Liontrust UK Growth Fund

March 2018 review

The Liontrust UK Growth Fund returned -1.0%* in March, compared with the -1.8% return from the FTSE All-Share Index.

 

Equity markets extended their losses in March, with the prospect of a trade war led by the US and China taking up the mantle of investors’ primary focus. Donald Trump announced hefty tariffs on steel and aluminium imports, before outlining a range of tariffs targeted at imports from China. Equity investors globally fretted over the prospect of retaliatory measures and the risk of a downward spiral into a damaging bout of protectionism. As has been widely commented on, the first three months of 2018 represented the weakest quarter for global equities since Q3 2015. Commodity markets also showed signs of stress; aluminium (-6.0%) and copper (-4.4%) were among those suffering falls.

 

Against such a backdrop, it is unsurprising that the FTSE All-Share’s basic materials sector fell 3.4%. The technology sector also saw marked losses, in what was a global trend. In the US, Facebook came under scrutiny due to Cambridge Analytica’s use of its data, while a fatality from a self-driving Uber car crash further dented sentiment towards the tech stocks which drove much of 2017’s gains. The UK technology sector is small at less than 1% of the FTSE All-Share Index, so a halving in the share price of its second largest constituent Micro Focus (a Fund non-hold) dragged the sector’s March return down to -18.8%. Micro Focus revealed problems with integrating its US$8.8bn reverse takeover of a Hewlett Packard Enterprise division and announced the departure of its CEO after only six months in the job.

 

Following last month’s approach for Fidessa, NEX Group (+45.9%) joined it as the subject of takeover discussions while Shire (+15.6%) shares rose on news that Japanese pharmaceutical company Takeda was “considering marking an approach”.

 

In other corporate activity for Fund holdings, GlaxoSmithKline (+6.6%) announced an agreement to buy Novartis’ 36.5% stake in their consumer healthcare JV for £9.2bn. It is also initiating a strategic review of Horlicks and other consumer nutrition products to explore options to support the funding of the transaction. Investors welcomed the news, viewing it as a smarter strategic option than a proposed deal to acquire Pfizer’s consumer healthcare division which was also on the table. Glaxo had pulled out of the bidding with Pfizer earlier in the month.

 

The Novartis deal is expected to be immediately accretive to earnings for Glaxo and should boost operating cash flow. It also removes the uncertainty created by a put option which Novartis previously held concerning its stake in the JV. 

 

Following an adverse US antitrust review, Ultra Electronics (-13.0%) announced the termination of its merger with Sparton, news which triggered a fall in the company’s share price. In July 2017, Ultra Electronics had raised around £134m via a placing of shares in order to finance the merger. With the transaction no longer progressing, it plans to return the proceeds via share buybacks. The news regarding Sparton was contained within final results which showed trends in line with those indicated in its January trading statement. Revenue dropped 1.3% to £775m and underlying operating profit fell 8.4% to £120m due to contract delays, but order intake rose 16% to £901m. For 2018 it has order cover of 62% compared with 56% in 2017.

 

While NEX Group shares were rocketing on the CME approach, investors in TP ICAP (-16.9%) – the remainder of the businesses affected by the transaction between ICAP and Tullet Prebon – were reacting less positively to the release of final results. On a pro-forma basis in its first full-year since the transaction, TP ICAP saw a 44% fall in statutory operating profit to £102m, even as revenues rose 4% to £1.76bn. On an underlying basis, adjusting for exceptional items such as acquisition/disposal and integration costs, the picture improves, with operating profit rising from £240m to £263m. TP ICAP also echoed last month’s positive outlook comments from NEX Group, referring to an encouraging start to 2018 as volatility picks-up from the lows experienced in 2017.

 

Shares in EMIS Group (+13.0%) staged a partial recovery from the falls which accompanied January’s disclosure of service level failures on its NHS Digital contract. It released full-year results which revealed it had made a provision of £11.2m to cover the related costs.  Although this amount is slightly greater than the initial cost estimate given in January of “upper single digits of millions of pounds”, the company was able to provide better news in the form of a company-wide SLA (service level agreement) review which found no similar issues with other customers. So although 2017 financial results have been heavily affected (reported operating profit down 55% to £10.6m), this setback was already in the price following January’s warning and investors have now been able to take comfort from the likelihood that this was an isolated incident.

 

EMIS’s underlying performance in 2017 was otherwise in line with its expectations. Recurring revenues have further increased to now account for 83% of revenues. In 2018 so far it has already secured revenue amounting to over 90% of the 2017 total.

 

Having de-rated at the start of 2018, consumer goods businesses showed some relative strength in March. Reckitt Benckiser (+4.5%) had also shown interest in Pfizer’s consumer healthcare division, before it too walked away from the deal, a decision which investors welcomed. Anglo-Dutch consumer goods Unilever (+6.0%) also updated on strategy, announcing a reorganisation to three divisions (beauty & personal care, home care and foods & refreshment) and its intention to move from two legal entities (plc & N.V) to a single entity incorporate in the Netherlands. It will retain share listings in London and Amsterdam as well as New York.

 

Wood Group’s (-11.9%) final results showed that on a reported basis its revenues were boosted to the tune of 25% by the acquisition of Amec Foster Wheeler in October. On a proforma basis however, revenues weakened by 12% to US$9.88bn and EBITA dropped 11%. Although the company commented that the results were ahead of expectations on a reported basis and in-line on a proforma basis, investors appear to have focused on predictions of only modest EBITA growth in 2018, as the company looks for its core oil & gas markets to make a slow recovery from very challenging conditions. In March it separately announced a contract with Saudi Aramco and SABIC to provide design and project management services on the engineering, procurement and construction phase of the world’s largest fully integrated crude-oil-to-chemicals complex in Saudi Arabia.

 

Brooks Macdonald (-8.0%) revealed a 26% year-on-year increase in discretionary funds under management to £11.7bn. Statutory profit before tax (PBT) fell from £8.1m to £0.6m due partly to a £5.5m increase in provisions for legacy issues relating to the Spearpoint business which it had acquired in 2012. While last year it made a £6.5m provision for settlements relating to some discretionary portfolios, it has now raised this to £12m. On an underlying basis PBT increased to £8.5m. As flagged in its trading statement, revenue yields have declined due to lower dealing volumes and a shift in product mix to those with flat fee structures. Revenues rose 11% to £48.8m.

 

Positive contributors included:

NEX Group (+45.9%), Shire (+15.6%), EMIS Group (+13.0%), Petrofac (+12.2%) and GlaxoSmithKline (+6.6%).

 

Negative contributors included:

TP ICAP (-16.9%), Ultra Electronics Holdings (-13.0%), Wood Group (-11.9%), Brooks Macdonald Group (-8.0%) and Renishaw (-6.5%).

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

 

Mar-18

Mar-17

Mar-16

Mar-15

Mar-14

Liontrust UK Growth I Inc

2.6

23.2

2.7

9.2

9.5

FTSE All Share Index

1.2

22.0

-3.9

6.6

8.8

IA UK All Companies

2.7

17.9

-2.4

5.8

14.2

Quartile

2

1

1

1

3

 

*Source: Financial Express, as at 31.03.2018, total return (net of fees and income reinvested), bid-to-bid, institutional class.

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 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 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

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.
Monday, April 16, 2018, 2:04 PM