Liontrust UK Ethical Fund

Q3 2020 review

The Fund returned 2.8% over the quarter, outperforming the IA UK All Companies sector average of -1.0% and the MSCI UK Index’s -4.6% (both of which are comparator benchmarks)*.


On the economic front, most central banks around the world remain in ‘whatever it takes’ territory, with a challenging winter expected as the fallout from Covid-19 and renewed lockdowns continue. In the UK, the Bank of England remains dovish without doing that much, keeping its powder dry for a difficult period ahead, particularly with the Brexit situation unresolved.


As we have said before, the current situation is unique and it is ultimately impossible to predict the nature of economic recovery. We are long-term optimists but rather than trying to work out when the market will recover, our process focuses on the structural shifts to a more sustainable economy and companies making the world cleaner, healthier and safer. The impact of Covid-19 does not change our view that companies exposed to sustainable themes will see strong growth and many of these areas continue to accelerate as the world recovers.

Over a weaker quarter for equities in general, long-term holding Kingspan was once again our best performer, despite a slowdown in construction activities due to lockdown measures around the world. The thermal insulation provider issued the kind of solid results we expect from this market leader: first-half revenues were down 8% in what the group called a period of unparalleled challenges but CEO Gene Murtagh said the rapid introduction of cost containment measures has been key. With over €1bn in cash and undrawn facilities, the company is well placed to come through the crisis in a strong position.

While expecting a weak environment ahead, Kingspan highlighted policymakers’ growing focus on ensuring buildings are more energy efficient exactly the kind of structural growth trend that underpins our sustainable themes. Its prospects are further brightened by EU and UK commitments to build back better, with a focus on improving the sustainability of our built environment.

Packaging provider Smurfit Kappa was another strong contributor, with the company announcing strong first-half results at the end of July. The market reacted well to its decision to pay an interim dividend, having opted to postpone a distribution back in April due to Coronavirus uncertainty. Smurfit continues to benefit from growing consumer demand for sustainable packaging and, highlighting its own ESG credentials, the company completed its largest ever investment, €134 million in a recovery boiler in Austria, early in 2020, which will reduce its CO2 emissions by 40,000 tonnes.

We have written in recent months about how Covid-19 has accelerated and highlighted certain themes and see that happening again in the Testing, Inspection and Certification (TIC) industry, with renewed focus on how things get onto our shelves. Intertek is one of our key holdings in this space and features among the top performers in Q3, boosted by resilient revenue performance, robust margins and strong cash flow over the first half of the year. Signalling this, the company was able to announce an unchanged half-year dividend and we believe this is another of our names well positioned  to benefit from the post Covid-19 recovery and increased need for quality assurance.

Echoing our own philosophy, the company noted major structural growth drivers in its market over the year ahead, focusing on more diversified supply chains with greater traceability, improved intelligence and increased resilience (Safer), a lower carbon economy with stay-local lifestyles, more remote working, distance learning and online shopping (Cleaner), and better personal safety, higher health, hygiene and well-being standards and greater investment in healthcare (Healthier). Intertek has increased its offering in these areas, from Protek, an end-to-end health, safety and wellbeing assurance program, to CarbonClear, an assurance program that certifies the upstream carbon intensity per barrel of oil.

AJ Bell also remains a consistent performer under our Saving for the future theme. The company allows individuals to invest in companies and funds efficiently and cheaply, benefiting from increasing individual responsibility to save and plan for the future and continuing to gain share in a steadily growing market.

Elsewhere, we would reiterate recent comments about the acceleration in themes such as Connecting People and Enhancing digital security and holdings such as Softcat and Helios Towers continue to perform well against this backdrop. Our sole addition to the portfolio last quarter, Oxford Instruments, has also had a decent period, with growing demand for its high technology products, systems and tools among the world's leading industrial companies and scientific research communities.

Among our other weaker names, given the fact large parts of the UK are back in some form of lockdown and people are working at home where they can, it is little surprise to find travel companies including Trainline and National Express continuing to struggle.

Reporting six-month results to the end of August, Trainline said net ticket sales had fallen to £358 million, equivalent to 19% of the same period in 2019. Indicating a slight improvement in the second half, where lockdown rules were eased, net sales increased to £280 million, equivalent to 30% of last year’s levels. Commenting on recent months, CEO Clare Gilmartin said the company has rapidly processed unprecedented levels of refunds, reduced costs wherever possible and ensured it has enough liquidity to operate for the foreseeable future. She also noted the faster shift to online reservation and digital ticketing given the increased need for touchless travel, with the company working hard to make rail and coach travel easier, safer and more accessible.

This reinforces our original thesis on the stock, which we added to the portfolio in the second half of last year. At the time, we said one of the key drawbacks of European rail travel is the difficulty of buying tickets, particularly for multi-part trips or across regions compared to one-stop flight aggregators. Trainline is looking to compete with air travel by offering a similarly efficient service for rail, allowing people to combine several journeys and book through a single portal. At the current valuation, we believe the market is ascribing minimal value to Trainline’s international operations.

National Express also released an update in September, trading slightly above its base case (assuming revenues of around 50% of pre-Covid 19 expectations) due to closely managing customer relationships, contract details and service requirements. The company noted several contract wins over recent months, demonstrating ongoing demand for its services, and a strong liquidity profile after raising a further £240m in additional capital.

As we said last quarter, we continue to see safe, efficient mass transport as the only way to reduce congestion and emissions in our cities and see both names as well positioned to benefit when travel restrictions are lifted in their markets.

In terms of new holdings over the quarter, we added Avast, which provides security services to over 400m people, another position under our Enhancing digital security theme. The main product is free, with only 13m taking the premium service, and this freemium model is an economic way of acquiring customers with ample opportunity to upsell other services. It is consistently rated as one of the best anti-virus and privacy protection services and we believe it will continue to grow strongly. As evidence of this, the company released six-month results in August, showing revenue growth of 6.6% over an extremely difficult first half of 2020.

CEO Ondrej Vlcek acknowledged the work-from-home trend amid the Covid-19 outbreak has driven an increase in online consumer activity and product engagement, adding a further 640,000 paying customers over the period. As a further positive, the group announced the launch of Avast Smart Life for 5G, its first smart home security solution for fifth-generation technology. This allows operators to protect subscribers' smart home and all connected devices at virtual router level, based on Avast's AI-driven threat detection technology.

We sold Pennon over the quarter: its Viridor waste business was bought by private equity and we felt the remaining South West Water does not exhibit much in terms of either growth or value.

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







Liontrust UK Ethical 2 Acc












IA UK All Companies













*Source: Financial Express, as at 30.09.20, 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.


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.

Monday, October 19, 2020, 1:11 PM