Liontrust UK Ethical Fund

Q4 2017 review

The Fund slightly lagged its MSCI UK benchmark over Q4, registering a return of 4.2% against 4.9% from the index*.

 

Our process targets businesses that can grow structurally, driven by the shift towards a global economy that is more efficient, provides a higher quality of life and is more resilient.

Softcat, one of the leading value-added resellers in the UK, was the main contributor to performance over the quarter after a very strong set of full-year results, delivering organic sales growth in excess of 23% year-on-year.

We suspect this company was potentially positively affected by Brexit, as customers may have brought forward big purchases before IT vendors hiked prices to counteract weaker sterling. The long-term thesis on Softcat remains in place, namely that a relentless focus on customer and employee satisfaction results in a distinctive organisational culture that will continue to drive strong sales and profitability growth.

Hargreaves Lansdown was another top performer over the quarter, with its 20% share price markedly outperforming the broader market. The company released a quarterly trading update that demonstrated impressive net new business growth, with much of this coming from a key competitor suffering operational issues.

Despite such strong performance, our thesis on the company remains unchanged. Market-leading customer satisfaction scores, coupled with a shift of financial responsibility from governments and companies towards individuals, leads us to believe there is still substantial upside in our holding.

A detractor from performance was UK housebuilder Crest Nicholson. Crest had a strong 2017 overall, with the shares ending the year 19% higher than they started it, despite what we suspect was some profit taking in the final quarter.

 

The company is a leader in the construction of high-quality, energy-efficient homes in the UK and the sustainable approach enables it to develop land in partnership with local authorities. On top of this, with the stock trading on less than 7.0 times next year’s consensus earnings, we see excellent value in the shares, which we suspect is largely a result of Brexit uncertainty.

 

Poor performance also came from a stock we bought towards the beginning of the quarter, Cineworld. This resulted from a news leak that the company was in talks to acquire Regal Entertainment, a much larger US cinema chain.

 

To do so would require significant gearing and a substantial rights issue, both of which were, understandably, taken poorly by the market. At one point, the shares were down 24% over the quarter, before recovering towards the end of December. This scale of acquisition was absolutely not part of the investment thesis and as such it is being revisited.

 

Finally, we participated in a capital raising for one of our smaller holdings Xeros Technology. Xeros is a company that uses polymer beads to revolutionise water-intensive industrial and commercial laundry processes by reducing water and chemistry usage. The company is still in its early stages but we are excited about the potential impact these technologies can have on key sustainability issues.

 

Discrete years' performance* (%)

 

 

Dec-17

Dec-16

Dec-15

Dec-14

Dec-13

Liontrust UK Ethical 2 Acc

22.5

4.5

10.6

2.0

35.5

MSCI UK

11.7

19.2

-2.2

0.5

18.4

IA UK All Companies

14.0

10.8

4.9

0.6

26.2

Quartile

1

4

1

2

1

 

 

*Source: Financial Express, primary share class, total return (net of fees and income reinvested) to 31.12.17

 

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 issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Some of the Funds managed by the Sustainable Future Equities team involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.

Disclaimer

This content 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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, January 25, 2018, 5:13 PM