Liontrust UK Ethical Fund

Q1 2020 review

The Fund returned -26.2% over the quarter, outperforming the IA UK All Companies sector average of -27.9% but lagging the MSCI UK Index’s -23.9%*.


Like all other investors, our funds have been impacted by Coronavirus-related volatility in recent weeks, with markets pricing in a deep economic downturn. It remains challenging to predict the length and depth of this but we are confident the underlying quality and resilience of the businesses in which we invest can withstand this volatility.

While we have experienced a difficult spell of short-term performance, we encourage a long-term view and, as much as possible, to look through a period where some companies are falling up to 80% only to rise 50% in the following days. The intrinsic value, based on their long-term ability to generate profits, of companies does not typically change this dramatically in such a short period.

Despite the huge toll this virus has already inflicted, we are beginning to see some light at the end of this dark tunnel. The Chinese economy is in the midst of a restart, suggesting that once the medical threat is contained, our economies can resume reasonably quickly. Cases in Italy are also starting to slow, suggesting lockdown measures can be effective in preventing the virus’s exponential growth. We remain optimistic that, in time, this battle can be won.

Over the latter weeks of March, we have seen enormous fiscal measures across the world and these are crucial in terms of plugging the economic hole we are entering. Governments have pledged to support businesses and families over the next few months in an attempt to ensure our economies come through this crisis intact and can function effectively. The size of these fiscal pledges is extra-ordinary but necessary in our opinion and markets reacted positively to this news, rallying from mid-March lows.

It is ultimately impossible to know what impact the current crisis will have on sustainable issues: on the one hand, we would hope the current ‘uniting against a common enemy’ trend could be directed against climate change in the future; on the other, we may find governments have used much of their firepower fighting economic slowdown to be spending money on sustainable projects for some time to come. There will undoubtedly be a greater focus on health and disease prevention, at personal, national and international levels. We can also expect greater use of remote working and conferencing – now that its use has become widespread.

Our base case, therefore, remains that sustainable companies have better growth prospects and are more resilient than businesses not prioritising ESG – and these advantages remain underappreciated by the wider market.

Across the portfolios, we continue to concentrate on where we have expertise and confidence in our predictions, namely the 20 sustainable themes that identify companies set to benefit from making our world cleaner, healthier and safer. The impact of COVID-19 on our health, livelihoods and economies does not change our view companies exposed to these themes will see strong growth in coming years.

The sudden loss of revenues caused by the crisis has forced companies to react but many we have spoken to are doing so in as responsible a way as possible, recognising cutting staff and suppliers with no regard will endanger their eventual recovery. It is a difficult situation because businesses need to do all they can to stay in existence and also preserve their ability to thrive in the future.

While the portfolio has clearly been caught up in the widespread indiscriminate selling, our stronger holdings have included London Stock Exchange and Smart Metering Systems, with the latter boosted by a sale of a portion of its smart meter assets for £291m, underpinning the value creation of its activities.

Another strong contributor was Ceres Power, with its fuel cell technology expected to play a big role in the decarbonisation of the global economy. The company released results in March and despite the current disruption, said it expects full-year revenue growth to roughly match the 33% year-on-year increase achieved in the first half of its financial year. Looking to commercialise its technology, its strategy is to sign joint development and licensing agreements in markets such as China, Japan and South Korea.

Some of our themes have also performed better in the midst of difficult conditions. As millions of us face up to working remotely for the foreseeable future, several names held under our Connecting people and Enhancing digital security themes also have held up well, including Helios Towers and Softcat.

Looking at the UK market, the index has a heavy weighting to oils, miners and large banks whereas the fund has zero exposure to these sectors and is also underweight consumer-exposed areas. The latter has still been the main detractor, however, with a number of our consumer discretionary holdings selling off as they face an undefined period with zero revenues.

Companies such as Crest Nicholson, Cineworld, DFS and Gym Group are cutting costs as far as possible and speaking with creditors to navigate through this unprecedented period.

With these, and holdings across the portfolios, our focus has been twofold: first, have the prospects changed five and ten years from now and second, how are companies positioned for the next six to 12 months in terms of cash and the capacity to flex down the cost base and access debt facilities? In the majority of cases, we remain confident in the long-term prospects and have been in contact with nearly all of the management teams to understand how they are dealing with these challenging times.

Gym Group is a good example: we believe long-term demand for low-cost fitness is undiminished and may even be bolstered after a period of lockdown as people look to reduce their expenditure. We spent time speaking to management, discussing the measures they have taken to cut costs and adapt their service to provide fitness instruction at home for members. The company entered this crisis with a strong cash position and low levels of debt and we believe it can emerge stronger than small independent peers or even large highly levered competitors.

We are not the kind of investors who will pile into lower P/E stocks just because they are cheap but we do expect to see opportunities to tilt within the portfolio: while our more defensive areas have outperformed on a relative basis, many of our more technology-orientated names have struggled for example and we would potentially top up positions at these more attractive valuations.

In the midst of recent events, we are reviewing our watchlist intently and see opportunities arising from the volatility. We have researched many high-quality companies over the years benefiting from sustainable thematic growth, strong sustainability management and business fundamentals but that did not meet the fourth aspect of our process – attractive valuation, resulting in 10% of annualised upside on a five-year horizon. There may be an opportunity to add a few select companies that now meet this target.

As we see opportunities to add, we are doing so in a very gradual way, initially from cash but in time by selling very defensive names such as renewable energy generators and investing in long-term winners at attractive entry valuations. This will be at the margin, as, for the most part, we are comfortable with the long-term prospects of all the holdings in the portfolio.

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

 

Mar-20

Mar-19

Mar-18

Mar-17

Mar-16

Liontrust UK Ethical 2 Acc

-7.6

6.6

10.9

15.0

-0.2

MSCI UK Index

-19.1

7.6

-0.2

23.5

-5.9

IA UK All Companies sector average

-19.2

2.9

2.7

17.9

-2.4

Quartile

1

1

1

3

2

 

*Source: Financial Express, as at 31.03.20, primary share class, total return, net of fees and income reinvested.

 

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 majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well-regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

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 17, 2020, 4:56 PM