 18% to £179m while pre-tax profits increased by 9% to £26m and orders saw a hefty 42% jump to £244m – leaving an end-year order backlog of £180m. Commenting on the worsening of the Covid-19 impact since 31 March, Kainos highlighted its cash balance of £41m, its success in shifting to work-from-home delivery of services and some cost containment measures such as temporary salary reductions. It also decided not to declare a final dividend, but to review the dividend position later in the year when there is more clarity of the pandemic’s impact.


Among the Fund’s performance detractors in May, Compass Group (-11.4%) provided the most significant corporate update. It issued half-year results to 31 March 2020 but of more interest, given the worsening of the Covid-19 crisis since then, was an accompanying update on actions it’s taking to cope with the pandemic. In April, about half of the catering group’s business was closed due to various country lockdowns, which fed directly through to a 46% drop in organic revenue during the month.  Compass has taken a number of actions to mitigate the impact on liquidity: increasing credit facilities from £2.0bn to £2.8bn; obtaining waivers on some leverage covenants; a reduction in the cost base of around £500m a month and a suspension of its dividend programme. But the most eye-catching measure was a share placing to raise a £2bn. The placing was completed at a share price of 1025p.


The Fund chose not to top up the position via the placing. We still like the business for the long-term competitive advantage that we think it possesses, but we are less certain about the pace of recovery it will experience when the economic upturn comes. However, the relative ease with which Compass was able to issue shares equivalent to 12% of its total equity is an endorsement of the quality of the business. 


As investors became more confident of the prospects for economic recovery from Covid-19, a number of the Fund’s holdings rallied – particularly those in the industrials sector - helped in several instances by trading updates.


Among this group, TI Fluid Systems (+19.9%) was the largest gainer. It released a Q1 trading update which, as expected, showed a sharp drop in revenues. The company manufactures highly engineered automotive fluid storage, carrying and delivery systems. Global light vehicle production is estimated to have fallen 23% in Q1 as economies shut down around the world. In this context, TI Fluid Systems’ 16% fall in revenues looked less concerning. In line with the majority of listed companies, TI Fluid Systems withdrew its 2020 outlook. At the end of March, the company drew down €146m of its €192 million revolving credit facilities as a precautionary measure, boosting liquidity to around €600m.


Industrial quality assurance provider Intertek Group (+17.5%) issued a trading update covering the four months to 30 April. Revenue of £882m represented a 4.6% year-on-year fall. It also declined to give 2020 guidance but is proceeding with payment of its 2019 dividend in June.


Sales for industrial threads manufacturer Coats Group (+17.2%) fell 17% in the first four months of 2020, including a 50% drop in April. The drop was felt hardest in its Apparel & Footwear business and resulted from a combination of cancelled or deferred orders and enforced closures of its facilities. However, only two of its facilities are currently subject to enforced closure (compared with 15 in March) and Coats is aiming to reduce Q2 operating costs by 40% year-on-year. In dealing with short-term liquidity demands, the company also highlighted around US$235m headroom in its US575m debt facilities and has negotiated a deferral of US$17m in pension deficit payments due in 2020.


Spirax-Sarco Engineering (+13.1%) designs products regulating steam and electrical thermal energy. Its AGM statement acknowledged that the macroeconomic backdrop had worsened significantly since it released results on 11 March, but also highlighted some defensive characteristics of its sales: over 50% of sales are to less cyclical sectors such as healthcare, food & beverage and power generation & water treatment, and 85% of demand comes from clients’ operating rather than capital budgets. Trading in the first four months of 2020 has therefore been fairly resilient, with organic sales falling 5%. In contrast to many of its peers, Spirax-Sarco gave the bare bones of 2020 financial guidance, with, for example, its Steam Specialities division expected to register a sales decline in line with the 6.6% fall forecast for global industrial production.


Positive contributors included:

Hargreaves Lansdown (+27.3%), RWS Holdings (+20.6%), TI Fluid Systems (+19.9%), Kainos Group (+19.4%) and Intertek Group (+17.5%).


Negative contributors included:

Robert Walters (-17.9%), Eco Animal Health Group (-14.1%), Compass Group (-11.4%), Savills (-10.6%) and Next Fifteen Communications (-6.2%).


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








Liontrust Special Situations I Inc






FTSE All Share






IA UK All Companies













*Source: Financial Express, as at 31.05.20, 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.


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, June 12, 2020, 3:51 PM