Liontrust UK Ethical Fund

Q2 2020 review

The Fund returned 13.8% over the quarter, lagging the IA UK All Companies sector average of 14.2% but outperforming the MSCI UK Index’s 8.2%*.

After a very difficult March as the full ramifications of Covid-19 became clear, the second quarter saw markets retrace a large part of their losses, with the stimulus effort from central banks and governments seen as sufficient to avert a financial crisis. As we have continued to stress, we see little value in economic guesswork, and across our portfolios, we concentrate on where we have confidence in our predictions, namely our 20 sustainable themes.

As we look forward, we expect that the adaptations we have made to our interactions will allow for a robust economic recovery until the advent of a vaccine. There will be volatility ahead and real risk of an uncontrolled second wave, but we believe the structural trends of our sustainable themes will continue to support the growth of the companies in the portfolio while delivering a cleaner, healthier and safer future. Our base case remains that sustainable businesses have better growth prospects and are more resilient than those not prioritising ESG – and these advantages remain underappreciated by the wider market.

With the UK hit particularly hard amid Covid-inspired volatility given the index’s large exposure to the oil, mining and airline sectors, our portfolio initially benefited from avoiding those parts of the market but lagged in June as the worst-performing areas rallied hardest.

We did also see a rebound in some of our domestic names that have struggled in recent months, including housebuilders Crest Nicholson and Countryside Properties. This follows improving statistics on Covid-19 cases and the restarting of certain sections of the economy but is also evidence that demand remains. There is a long way to go but the path to more normal levels of business is clearer and our confidence in the longer-term prospects has increased.

From a sustainable standpoint, June also saw two remarkable events linked to climate change, BP writing down £17bn of oil reserves due to the likelihood demand will fall over the coming decades, and the fact it has been two months without coal being burnt in the UK for electricity generation. Just 10 year ago, coal was around 25% of electricity production.

Our UK portfolios are well aligned with this de-carbonisation of our energy system, holding large operating renewable energy generators such as Greencoat Wind and The Renewable Infrastructure Group, as well as small local wind energy company Thrive Renewables. We are also invested in companies that avoid the need to consume electricity in the first place (so-called negawatts) such as SDCL Energy Efficiency Investment Trust, which provides capital to invest in technology designed to reduce energy consumption, and long-term holding (and perennial contributor to returns) Kingspan, which provides thermal insulation to buildings.

As we said in Q1, we spent a long time revisiting our positions in the wake of the outbreak, and the fact we have only removed a couple of names, as well as topping up a number of holdings, shows we largely remain confident in the long-term prospects of our companies despite difficult conditions to come.

In March, companies such as Cineworld, National Express, Gym Group and Crest Nicholson saw their revenues disappear for an indeterminate period. Our response was to assess which were in a position to weather the storm and emerge stronger and which faced such heightened risks that they were no longer suitable investments. From this analysis, we concluded we were comfortable backing almost all of our companies, which is testament to the importance we attach to the resilience of each business.

Cineworld was the exception – we felt its balance sheet was not appropriate for the challenges that lay ahead –so we exited this position. The difference with Cineworld versus many other holdings where we remain confident in their prospects is that the company recently made a large acquisition in the US by gearing up its balance sheet and was preparing to make a similar purchase in Canada before Covid-19 forced a rethink. A period of no revenues has left the business struggling to finance these borrowing costs and, in hindsight, we should have seen the excess leverage as more of a red flag.

Elsewhere, we continue to see an acceleration in themes such as Connecting People although our favoured holdings in this area, including Helios Towers and Softcat, had a slower quarter as other positions came to the fore.

This included Ceres Power, a technology business developing fuel cells for transport, plus several names held under our Saving for the future and Insuring a sustainable economy themes, including Hargreaves Lansdown, Prudential, Legal & General and AJ Bell. Although challenged by short-term economic weakness, we believe households will look to raise saving rates over time to protect themselves from future crises and these businesses sit across the investment, pension and insurance markets.

Highlighting its resilience amid recent upheavals, Hargreaves reported $4bn of net new business in the first four months of 2020 and 94,000 new clients joining the firm, for example.

In terms of recent portfolio activity, the sole addition was Oxford Instruments, a provider of high technology products, systems and tools to the world's leading industrial companies and scientific research communities.

A number of our holdings have also sought additional capital as they look to get through the next few months and we feel this offers an opportunity to both stand by, and increase our position in, favoured companies for the long term such as The Gym Group, DFS, and National Express.

High-quality furniture seller DFS continues to do well in terms of online sales and has a track record of growth during difficult periods, increasing its market share from 18% to around 25% in 2008/09. It has subsequently grown market share to 35% and we feel this is one of several consumer holdings that can emerge from Covid-19 stronger despite a severe decline in revenues – and this underlying belief in our thesis gave us the confidence to participate in the capital raising.

While National Express remains among the fund’s weaker names in Q2, we would note the company’s coaches returning to the roads in July after a three-month hiatus. National Express raised £240m in additional capital to reduce debt on its balance sheet and we participated as we see safe, efficient mass transport as the only way to reduce congestion and emissions in our cities. The company has committed to never buying another diesel bus in the UK, pledging to invest in battery and hydrogen over the coming years and potentially linking up with Ceres Power.

Among other weaker stocks over the quarter, Compass Group has also continued to struggle, as would be expected of the world’s largest catering business in a period of global lockdown. We like this business under our Leading ESG management theme, with best-in-class sustainability in terms of reducing food waste helping the company improve operating margins versus peers.

A large part of its revenues come from feeding people at work or at live events, however, and due to the current situation, these have been extremely challenged. Having spoken to Compass Group and done our own analysis, we believe 30-50% of the company is resilient to the crisis and considering the strong balance sheet, it should be able to manage its way through. In normal times, this is a business that generates a return on invested capital of 20% and earnings growth of 8-10%, so we are happy continuing to hold the stock and expect it to generate strong returns in the coming years.

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







Liontrust UK Ethical 2 Acc












IA UK All Companies













*Source: Financial Express, as at 30.06.20, primary share class, total return, net of fees and income reinvested.


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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. 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.


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.

Thursday, July 16, 2020, 3:28 PM