Liontrust UK Growth Fund

February 2020 review

The Liontrust UK Growth Fund returned -9.0%* in February. For comparison the FTSE All-Share Index returned -8.9% and the IA UK All Companies sector average return was -9.4%.

 

Global stock markets sold off heavily in February amid the continued spread of coronavirus, with cases outside of China jumping. Investors pre-empted the economic impact of containment measures from governments around the world, sending equities and other asset classes lower with only ‘safe-havens’ such as government bonds or gold registering positive returns.

 

There still remains a large amount of uncertainty surrounding the duration and size of the impact of coronavirus, both in human and economic terms. The Economic Advantage investment process does not attempt to predict events which are notoriously difficult to forecast, and we will continue to focus on companies’ fundamentals. The companies we have invested in tend to have robust balance sheets. Many also have high recurring income. This is one of the core intangible assets that we look for, alongside strong intellectual property and distribution networks. The Economic Advantage investment process has served us well during bouts of previous stock market turbulence, such as the 2008 financial crisis and we believe the strengths of the investment process could again be important during this period of uncertainty.

 

During February, positive attribution came from the Fund’s zero weighting to miners, with industrial commodity prices taking a hit from the expected economic disruption. The Fund also holds relatively few service sector companies which rely on ‘person to person’ contact, such as retailors, leisure, and transport.

 

There were areas of the portfolio which did succumb to the broad market weakness. Its oil holdings Royal Dutch Shell (-15.3%) and BP (-11.7%) both tracked declines in the oil price (Brent oil fell 13.1%). Some of our industrial holdings, such as Coats Group (-21.5%) and Renishaw (-12.12%), saw double-digit falls due to concerns about supply-chain disruption. It was a similar case for our fast-moving consumer groups. Drinks company Diageo (-7.2%) notably released an update giving an initial estimate of the negative impact it expects to incur. For fiscal 2020, it forecasts a £225m-£325m reduction in organic net sales and a £140m-£200m hit to organic operating profit.

 

During the month the Fund's cash weighting was reduced significantly as we used the market dislocation to invest pro-rata into existing holdings, with some exclusions. This broadly left sector and individual stock exposures relatively similar to previous months.

 

Away from coronavirus, pharmaceutical giant GlaxoSmithKline (-11.2%) reported a 10% increase in revenue to £33.75bn for 2019, while adjusted earnings-per-share (EPS) rose 4%. Looking to 2020, the company emphasised its first priority as 'innovation, to progress our pipeline and support new product launches', forecasting a 1%-4% decline in adjust EPS. 

 

Fellow healthcare stock Indivior (+14.0%) was one of two gainers in the Fund. The company’s shares were trading even higher before its full year results revealed that net income halved during 2019, with operating profit falling 40%. This decline was primarily due to the market share loss of its SUBOXONE Film to generic competitors and Indivior forecasts further losses in 2020. It also warned of a potentially material impact from a federal indictment on charges of health care fraud, wire fraud, mail fraud and conspiracy in connection with the marketing and promotion practices.

 

British American Tobacco (-8.8%) also released full year results. Revenue increased 5.7%, but profit from operations decreased 3.2% and diluted earnings per share fell 5.4%, mainly due to litigation charges and restructuring costs. Adjusting for these items, profit was 6.6% higher. In 2020, the company expects a contraction in the global cigarette industry, but is anticipating adjusted revenue growth of 3%-5%.

 

Positive contributors included:

Indivior (+14.0%) and Spectris (+2.7%).

 

Negative contributors included:

Coats Group (-21.5%), WH Smith (-19.4%), Royal Dutch Shell (-15.3%), Ultra Electronics (-13.9%) and BP (-10.7%).

                            

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

 

Dec-19

Dec-18

Dec-17

Dec-16

Dec-15

Liontrust UK Growth I Inc

19.9

-6.1

14.2

18.1

9.6

FTSE All Share

19.2

-9.5

13.1

16.8

1.0

IA UK Smaller Companies

22.3

-11.2

14.0

10.8

4.9

Quartile

3

1

2

1

2

*Source: Financial Express, as at 29.02.20, 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 31.12.19, 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.

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.

Thursday, March 5, 2020, 12:52 PM