Liontrust UK Growth Fund

March 2020 review

The Liontrust UK Growth Fund returned -12.8%* in March. For comparison the FTSE All-Share Index returned -15.1% and the IA UK All Companies sector average return was -18.4%.


The economic and social situation we all find ourselves in is without precedent. The stockmarket reaction has been sharp and pronounced, but in this respect we do have a certain amount of experience to draw upon; investing through periods of volatility and uncertainty is not new to us. We have been applying the Economic Advantage investment process for over 20 years, a period which includes previous sharp sell-offs such as the technology correction at the turn of the century and the financial crash of 2008.


During these previous bouts of stock market turbulence, our strict adherence to investment process has served our funds well. We believe its strengths will again prove important during the coronavirus crisis. In times like these, having a clear investment process is invaluable as its decision-making framework ensures we continue to take a rationale approach to managing the portfolios.


The Fund, while suffering a painful drop during March, has displayed some insulation from the worst of the sell-off. The Fund has low exposure to the financials sector (-18.6% in March), where liabilities may accrue, and the stocks it owns in the consumer goods or consumer services sectors on average outperformed the respective 21.4% and 10.5% falls in these areas of the FTSE All-Share.


We are, however, well aware that this crisis will negatively affect nearly all businesses so our companies may well feature in a ‘second wave’ of negative stock market updates. We also acknowledge that while our companies may tend to outperform the market’s fall as weaker businesses suffer, they will likely underperform the bounce when it comes (we already saw this effect during the sharp rallies in highly volatile conditions in March).


Some of the Fund’s consumer goods businesses have held up relatively well: Reckitt Benckiser (+7.5%), Unilever (-2.3%) and Diageo (-6.5%) for example. Within the typically cyclical industrials sector, to which we are overweight, we found that a handful of our businesses outperformed the sector’s 21% fall: Spirax-Sarco Engineering (-2.7%), Renishaw (-9.4%) and Spectris (-9.5%). Others, however, such as Coats Group (-28.5%) and Aggreko (-28.0%) fell heavily. The industrial engineers we own are affected by both demand and supply chain shock, so it’s unsurprising these stocks de-rated. These companies are manufacturing products with significant intellectual property that are hard to replicate and we’d expect demand to return to these companies when economic activity recovers.


The Fund does own a few companies exposed to some person-to-person business, such as Next Fifteen Communications (-38.3%) in public relations, Pagegroup (-10.4%) in recruitment and Compass Group (-26.1%) in contract catering. It also owns WH Smith (-40.8%) whose growing Travel division in conspicuously exposed to current restrictions on movement.


Another group of detractors in the portfolio can be attributed to the oil price falls, for which the price war between Russia and Saudi Arabia is a significant factor in addition to the plunge in global demand. Stocks affected by the price fall include John Wood Group (-57.5%), Weir Group (-44.8%), Petrofac (-38.6%) Rotork (-23.6%), Royal Dutch Shell (-18.3%) and BP (-13.1%).


Stock and sector dynamics have – as described above – been driven by the obvious top-down implications of lockdown style measures worldwide. We are still in the early stages of individual companies updating investors on the specifics of the coronavirus disruption. The overall impression is that it is very difficult for most companies to make any meaningful forecast of the likely impact, which makes the FCA’s decision to allow an extra two months to prepare annual financial statements look like a sensible step.


In the current environment, investors are focusing as much on companies’ balance sheets and funding positions as on the immediate hit to trading activity.


The Economic Advantage investment process determines portfolio holding sizes based on a risk assessment that includes a number of measures, including financial risk. This checklist approach to determining the holding sizes of investments may seem rather pedestrian during a bull market, but it really comes into its own during setbacks. We have reviewed the balance sheet strength of our companies and are comfortable with the portfolio, but these are extraordinary times and working capital shortfalls can occur quickly.  Whilst we have been encouraged by the government’s action in promising loans, the terms of these loans remain to be seen. So we do expect to see companies of all sizes move to increase available liquidity by various means including raising money on the bond markets, negotiating increased or new bank lending and/or issuing new equity. Already some of the biggest index constituents including British American Tobacco, Royal Dutch Shell and BP have tapped the bond markets, and where they lead others will surely follow. 


In terms of transactions there were no new names introduced into the portfolio this month, however we were active in a number of existing holdings with top- up purchases centred on some of the shares which have lagged the most during the downturn. 


While near-term returns for companies will obviously be heavily challenged by the current environment, we have high conviction in the companies we own. These stocks have strong barriers to competition, attractive market positions, a history of good returns and long-term growth potential. Many companies will lose earnings for a period, and we don’t know how long that period will be, but they are not facing a loss of their business franchise.


There are a number of great businesses that are trading at levels we have not seen for a very long time. The market will regain its poise and we should be mindful of how sharp the upturn could be when this happens. If valuations remain depressed for an extended period of time, we would expect mergers and acquisitions to play a role in unlocking value. The intangible assets the Economic Advantage process targets in its investments have historically proven appealing to corporate acquirers and we would expect this to remain true were corporate activity to pick up again.


Positive contributors included:

Reckitt Benckiser (+7.5%), AstraZeneca (+6.2%), Indivior (+5.3%), WM Morrison Supermarkets (+3.9%) and Ultra Electronics (+3.2%).


Negative contributors included:

John Wood Group (-57.5%), Weir Group (-44.8%), WH Smith (-40.8%), Petrofac (-38.6%) and Next Fifteen Communications (-38.3%).


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







Liontrust UK Growth I Inc






FTSE All Share






IA UK All Companies













*Source: Financial Express, as at 31.03.20, 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 31.03.20, 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.


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, April 9, 2020, 3:39 PM